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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (242)  | Author's Website |

Danish Brewer Is One of Few Publicly Traded Beer Companies Left

Royal UNIBREW has been growing sales and earnings without diluting shareholders

Royal UNIBREW (OCSE:RBREW) is a brewer and distributor of juices and soft drinks based in Denmark. The company does not have an American listing but has been very successful. The stock is reasonably priced, and profit margins are high.

The company has 54.1 million shares, the stock trades at 317 Danish krone ($46.79), and the market cap is 17.149 billion krone. It takes 6.79 krone to buy one dollar. Estimated earnings for 2016 are 14.43 krone, and the stock trades at a price-earnings (P/E) ratio of 22. The dividend is 7.2 krone, and the dividend yield is 2.27%.

Trailing 12-month revenues are 6.269 billion krone. Revenues have grown from 4.481 billion krone in 2013. Not only is this high growth, but shares outstanding have remained the same. Free cash flow is 980.6 million krone, and the free cash flow yield is 5.7%. The balance sheet shows 12.4 million krone in cash and 883 million krone in accounts receivables. The liability side shows 1.091 billion krone in payables, 319 million krone in short-term debt and 954 million krone in debt.

Return in invested capital is 16.9%, and operating margins are 15.2%. Return on equity is usually in the high teens or low 20s according to Bloomberg. EBITDA margin is 19.6%. A 450 million krone share buyback has been announced.

Key markets include Denmark, Germany, Finland and the Baltics. In addition to beer, the company also distributes Pepsi. Beers are sold under brand names Royal Okolgisk, Lottry, Gylden IPA, Faxe Premium and Kalnapilis. Royal brews and markets Heineken (XAMS:HEIA) in Denmark. This article from Bloomberg discusses how Unibrew has outperformed Carlsberg, the largest brewer in Denmark. Unibrew breaks revenues down into 45% for Western Europe, 47% for the Baltics and 8% for Malt Export. Another of our holdings, Orkla (ORKLY), distributes Pepsi in Norway.

Royal got the Heineken and Pepsi deal when it purchased Hartwell in 2013. Hartwell is based in Finland and distributes for Anheuser-Busch Inbev (NYSE:BUD), Diageo (NYSE:DEO) and several other franchises. Hartwell also produces water, soft drinks and cider.

Royal expanded its microbrewery Albani. I don’t know if microbrews have the same attraction in Denmark as they do in the U.S.

I’m trying to find reasons why or why not to buy the stock. In a recession, people are going to continue to buy beer and drinks. Royal does not seem to focus on high end, as far as I can see. In a recession, people will drink less Johnny Walker Blue Label (premium with higher profit margins) and more Red Label (lower end Scotch with lower profit margins). This is what will hurt certain brewers and distillers like Diageo. As for the Baltics and Europe, these are mature markets. The demographics are steady.

I can’t find a reason not to buy Royal. Another thing I like about the stock is that there are only a handful of publicly traded brewers. Sure, Inbev and Heineken have economies of scale, but I think that leaves room for Royal and the few remaining small brewers. I don’t have an opinion about the Danish krone or the euro. Both could continue to weaken.

The stock is reasonably priced, has a decent dividend yield and has a nice free cash flow. Profit margins are high and returns on equity and other metrics are high. Royal is a very enticing stock.

Disclosure: We own Heineken and Orkla.

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About the author:

Holmes Osborne, CFA
Holmes Osborne is principal of Osborne Global Investors.

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