Anheuser-Busch Inbev (ABI) Com Stock NPV
HL comment (25 October 2019)
AB InBev reported organic revenue growth of 2.7% in its third quarter, despite a 0.5% fall in volumes following last year's World Cup. However, increased costs as a results of currency and commodity price headwinds meant operating profits fell 2.6% to $4.1bn.
Full year guidance has been cut to "moderate" (instead of "strong") operating cash profit growth.
The dividend has remained flat at EUR 0.80 per share.
The shares fell 10% following the announcement.
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 expects to reduce net debt to 4x operating cash profits by the end of the year, but that's still fairly punchy in our opinion.
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.
However, AB Inbev does have an enviable portfolio of brands, and the shares trade on a PE ratio of 19 times - bang in line with the long term average at a time when the valuations of many consumer goods groups are closer to historic highs. A prospective dividend yield of 2.2% offers some compensation for those prepared to wait out the current turbulence.
Third quarter results
Organic volumes declined in the North American and Asia Pacific regions by -3.3% and -6.5% respectively. Despite growth elsewhere, including Mexico, South Africa and Colombia, this was enough to drag overall volumes down by -0.5%.
Revenue growth was driven by price increases and the trend toward premiumization. However, a 6.9% increase in costs meant gross margins fell 1.6 percentage points to 61%.
AB InBev's global brands (Budweiser, Corona and Stella Artois) grew their revenues by 4.1% worldwide, and the group's smaller High End Company grew 13.5%.
The group successfully listed a minority stake in their Asia Pacific business on the Hong Kong Stock Exchange for $5.8bn, which the group has used to repay some of its debt. As a result net debt to cash profits is expected to be below 4x by the end of the year, one year ahead of schedule.
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