SAB Miller's New Restructuring Program Is Good News

Includes: FMXUF, SBMRY
by: Véronique Adam

Stock price: p1786 (US$2968)

Conclusion: We think that SAB Miller’s (OTCPK:SBMRY) exposure to emerging markets and a possible deal with Femsa (OTC:FMXUF) are largely priced in. We revise our valuation range to p1800-p1900 (US$2991-3157) following the announcement of a new restructuring program.

H1 results: sales down 6% reported (+3.1% organic), EBITA down 2% reported (+10.7% organic), EPS up 6% reported.

Comparing apples with apples:
SAB Miller reported 3.1% organic growth (mostly pricing) in H1, which is much better than the flattish numbers published by peers. Mature markets account for only 44% of SAB volume versus 50-70% for peers. We expect SAB to continue to outperform the category thanks to continuing growth in Latin America, Africa, notably South Africa and Asia.
Notwithstanding superior revenue growth, SAB is expanding operating profit , excluding currency impact, at a slower pace than competitors. This is partly due to the impact of supplier contracts and a hedging program which are limiting the benefits of lower spot commodity prices. Input costs should start to ease in H2 and next year. In addition, SAB suffers from margin erosion in South Africa owing to intense competition and increased marketing spending. Last, competitors reap the fruits of massive cost cutting programs.

H2 growth will largely depend on forex. Management warned that both pricing and margin will face a tougher comparison base in the last six months of F10. The good news should come from forex, based on current exchange rates. We estimate that H2 could be boosted by the strength of the ZAR , COP and EUR versus the USD. In H1, negative currency impacted sales by 9.5% and EBIT by 12%. As a result, reported EPS excluding exceptionals could increase by 19% in Fiscal 10. Forex should again positively impact H1 F11 results.

The announcement of a new restructuring program ($800m cost between F10-F13) in addition to the MillerCoors costs savings is good news. According to management, this business capability program will help to streamline procurement, finance and HR functions and install regional platforms to run sales, distribution and supply chain. Management expects to save $300m by 2014 and deliver $350m of working capital between F10 and F12, while the synergies related to MillerCoors will achieve $700m by F12 ($365m left for F11 and F12).
For the next two years, the impact on margins will depend on the retention rate of these savings. Assuming a 50% rate, we estimate the impact on group margins at around 50bp and 70 bp respectively.

SAB Miller trades at 16.5x P/E and 10x EV/EBITDA based on cal F10. Our DCF confirms a valuation range of p1800-p1900. Upside risks would come from the acquisition of Femsa, which looks feasible given SAB Miller’s financial flexibility.