BUD
Anheuser-Busch InBev SA/NV
St Andrews Investment Society 15.11.2016
Anheuser-Busch InBev SA/NV
BUD
A titan of the beer industry, Anheuser-Busch InBev SA/NV is primed to see growth due to undervaluation of their recent merger with SAB Miller Price (14.11.2016) and improved economic conditions in key markets. Market Cap (bn) EV (bn)
Company Overview Anheuser-Busch InBev SA/NV (AB InBev) is the world’s largest producer of beer. Following a merger with their largest competitor, SAB Miller, AB InBev now produces 27.6% of global beer volume, and collects 46% of total global profits. Their alcoholic beverages are broken down into three different groups; Global Brands which encompass their top selling brands, Budweiser, Corona, and Stella Artois, International Brands which constitute smaller international brands such as Becks, Leffe, and Hoegarden, and the Local Champions consisting of top selling local brands such as Bud Lite in North America or Cass in South Korea. AB InBev was segmented into six regions as of 2015: North America (36.5%), Latin America North (27.8%), Mexico (11.9%), Latin America South (9.4%), Asia (8.0%), and Europe (6.4%). A seventh is expected to appear on the 2016 financial report due to the addition of a major stake in the African market.
Investment Rationale Future domination of the market due to lack of competitors. Following their merger with SAB Miller, AB InBev holds a 27.6% total production share of global beer and 46% total profit share. In comparison, their two next largest competitors Heineken and China Resources Enterprise who hold 9.1% and 8.2% total production share of global beer respectively. Similarly, the two competitors hold 15.1% and 13.1% of global profits. AB InBev’s total domination of the market will provide consistent profits for years to come.
$101.92 $171.60 $282.15
Consumer Essentials Price Target Investment Horizon
$117.00 18m
24m performance: 140 120 100 80
Market Data: 52- Week Range Shares Out. (bn) EV/EBITDA EV/OpFCF P/E Div./Yield
$101-$137 1.7 22.8x
20.0x 54.5x 3.6%
Financial Data: Revenue (bn) Revenue growth EBITDA (bn) EBITDA growth EBITDA margin
43.6 -7.3% 17.1 -7.6% 40.2%
Strong growth plans in the emerging markets of Africa and Asia. AB InBev’s only Leverage: untapped market was the African Continent. Following their merger with Net Debt (bn) SAB Miller on October 28th, 2016 AB InBev now has a foothold in 17 Net Debt/EBITDA different African nations, such as the SAB Miller hub South Africa and EBITDA/Interest Nigeria which reported 31% revenue increase over 2015. Similarly, in Asia, AB InBev’s 19% Chinese volume is set to expand as demand for premium beers increases, as well as the intent to purchase local brands in T2 and T3 cities throughout the country.
42.2 2.5x 8.8x
Currently preforming above industry average in many regions. Currently AB InBev is outperforming its competitors in China and Mexico, as well as in Latin America South. AB InBev posted extremely strong results for 3Q16 in these three key markets. Additionally, AB InBev’s Dividends per Share growth and Earnings per Share growth are increasing at a faster rate than competitors, many of whom do not pay dividends at all. Underperformance in second largest market to stabilize as the Brazilian economy improves. After three unsuccessful quarters, AB InBev has seen their stock price take a hit due to losses posted in their second largest market, Brazil. Page 1 of 6
BUD
Anheuser-Busch InBev SA/NV
This should only be a temporary hit as demand for all products in Brazil is down due to geopolitical issues such as the ousting of the president in August as well as a two year long economic recession. In the meantime, AB InBev is employing measures to help immediately combat these problems and increase margins.
Market Position With AB InBev’s merger with SAB Miller, its position in the market is incredibly strong. Major competitors lag significantly in terms of size and revenue, and AB InBev’s management has made clear its ambition to tighten its grip on the global beer market. A list of its major competitors is included below. China Resources Beer Holdings is a state-owned beer company operating out of Hong Kong. Molson Coors Brewing Company operates primarily in Canada, the US, and the UK. Carlsberg operates mainly in Europe and Asia. Carlsberg does not have a large production footprint, instead brewing its products in Europe and exporting them to global markets Heineken N.V. operates primarily in western and central Europe. However, the company has little penetration into the Americas. In 2008, it sold 19 million hectoliters of beer in these regions, in comparison to AB InBev's 160 million hectoliters. Tsingtao is a mainland Chinese brewery headquartered in Qingdao and commands c.15% of the Chinese domestic market share.
