Anheuser-Bush Inbev (NYSE:BUD) Stock price: €35.9 (US$49)
Superior growth platform coupled with further costs savings lead to 20%+CAGR in EPS between 2010 and 2012. Notwithstanding a weak first quarter, we believe re-rating will continue, based on our valuation range of €39-€41 (US$53-56) per share.
2009 Results: Sales up 56% to $36.7bn (up 2.5% organic). EBITDA up 16.6% organic. EPS $2.48 (-1% vs 2008). Guidance 2010: “solid operating performance” skewed towards H2.
Superior growth platform
ABI increased sales by 2.5% like for like in 2009, while most brewers reported flat revenues last year. Own beer volume resisted well with less than 1% decline vs. 5-6% decrease for peers.
- Brazil helped with 10% growth, driven by the market and further share gains (70% in Q4), compensating for lower volumes elsewhere. We expect Brazil to continue to expand at a high single digit growth rate, compounded by positive forex.
- We expect other markets to show subdued growth in 2010, notably the US (poor weather in Q1), Western Europe and Russia (excise duty increase).
- Nevertheless, ABI increased sales and marketing expenditures in 2009, unlike peers, which bodes well for its key brands. Sales and marketing expenses rose by 20% in Q4 with higher spending across all regions and new product launches in the US.
- As to pricing in the US, there might be pressure but both ABI and MillerCoors seem to remain disciplined and committed to deliver on the bottom line front.
- Longer term, we expect ABI to get more involved in the Mexican market once the arbitration proceeding with Grupo Modelo is resolved.
The most profitable of the global brewers
EBITDA margin (35.5%) stands well above peers average (20-22%) thanks to economies of scale, notably in the US, Canada and Brazil combined with tight costs management. We expect EBITDA to increase by 8% to €13.1bn vs €12.1bn (proforma base following 2009 disposals). We see the group EBITDA margin moving from 35.8% restated in 2009 to 37.9% in 2012.
- Cost savings of €1.11bn in 2009 exceeded guidance by 11%. Management confirmed incremental savings of $890m over the next two years ($500m in 2010 and $380m in 2011).
- Selected Joint purchasing agreement with PepsiCo (NYSE:PEP) in the US comes on top of the existing $2.25bn cost cutting programme. ABI and PepsiCo will buy jointly goods and services such as IT hardware, office supplies, travel services, transportation or maintenance supplies at competitive prices. Longer term, we also believe that US distribution offers significant potential efficiency gains.
- ABI is planning to cut 10% of its workforce of 8000 in Western Europe in order to adapt its structures to lower volumes and shift to the off trade.
- ABI will continue to deliver on net debt reduction. ABI divested $9.4bn of which $7bn in cash, reduced Capex by $1.5bn and improved working capital by $787m, reducing net debt by $11.5bn to $45.2bn. We expect net debt/EBITDA to fall from 3.7x to 3x by the end of 2010, thanks to $6.7bn FCF generation.
ABI trades at 16.1xP/E and 8.9xEV/EBITDA based on 2010 estimates, implying a slight premium to peers. We think it is justified by ABI’s superior EPS growth. Our DCF based valuation suggests a target price of around €41 (US$56) per share.
Author's disclosure: Long ABI at time of writing.