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AB InBev - recovery builds steam

William Ryder, Equity Analyst | 6 May 2021 | A A A
AB InBev - recovery builds steam

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Anheuser-Busch Inbev Com Stock NPV

Sell: 49.66 | Buy: 49.66 | Change 0.41 (0.83%)
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AB InBev's first quarter revenue rose 17.2% to $12.3bn. Total volumes were up 13.3% and revenue per hectolitre rose 3.7%. Underlying operating profit rose 18.4% to $3.1bn. The group expects underlying cash profits to grow 8-12% this year, and capital expenditure of $4.5-5.0bn.

AB InBev have announced that Carlos Brito is to step down as CEO on 1 July after 15 years at the helm. He will be replaced by Michel Doukeris, currently the president of the group's North America Zone.

The shares rose 3.4% following the announcement.

View the latest AB InBev share price and how to deal

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.

Despite selling a minority stake in Budweiser APAC, part of the group's Asian operation, for $5.8bn, and the $10.8bn sale of the Australian business, debt was still a whopping 4.8 times underlying cash profits when we last heard. That's a lot higher than we're comfortable with.

For that reason, we were a little surprised to see the dividend return. Admittedly, it was half 2019's final dividend. But it still grates when AB InBev is allegedly doggedly committed to getting the balance sheet in order. Tough though it is to lose a dividend, we think it'd be better if management channelled those funds elsewhere.

If you can see past the debt shaped millstone hanging around the group's neck, there are bright spots. Sales did well coming out of earlier lockdowns, and the most recent quarter also made encouraging reading.

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.

And because AB InBev has such high fixed costs, an increase in sales should be met with an even bigger increase in profits. (A production line is a lot more efficient on a cost-basis when it's working at full capacity). Of course, the opposite's also true, which is why last year was so challenging.

AB InBev's enviable portfolio of brands and huge global footprint means some level of revenue is pretty much guaranteed. Its long-term growth opportunities shouldn't be dismissed either. But debt is a problem, and we have trouble being more positive while the balance sheet looks the way it does.

AB InBev key facts

  • Price/Earnings ratio: 22.2
  • 10 year average Price/Earnings ratio: 19.5
  • Prospective dividend yield (next 12 months): 1.4%

All ratios are sourced from Refinitiv. 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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First quarter results

Total North American volumes rose 2.9% and own beer volumes up 1.8%. Revenue rose 5.0% to $3.8bn. In the United States total revenue rose 5.4%, reflecting higher sales to wholesalers and slightly reduced sales to retailers. In Canada volumes and revenues both grew by low-single digits as the group outperformed the market. Underlying cash profits (EBITDA) for the division rose 2.2% to $1.4bn.

In the Middle Americas revenue rose 16.0% to $2.8bn, with total volumes up 10.4% and own beer volumes up 12.2%. In South America the two volume measures were up 12.1% and 15.1% respectively, and revenue rose 29.0% to $2.2bn. Underlying cash profits for the regions were up 10.6% to $1.4bn and 23.3% to $763m respectively. Both Brazil and Colombia achieved revenue growth in the mid-twenties, while Mexico enjoyed high-single digit growth.

In the Europe, Middle East and Africa volumes fell 2.1%, with own beer down just 0.1%. Revenue was down 0.4% at $1.6bn and underlying cash profits fell 14.0% to $403m. Europe struggled due to bar and restaurant restrictions, although AB InBev put in a good showing in the UK, Belgium, Italy and France. In South Africa a sales ban continued to hold back progress.

In the Asia Pacific region volumes rose 63.3% and revenues rose 61.7% to $1.6bn. Underlying cash profits rose 166.6% to $570m. Volumes rose 85% in China, and management estimates this growth to be ahead of the overall market.

AB InBev's Global Export and Holding Companies saw a 70.1% increase in volumes and underlying cash losses widened by 30.1% to $241m.

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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 Refinitiv. 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.