Concern for Compania Cervecerias as Chile's Economy Anticipates Downturn

 |  Includes: CCU, CGBWF, DPS, KO, PEP
by: IncaInvest

Estimates for Chilean beverages company, Compañia Cervecerias Unidas S.A. (NYSE: CCU), has been revised downwards by Research Oracle, due to an anticipated slowdown in Chile's economy. CCU reported an increase in top-line due to strong growth in the Beer-Argentina segment, which was up (+110.2%) year-on-year. However, net income was lower by (-6.9%) due to higher General and Administrative Expenses, as well as increased interest expenses and negative impact from currency fluctuations. Earnings per ADR fell from US$0.31 in 3Q '07, to US$0.29.

In their analysis, Research Oracle expresses concern over the effect that declining commodity prices will have on the Chilean economy, which has still been relatively sheltered from the international crisis. Chile supplies a third of the World's copper output, and the latest macroeconomic data from The Central Bank of Chile points to declining industrial production and domestic consumer demand, combined with higher expected unemployment. Chilean economists have also changed their estimates for economic growth from (3.5%) to (2.5%) in the last month.

Furthermore, they expect widening margins due to anticipated decline in global commodity prices, such as barley and sugar, partially offset by higher power and SG&A expenses.

Research Oracle's earnings estimates have been revised to Ch$84.6 billion (US$125.7 million) for 2008, Ch$96 billion (US$142.6) for 2009, and Ch$97.3 billion (US$144.6) for 2010, based on Ch$673/USD. With 318.5 million shares, this reflects EPS at Ch$265.69, Ch$301.42, and Ch$305.51 for FY 2008 through 2010.

In their valuation, they have assigned a P/E multiple of 12.5, and EV/sales multiple of 1.5, setting target price by a weighted average of three methodologies; DCF approach (60%), EV/Sales approach (20%), and P/E approach (20%). The approach set the target price at Ch$3.659 (US$5.44). At an ADR ratio of (1:5), this reflects a target price of US$27.2 per ADR, reflecting an upside potential of (+12.21%) from the closing price on December 5.

Inca Invest Commentary

As Research Oracle point out in their analysis, the Chilean stock market has outperformed the global average so far this year, being down only -24.5% YTD. Compared to other South American markets (Brazil, Argentina), as well as Europe and the U.S., multiples in Chile are still quite high, and should be expected to come down to a level more in harmony with other markets, we believe.

CCU is currently down -32,21% YTD, trading at a P/E of 11.54. In comparison Coca-Cola (NYSE:KO) is down -25.08%, trading at a P/E of 17.87. PepsiCo (NYSE:PEP) is down -29.68% YTD, trading at a P/E of 15.25. Dr. Pepper (NYSE:DPS) is down -46.51% YTD, with a P/E of 8.22. Carlsberg (OTC:CGBWF) is down -69.11% YTD, at a P/E of 9.09.

We see it as unlikely that multiples will return to previous highs any time soon, thus reflecting negatively on our outlook for CCU. In addition, we do not see a significant increase in earnings for 2009.

The technical perspective confirms our bearish view, with the medium-term trend still falling, and RSI indicating selling pressure. The ADR formed a descending triangle formation on November 13.

click to enlarge

Click to enlarge

In the case of a rally, short-term resistance is in the 26.00 - 26.50 range, reflecting the low on November 20. The current price level would be a good entry point, with an upside potential of 10.3% from Friday's close at 24.24.

However, our medium-term outlook is still bearish, and would be confirmed by a break-out below resistance at 24.00.

CCU's latest interim statements can be found in our download section.