Anheuser-Busch InBev: Still Room for Further Upside

| About: Anheuser-Busch Inbev (AHBIF)

Stock price: €29,6 (OTCPK:AHBIF)

Conclusion: Room left for further upside based on €33-35 valuation range.

Going forward, we expect Anheuser-Busch InBev's [EBR:ABI] (OTCPK:AHBIF) stock price to be driven by:

  • Favorable geographic mix thanks to the exposure to Latin America (1/3 of volumes), notably Brazil, which enabled the group to post 3% revenue growth in H1. The decline in North America (35% of total volumes) has also been far less pronounced than in Western and Eastern Europe, which account for less than 20% of volumes. In addition, recent consolidation in the US should help to support future pricing.
  • Profitability gains in all regions (+541bp EBITDA margin in H1, less in H2 due to slower top line and tougher comparison) helped by procurement savings, improved brewing productivity, distribution synergies in the US, lower fuel and transportation costs and lower media rates. We expect $1.4bn additional savings from the integration of AB ($860m saved by end of June).
  • Deleveraging of the balance sheet helped by lower capex, working capital inflow and disposals. We expect net debt to be reduced by $11bn by the end of 2010 to $45.3bn, representing 3.4x EBITDA based on 2010 forecasts.

Anheuser-Bush InBev trades at 14.5x our 2010 estimates, implying 7% premium to the beverage sector. We feel that the valuation remains attractive based on superior EPS growth (15%+ growth in 2010 and in 2011) and also a FCF yield of 8.5% (200bp above average in the sector). DCF leads us to confirm our 12 months valuation range target of €33-35 per share.

Disclosure: Long ABI at time of writing.