Revenue (2015, $bn) by Company 50 40 30 20 10 0 AB InBev SA NV Carlsberg Heineken Molson Coors China Resources Beer Holdings Tsingtao
Financial Position Dividends per share increased 43.6% YoY. This positive trend is particularly noteworthy because most companies in the Beverages (Alcoholic) industry do not even pay a dividend at all. Furthermore, measured on a 5-year annualised basis, dividends per share and earnings per share growth ranked highest relative to its industry peers, at $3.87 and $1.86 respectively. Year on year, AB InBev’s revenues fell by -7.4% from 47.1bn to 43.6bn, performing better relative to most of its industry peers. Furthermore, despite a 1.4bn decline in cash reserves, the company earned 14.2bn from its operations with a Cash Flow margin of 32.4%. A further 4.9bn was used on investing activities, and 9.28bn was paid in financing cash flows. Although overall EBITDA growth and Revenue growth are down, AB InBev posted extremely strong results for 3Q16, especially in China, Mexico, and Latin America South, three of its key markets. In China, beer industry volumes were essentially flat. Despite this, AB InBev’s volumes grew by 1.6%, EBITDA grew by 25.3%, and Revenue grew by 6.3%. In Mexico, EBITDA grew by 5.8% and Revenue grew by 12%. Latin America South, EBITDA grew by 28.7% and Revenue grew by 22.2%. Favourable consumer environments and the company’s own commercial initiatives drove its excellent performance relative to industry peers.
Page 2 of 6
BUD
Anheuser-Busch InBev SA/NV
In Brazil, AB InBev continues to face significant challenges. In 3Q2016, EBITDA declined by -33.0% and Revenue declined by -6.8%. These resulted from unfavourable consumer disposable income conditions and the company’s decision to implement price adjustments. However, the company projects improvements in its performance in Brazil in the medium term as disparities in regional per capita income close. AB InBev has faced significant challenges in the past year. Despite unfavourable conditions in Brazil, the company secured excellent results in China, Mexico, and Latin America South, outperforming industry peers. With EBITDA growth and neutral change in Revenue in the US, as well as EBITDA and Revenue growth in Europe, performance was solid despite declining beer industry volumes.
Share of Total Revenue by Region
EBITDA Share per Region
North America (36.50%)
Latin America North (20.8%) Latin America South (7.9%)
Mexico (11.90%)
Europe (9.2%) North America (35.7%)
Latin America North (27.80%) Latin America South (9.40%)
Asia Pacific (12.7%)
Europe (6.40%)
Global Export and Holding Companies (4.4%)
Asia Pacific (8.00%)
Mexico (9%)
AB InBev - Financial Summary FY2013A
FY2014A
FY2015A
LTM
13A-15A CAGR
43,195
47,036
43,604
42,305
(0.94%)
8.7%
8.9%
-7.3%
-
EBITDA
23,248
18,465
17,057
16,258
Margin
54.2%
39.3%
39.1%
38.4%
20,443
15,111
13,904
13,073
Margin
47.3%
32.1%
31.9%
30.9%
OpFCF
13,864
14,144
14,121
-
Margin
32.1%
30.1%
32.4%
-
14,390
9,216
8,273
-
33.3%
19.6%
19.0%
-
($m, FYE Dec) Revenue Growth
EBIT
Net income Margin
(14.34%) (17.53%)
1.85%
(24.18%)
Page 3 of 6
BUD
Anheuser-Busch InBev SA/NV
Growth Prospects & Risks Latin America: Brazil is currently in a recession; however, they are showing an uptrend in the economy, which matches a reduction in the loss of sales (see below). While the eventual rebound will hopefully allow for the second largest portion of the company to turn a profit (currently c.20.0% of revenue), quarter three (not pictured on the graph) showed mild improvement with growth sitting at around -4.1%, though the continued upward trend is encouraging. AB InBev, in response to the situation in Brazil, is currently taking steps that are accretive to margins. One major factor is the started use of reusable glass bottles. Reusable glass bottles are both cheaper, bring the cost per unit down, as well as attractive for more environmentally conscious consumers. With core brands of beer making up most of the Brazilian beer sales, lowering the cost per unit will help further stabilize the Brazilian market. Brazil is one of the world’s most economically unequal nations, with the top earning individuals often not suffering from lack of credit and high interest rates. This is, according to Trefis, is a boon to the company’s premium brands in the region, which currently only make up 10% of total sales in the region. Trefis predicts that as the economy normalizes, Brazil will see a raise in premium brand’s total sales percentage, increasing profits respectively. In response to the growing demand for Budweiser in Mexico, AB InBev will be investing $325m in a new brewery as well as an aluminium beer-can factory in Mexico. The brewery will increase production in Mexico by an additional 5 Million Hectolitres, but more importantly the aluminium can factory will produce likely 1 billion cans per year, and will end the Mexican branch’s need for importation of cans. China: The Chinese beer market as a whole has been doing poorly over the course of 2016, however, AB InBev’s revenue neutral 2016 (as opposed to the to an industry average of a four-point reduction) shows promise in an improved economy. China, in 2002, overtook the United States as the world’s largest consumer of beer, but makes 21% less revenue than the United States market due to the high consumption of inexpensive brands such as Snow. One of the conditions of the AB InBev/SAB Miller merger was the sale of Snow, leading AB InBev to shift their focus almost solely on their premium brands. In 3Q16, revenue grew by 4.6% per