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AB InBev - results beat market expectations

Nicholas Hyett | 25 July 2019 | A A A
AB InBev - results beat market expectations

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AB InBev reported second quarter sales growth of 6.2%, and a 9.4% increase in cash profits or EBITDA (earnings before interest, tax, depreciation and amortisation) to $5.9bn.

Results were comfortably ahead of analyst expectations, driven by product premiumisation and strong volume growth.

The group reiterated dividend growth would remain modest while it focusses on paying down debt.

The shares rose 5.3% following the announcement.

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Our View

It's impossible to miss AB Inbev's debt pile. At almost 4.6 times earnings, net borrowing levels have got the brewing company in a bit of a bind.

The group had planned to cut that by spinning off and listing its Asian business. Not only would this have raised a cool $10bn - it would probably have taken some debt with it. The U-turn on this decision, after investors raised serious concerns over the price, has left the group scrambling for alternatives.

First in the firing line is the Australian business which has been offloaded for around $11bn, and others are soon to be shovelled out the door. The urgency around getting debt under control comes after the 2016 acquisition of SABMiller, shifted debt from $42bn to $109bn. A suffocating level of debt and increased exposure to volatile emerging market sales isn't an ideal concoction.

There are some bright spots though. There's scope for huge volume growth in the years ahead in those less-developed markets, despite AB Inbev already brewing one in four pints globally. Increasing wealthy in those economies opens the door to price rises too.

In developed markets, a trend towards more premium products presents the opportunity to boost margins and revenues. And that's played well into the group's favour, as strong brands like Michelob Ultra, Stella and Corona, have reaped the rewards of that shift.

AB InBev's dominant market position and portfolio of brands should provide unique advantages. Particularly as it tries to deliver above market revenue growth and further margin improvement. Unfortunately the debt pile will loom over the group for some years yet, and likely hinder shareholder returns.

Despite that the shares change hands for 19.8 times earnings, slightly above the longer-term average, testament to the group's fundamental attractions.

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Second quarter results

Within the United States, revenues grew 1.8%, thanks to ongoing premiumisation and a decision to increase prices earlier in the year. That helped margins improve 0.4 percentage points to 40.7%, which saw EBITDA rise 2.8%. The group expects a slight decline in total market share, driven by changing consumer habits.

Europe delivered a strong quarter and grew revenue and volume, resulting in EBITDA growth of high single digits. That's despite a strong comparable with last year, after the Men's Football World Cup boosted sales.

Mexico performed particularly well. Revenue and volume grew by double digits - helped by the later timing of Easter - and EBITDA increased 30%. Premiumisation and effective marketing campaigns saw Corona and Budweiser perform well in Colombia, with margins up almost 4 percentage points and EBITDA improving by low double digit percentages.

Brazil saw EBITDA decline 4.4%, as margins came under pressure from higher aluminium and barley costs. South Africa also suffered from higher commodity costs, seeing EBITDA fall by mid-single digits.

China enjoyed a 24.4% rise in earnings, as price increases and a focus on operating leverage continue to deliver results despite a softer market.

During the first half, the group disposed of its Australian Carlton & United Breweries division, for around $11.3bn. The transaction will complete during the first quarter of 2020.

The group's net debt to EBITDA ratio decreased to 4.58x in the first half, and expects this to fall to around 4x by the end of 2020.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.