The Corner analysis | Eurostoxx50: AB InBev

Company’s profile AB InBev is the largest brewer in the world and one of the top 5 companies in the consumer sector by number of brands and ebitda, with a portfolio of over 300 brands and operations in 30 countries. Major global brands of the company are Budweiser, Stella Artois and Scholarships. Additionally, the company has leading local brands in their respective markets: Skol in Brazil or Corona in Mexico (via its 50% share in Grupo Modelo).

To achieve its leadership position the company has made numerous mergers and acquisitions in the last 10 years such as the merger between Interbrew and Brazilian AmBev (in 2004) and the acquisition of Anheuser Busch (in 2008).

By region, the most important markets in volume sales are the U.S. (34% sales in 2011), LatAm North (30% of revenues come from Brazil), Asia (12% sales in 2011, mainly from China), Western Europe (8% sales in 2011), Eastern Europe (6% sales in 2011), LatAm South (9% sales in 2011) and others.

The company’s strategy ABI’s strategy is to grow above the industry average by actively managing its portfolio, so as to give preference to higher potential brands, preferably in the premium segment. Its aim is to grow in prices above inflation. Within this strategy, the company plans to make acquisitions, although since 2008 there has not been any relevant operation, as its priority in recent years has been to reduce the debt (which reached levels higher than 4.5 x EBITDA after the acquisition of Anheuser in 2008). Later this year, this ratio could be set at 2.5 x, a level that would allow ABI to study new operations in the beer market. Given the excellent track record of procurement management, we do not believe that this is a particularly negative for the value.

Last results On April 30 the company released its 1Q’12 results, which were in line with the ebitda expectations, with better performing organic sales and to a small extent worse operating margins. Sales organic growth was +6.2%, with a slightly higher margin (+21 bp) so that the organic ebitda grew by +7.4%. Geographically, U.S. stands out positively (+5.9% organic sales), since its weather has been favorable for beer consumption and the ABI business initiatives have had a positive impact on sales. On the negative side, Brazil division was below consensus forecasts (+6% organic ebitda vs. +13% Predicted). The company reiterated its guidance for the full year.

Corporate expectations In its final quarterly results, the company said it expected Brazil volumes to grow as well as U.S.’ (its key markets, together representing over 70% of ebitda), and its unit revenues to grow faster than inflation. This should mean a sales growth of around 4.5% by 2012. However, throughout 2012 we could see some pressure on margins, as unit sales costs could rise to a double-digit rate, and marketing and distribution costs could grow more than in 2011.

Conclusion Despite the value’s strong performance this year (+7.7% YTD YTD vs +7% Stoxx 600 Food & Beverage), the company continues to be cheaper than the sector (16.44 x 19.01 x PER’13 vs. PER ’13 of Stoxx 600 Food & Beverage). This is a clearly defensive company, number one in its 20 operating markets, with a good portfolio of brands, positioned in all segments of value, with balanced geographical exposure of high growth markets (Brazil and China) and mature markets (U.S. and Europe).

It also has ability to develop cross-selling brands across markets (launch of Budweiser in Brazil and Europe). ABI has strong cash generation capacity (over 9,000 M dollars yearly average), allowing it to increase the dividend or carry out acquisitions. On the other hand, it is highly exposed to U.S. market (42% of sales), which stands out as a very profitable market. Although volumes have fallen in recent months, as already noted, in its latest results presentation the company expects volume growth in Brazil and the U.S. Therefore, given the current market situation and despite volume growth and good results outlook for the coming years, we would rather wait for some price cuts to buy the stock.

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