hectolitre, due primarily to increases in premium brands such as Corona and Budweiser. This growth falls in line with World Bank’s 2013 projection that the Chinese beer market’s valuation would grow by 45% by 2017. While unlikely, AB InBev has continued to state their personal interest in buying local brands in T2 and T3 Chinese cities. Currently AB InBev post-merger owns 19% of the total Chinese market share. Craft beer poses far less of a threat in the Chinese market than in American markets, making capitalization of premium and local brands a far higher priority. Growth in the Chinese market is already being seen with a 25.4% growth in Chinese EBITDA in 3Q2016 alone. Africa: One of the key motivators behind the SAB Miller merger is their presence in Africa. As of SAB Miller’s last reported numbers, beer volumes rose 6% in Africa as of 1Q16, with revenue reaching 12%. AB InBev should continue to Page 4 of 6
BUD
Anheuser-Busch InBev SA/NV
expand on these positive numbers throughout 2016 and on. SAB Miller had a stake in 17 different African nations as opposed to AB InBev’s 3. It is likely that AB InBev’s will see their largest growth from African markets over the next two years. Nigeria in particular should be noted as a high growth potential area. As of 1Q16 revenues were up by 31% and volumes rose by 27% from the previous year. Nigeria was highly contested space between SAB Miller and Heineken, though SAB Miller made their stake through providing inexpensive beer, an area of the market Heineken has little stake in. The introduction of AB InBev core brands should continue this trend and see further improvement in the African sector. Other: While further acquisition in the beer industry is seemingly impossible, CEO Carlos Brito has expressed interest in acquiring the world’s largest soft drink producer, the Coca-Cola Company. Currently holding an EV of $201bn, a takeover of Coca-Cola would be larger than that of SAB-Miller, which cost AB InBev $98.8bn. This interest appears to fit into Mr. Brito’s stated goal of making non-alcoholic drinks 20% of the total produced goods by 2020. Donald Trump: One of the highest costs in AB InBev’s third largest market, Mexico, is travel and importation. With an increased demand for Budweiser over the course of 2016 in Mexico, AB InBev was forced to ship additional units from American breweries beyond the border. Donald Trump poses a threat to the North American Free Trade Agreement, which allows for AB InBev to ship these products without penalty. Concerns range from at least an additional tariff imposed by the Mexican government on US goods to at most a temporary shutdown of US trade with Mexico. Trump’s trade policy also affects potential outsourcing of low skill jobs such as aluminium can manufacturing to foreign countries. Economic Recovery: We are projecting an economic upturn in Brazil over the course of the next 18 months, however, failure by the Brazilian government to stimulate the economy may result in a continued hold for the lower prices. Limited Growth: Following the merger with SAB Miller, AB InBev has become one of the largest companies in the world. The initial merger was rejected by most regulatory industries due to either a violation of anti-trust acts, or in China’s case, until sufficient bribery of the Chinese government was made (in this case, the total acquisition of Snow brands by the state run beverage company). AB InBev has grown primarily through merger and acquisitions during its history, and while acquisitions of American Micro Breweries may still be permitted, large scale growth in the beer industry through acquisitions will be severely limited. Low Demand in Africa: A large portion of AB InBev’s SAB Miller gamble lies in African growth. Failure to see significant growth in the African market could lead to the SAB Miller merger being labelled a failure and a subsequent fall in the value of AB InBev.
Page 5 of 6
BUD
Anheuser-Busch InBev SA/NV
Management Structure & Integrity AB InBev is a global brewing firm with key offices in many major countries, as well as its main office located in Leuven, Belgium. Its primary objective is to provide the world with a culture of smart, sustainable drinking which is evidenced by the company joining other leading alcohol producers in the 2013 ‘International Alliance for Responsible Drinking’, showing commitment to integrity and responsibility. The company has a strong, long-term managerial team lead by CEO Carlos Brito and Chairman Kees Storm. Brito has been in this position since 2009, thus he has been in charge and overseen the company since it took over Anheuser-Busch. This shows the company is in good hands as stock started at $38 to increasing over two-fold (to even $130 at one point) in just 8 years. Storm on the other hand is also a member of the board on Unilever, another very successful globally traded company. This shows he is a very competent manager, alluding us to the fact that AB InBev has a very strong front office.
Shareholder Structure With regards to shares, they are priced at $115.47 as of 8 November 2016. This in combination with shares outstanding of 2.0bn means AB InBev has a Market Cap of €229.7bn. Of the 2.0bn issued shares, 1.7m are ordinary unrestricted shares with the other 325.9m being restricted and unlisted. Of the restricted shares, Altria owns 56.8% (9.57% of the total) and Bevco owns 29.7% (5% of the total). AB InBev’s management itself owns a staggering 27.7% meaning the management and shareholders goals should be aligned.
Page 6 of 6
