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AB InBev - sales volumes plunge, Q2 expected to be worse

Nicholas Hyett, Equity Analyst | 30 July 2020 | A A A
AB InBev - sales volumes plunge, Q2 expected to be worse

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AB InBev's second quarter revenue fell 17.7% to $10.3bn as volumes fell 17.1%. Costs of sales fell 4.9% overall but, because fixed costs are high, costs per hectolitre rose 15.2%. As a result underlying operating profit fell 45% to £2.3bn.

The group's global brands, Budweiser, Stella Artois and Corona, saw volumes fall 16.6% globally and 12.6% outside their home markets.

AB InBev shares rose 5.5% in early trading.

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Our View

The closure of pubs and restaurants around the world cut off a major source of sales for brewers like AB InBev. This would be a problem at any time but it's especially worrying given the group's sizeable debt pile, courtesy of the 2016 SABMiller acquisition.

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 $10.8bn sale of the Australian business. Debt is now at a whopping 4.86 times underlying operating profit, and while some of that is down to decreased profits thanks to COVID-19, it's still way too much. Management knows this and is prioritising debt reduction.

In our opinion, the COVID-19 pandemic is going to make that a nigh impossible task in the short run. Frankly, we'll be impressed if the group can just stop the debt load growing any further. Once conditions return to normal AB InBev should be able to keep paying the debt down, but this looks like it might come at the cost of shareholder returns. The dividend has already been halved, and we suspect this won't be a temporary adjustment.

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.

AB Inbev has an enviable portfolio of brands, and if it can control its debt it should be fine in the long term. Over time we think the group should be able to rebuild the dividend, but given the debt position we'd be surprised by a quick bounce back.

AB InBev key facts

  • 12m forward Price/Earnings ratio: 21.0
  • Ten year average 12m forward Price/Earnings ratio: 19.2
  • Prospective yield: 2.2%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Second quarter results

In April volumes fell 32.4% worldwide as beer operations were shut down in key markets such as Mexico, South Africa and Peru. Lockdowns also closed bars and restaurants in most markets.

Volumes improved in May and were down 21.1% thanks to growth in China, strong sales in retail shops and a gradual easing of lockdown measures.

Volumes grew 0.7% in June as operations were resumed in Mexico and South Africa, sales grew in the US and China reported its highest ever monthly volume.

AB InBev assessed it's operating segments given the risk of COVID-19 and decided that the value of its South Africa and Rest of Africa needed to be written down by $2.5bn. This was partly offset by the sale of the Australian business for $1.9bn. Once non-recurring items and finance costs are included profit attributable to shareholders fell to $351m from $2.5bn last year.

Net debt stood at $87.4bn as of 30 June, which amounts to 4.86 times underlying cash profits. The group would normally like to operate with net debt at 2 times underlying cash profits and will continue to prioritise debt repayment. AB InBev has access to $34.1bn in liquidity, of which $25.1bn is cash and $9.0bn is credit. Free cash flow was negative at $405m during the first half.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

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