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Stock price: p1861 ($26.78 US)
Conclusion: SAB Miller’s (OTC:SBMRY) exposure to emerging markets seems fairly reflected in the stock price. We are seeing better upside elsewhere, based on our valuation range of p1900-p2000 per share.

FY2010 results: Sales up 4% (including share of associate and JV revenue) to $26.3bn (+4% organic). EBITA (+6% organic) EPS adjusted +17%. No guidance given for FY 2011.

Looking for 4% organic growth in FY11, more balanced between volume and pricing.

  • We forecast volume to pick up to 1.9% despite further decline expected in Europe (-1.5%) and in the US (-1%). Latam, Africa (including South Africa) and Asia (volume +3-5%) should more than compensate for the absence of recovery in developed markets. Management expects growth to be skewed towards H2, as H1 will be impacted by early Easter sales combined with cold weather across the Northern Hemisphere.
  • Pricing impact (+2.5%) could be less pronounced than last year (up 3.9%). Mainstream beer remains under pressure, notably in the US but also in Africa. Management looks on balance confident about pricing in the US. SAB should benefit from greater room to manoeuvre at the top end of the market.
  • Local premium beer should continue to expand at a faster rate than the rest of the portfolio,in Asia (+37% CAGR F07/F10), Latam (+14% CAGR), South Africa (+13% CAGR), Africa (+9% CAGR). Local premium brands are priced 10-20% above mainstream and provide higher margins.

EBITA margins gains could accelerate in F11 (+110bp vs +30bp in F10).

  • F10 headwinds to reverse. According to management, raw materials increased 4% last year, driving COGS up 3%. We estimate the negative impact at around 100bp of sales, implying 130 bp of underlying gain in margins.
  • First, pricing should increase while raw material and COGS could be flat to marginally down according to management.
  • Second, costs savings are on track. MillerCoors is expected to deliver $750m by end of 2012, implying further $340m by end of 2012 (SAB share around $200m). Business capability programme could start to provide savings estimated at $60m this year ($300m by F14).
  • Conversely, margin recovery in Africa might be held back by higher fixed costs related to investments in new capacities and lower margins from newly acquired businesses. As to South Africa, although we expect SAB to benefit from the Soccer World Cup, we think that it will have to further increase marketing spending to protect its market share.
  • Based on current rates, Rand/USD impact could be slightly positive for F11.

Business Capability Programme cost treatment.
SAB has started a plan to streamline procurement, supply chain, distribution, finance and human resources by deploying global IT system and regional operational platforms. The programme will take four years and cost $800m.

  • SABMiller is treating 100% of the costs as exceptionals items which, we feel, tend to flatter EBITA and adjusted EPS growth.
  • We think that half of it should be considered as ongoing operating IS/IT costs included in EBITA and adjusted EPS calculation.

As a result, we estimate adjusted net earnings for F10 at $2387m (vs $2509m reported) and EPS at $1,53 (vs $1,60 reported).

We include $115m and $70m costs in our F11 and F12 earnings estimates (EPS F11 $1,76 +15% and EPS F12 $2,04 +16% respectively).

SABMiller trades at 15.7xP/E based on calendar 2010 estimates, implying almost 10% premium to peers. The comparison in terms of FCF yield is even less favourable. We think ABInbev (BUD) and Heineken (HINKY.PK) offer better value in the beer sector.

Source: SABMiller: Mainstream Beer Under Pressure but Premium Brands Still Have Fizz