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AB InBev - a disappointing year

Emilie Stevens, Equity Analyst | 27 February 2020 | A A A
AB InBev - a disappointing year

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AB InBev reported organic revenue growth of 4.3% for the full year, reaching $52.3bn. Volumes grew 1.1%, and revenue per hectolitre increased 3.1%. However, cash profits rose just 2.7% to $21.1bn as higher costs and a challenging economic environment held the group back.

Management estimates that coronavirus and tough prior year comparisons will reduce first quarter cash profits by around 10% in 2020, although they still expect 2-5% growth over the course of the full year.

The board has proposed a final dividend of EUR1.00 per share, bringing the total payment for FY19 to EUR1.80.

The shares fell 8% following the announcement.

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Our View

AB InBev is a fundamentally attractive business - but it's impossible to miss the debt pile that's a legacy of the group's 2016 acquisition of SABMiller.

Efforts to bring debt under control have recently seen a minority stake in Budweiser APAC, part of the group's Asian operation, sold for $5.8bn. That follows the $11bn sale of the Australian business earlier this year. Management has now reduced net debt to 4x operating cash profits, but know they really need to half that.

Still, if you can see past the debt shaped millstone hanging around the group's neck, there are bright spots.

Footholds in less-developed markets from Latin America to Sub-Saharan Africa mean there's scope for huge volume growth in the years ahead. That's despite AB Inbev already brewing one in four pints globally, and a growing middle class in those economies opens the door to price rises too.

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

However, recent currency and commodity headwinds have increased costs and hurt margins. Management expects slower earnings growth in the near future as a result. Additionally, further debt reduction could soak up cash for years to come, so we find it difficult to get excited about the group's near term prospects. Coronavirus could also prove a major challenge - at least in the short term, but it's too early to say exactly how this will turn out.

AB Inbev does have an enviable portfolio of brands, and the shares trade on a PE ratio of 15 - well below the long term average of 19. A prospective dividend yield of 3% offers some compensation for those prepared to wait out the current turbulence.

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Full year results

Organic volumes declined in North America and Asia Pacific regions by 2.4% and 2.9% respectively. All other regions recorded volume growth, and every region grew revenue. However, sales growth slowed in the fourth quarter, primarily due to lower revenue per hectolitre as part of the group's push for affordability in some markets.

Cash profits fell in South America, EMEA (Europe, Middle East & Africa) and in the Global Export and Holding Companies division, but rose in North America, Asia Pacific and Middle America.

AB InBev's global brands, Bubweiser, Stella Artois and Corona, grew sales by 5.2% overall, and 8.0% outside their home markets.

Net capital spending rose from $4.6bn to $4.9bn. This was primarily spent on improving production facilities and logistics and commercial investments.

Net debt declined from $104.2bn to $95.5bn, although when the expected proceeds from the sale of the group's Australian operations are included net debt would be $84.6bn. On this basis net debt equates to 4.0x cash profits, which the group intends to reduce to around 2x.

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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.