Anheuser-Busch Inbev: Good Geographic Mix and Superior Execution

| About: Anheuser-Busch InBev (BUD)

Stock price: €34 ($51.09)
Conclusion: Favorable geographic mix coupled with superior execution. We raise our valuation range to €39-41 per share.

9 months: revenue growth +1.8% organic (+81% reported to $30bn), beer volume down 1.4% , EBITDA growth +18% organic (+67% reported). Guidance: EBITDA growth Q4 in line with Q3 (+12% organic).

Brazil helps.
ABInbev (NYSE:BUD) continues to outperform peers with a slight decline in volume compared to an average decline of 5% for peers in the first 9 months. Sales in Latin America North, mainly Brazil, rose by 8% (accelerating in Q3 +11%) helping to offset lower volume in the US, Europe and Asia. Market share in Brazil increased by 218bp in Q3 to 69.4% according to Nielsen. Going forward, Brazil should continue to benefit from positive macro factors such as increased disposable income and improved consumer confidence, while comparison should be easier elsewhere, except Russia.

Superior execution.

  • Bottom line is expanding at a much faster rate (+18% EBITDA,+22% EBIT organic growth) driven by the synergies derived from the integration of AB ($1bn for the whole year), procurement and manufacturing best practices and distribution savings in the US. In addition, ABInbev benefited from lower media rates in Europe and in North America.
  • Savings are ahead of plan and we think that management might soon revise up its guidance of $2.25bn by the end of 2011.
  • Cash management to accelerate deleveraging. We estimate FCF at $6.4bn this year, driven by savings, lower Capex ($1bn less from the combined base), $500m working capital release in the US.

Asset disposal done.
ABInbev overachieved its target with $9.4bn of asset disposal (stake in Tsingtao, Oriental Brewery, Metal packaging, Central European operations, Theme Parks) of which $7.4bn are cash proceeds at closing. We expect net debt to decrease to $49bn in 2009 (3.8x EBITDA), $39bn in 2010 (2.9x) and $31bn in 2011 (2.1x).

ABInbev trades at 15.3x and 12.7x P/E based on 2010 and 2011 estimates, which we feel looks reasonable in light of our estimated 2010-2012 CAGR in EPS (20%+). The stock offers almost 18% upside based on DCF.

Disclosure: Long BUD at time of writing.