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Holmes Osborne, CFA
Holmes Osborne, CFA
Articles (202)  | Author's Website |

Royal Unibrew Is a Reasonably Priced, Growing Company

Danish company is one of the few publicly traded brewers in the world

Danish brewer and drinks manufacturer Royal Unibrew (OCSE:RBREW) has been putting up great growth, is very profitable and the stock is reasonably priced. While putting up this growth, share count has actually fallen. Compared to the handful of publicly traded brewers left in the world, the stock is cheap. The biggest issue for the American investor is there are no American depository receipts and the stock does not trade over the counter; it must be purchased in Denmark.

The company has 52.5 million shares, the stock trades for 295.9 Danish krone and the market cap is 15.53 billion krone ($2.216 billion). It takes seven krone to buy one dollar. The dividend is 8.15 krone and the dividend yield 2.75%. Earnings per share are 14.7 krone and the price-earnings (P/E) ratio is 20.

The company earned 6.34 billion krone in revenues in 2016 and increased 5% from the previous year. Ebitda was 1.306 billion krone and up 7% from 2015. Unibrew is very profitable. The profit margin is 12.36% and operating margins 15.78%. Free cash flow was 1.022 billion krone and the free cash flow yield is 6.58%. Return on equity is 27%. All of these numbers are astounding.

For dividend fans, the dividend grew from 5.02 krone in 2010 to 14.63 in 2016. Put that in a dividend growth model.

Management has given guidance for 2017 of revenues between 6.25 billion krone and 6.45 million krone. Ebitda guidance is 1.285 billion krone to 1.385 billion krone. Ebit guidance is 980 krone and 1.080 billion krone. The reduction is due to a potential loss of a contract from Finnish grocer SOK.

Of revenues: 44% is beer, 13% other alcohol and 43% non-alcoholic. Its products are sold: 54% in the Baltics, 39% Western Europe and 7% is export. Unibrew is very focused on Scandinavia and the Baltics. Sales have grown from 3.43 billion krone in 2012 to 6.34 billion krone in the latest year. What is amazing is shares outstanding have barely budged from 52.85 million to 54.1 million. Over a million shares were bought back last year. Between the dividend and share buyback, management is very shareholder-friendly. Unibrew announced another share buyback in March 2017. The buyback is up to 560 million krone.

Charitable foundation Augustinus Fabrikker of Denmark owns 10.4% of shares. HC Royal Holding of Finland owns 7.1%. Perhaps this is part of the reason Unibrew is so shareholder-friendly. Unlike many Scandinavian companies, there are no dual-class voting shares. This too is nice.

The balance sheet shows 6.9 million krone in cash and 534 million krone in receivables. The liability side shows 1.769 billion krone in payables, 859 million krone in mortgage debt and 134 million krone in bank loans. Unibrew used a lot of cash last year in a purchase.

Unibrew's predecessors date back to the 19th century in Denmark. Faxe Bryggeri and Jyske Bryggerier merged in 1989 and became Bryggerierne Faxe Jyske . In 1992, the name was changed to Bryggerigruppen A/S (The Danish Brewery Group A/S). In 1998, The Danish Brewery Group A/S was listed on the Copenhagen Stock Exchange. The company acquired Albani Bryggerierne in 2000. Maribo Bryghus came along with the acquisition. In 2004, Latvian soft drink maker Cido Partikas Grupa was purchased. Soon after, Latvian brewer Lacplesa Alus was acquired. In 2005, Polish brewer Brok-Strzelec was added into the fold. Cido was purchased in 2004 and produces juice, mineral water, soft drinks and cider. The company changed its name to Royal Unibrew A/S in 2005.

The company owns five breweries and two soft drink and water facilities. Finland-based Hartwell was purchased in 2013, which goosed revenues for the company. Unibrew owns 25% of Norway's second-largest brewer, Hansa Borg Bryggerier. Hansa also bottles and distributes Heineken and Coca-Cola in Norway. Unibrew has had the PepsiCo (NASDAQ:PEP) contract for Denmark since the 1970s. It also distributes Lay's, Doritos and Bugles in Denmark

It is common for PepsiCo to partner with other bottlers to distribute its products in foreign countries. Coca-Cola (NYSE:KO) has taken a different route. It has bottlers that are often publicly traded in foreign markets. Coke usually is the largest shareholder of these bottlers. It is interesting how soda giants differ in this regard.

Sales jumped from 4.481 billion krone in 2013 to 6.056 billion krone in 2014 with the purchase of Hartwell. Earnings jumped from 480 million krone to 624 million krone in that year too. Great acquisition! Hartwell was purchased from Heineken in 2013 for 2.8 billion krone. In 2015, Hartwell faced a small slowdown in Finland due lousy summer weather.

Let's take a look at a few of Unibrew's larger competitors. Heineken trades at a trailing P/E of 30, has a return on equity of 11.73% and a 1.69% dividend yield. Unibrew is more profitable and the stock is cheaper. Anheuser-Busch InBev (NYSE:BUD) trades at a forward P/E of 23, has a 3.61% dividend yield and usually has a return on equity of about 18%. Unibrew is certainly more profitable and the stock is slightly cheaper.

Carlsberg's (CABGY) sales have actually shrank since 2012. The stock trades at a P/E of 22, sports a 1.54% dividend yield and the return on equity is about 10%. Unibrew's financials are far superior with much more growth. Having said that, Unibrew has a larger percentage of non-alcohol than these three brewers.

The other handful of brewers like Boston Beer (NYSE:SAM) or Molson Coors (NYSE:TAP) have had choppy revenues. Like many Japanese companies, Asahi and Kirin have had flat revenues for years. A Bloomberg article from September 2016 points out that Unibrew outperformed Carlsberg (Denmark's largest brewer) by a factor of eight over five years. Carlsberg has had a lot of problems in Russia.

Let's go back to a time when Unibrew was struggling. Like most companies, the brewer took it on the chin during the financial crisis. Revenues dropped from 4.178 billion krone in 2008 to 3.816 billion in 2009. That is a 9% drop! According to the annual report, 6% was attributable to the global recession and 3% due to exchange rate fluctuations and the decision to terminate unprofitable supply agreements. The dividend had been completely cut since 2007, when the stock paid 10 krone a share.

The company took an impairment of 455 million krone in Poland in 2008. The CEO at the time, Poul Møller, stepped down and was replaced by Henrik Brandt.

The Danish economy and krone are rock solid. Danish government debt is AAA rated. You cannot say that about too many European economies. The government recently repaid all of its foreign dollar denominated debt. This is the first time the country has had no foreign dollar debt in 183 years! Last month, the central bank sold 4.7 billion kroner to weaken the currency as euros were sold because of the French election.

Having said this, there are risks as there are several countries involved: Denmark, Finland, Italy, Norway, African nations and several others. Denmark and Norway each have their own currencies which fluctuate with the euro.

In December, CEO Henrik Brandt stepped down and was replaced by Jesper Jørgensen. Brandt had been at the helm since 2008. Jørgensen had worked at Carlsberg, Arthur Andersen and Germany-based Knauf. It appears Brandt had done a great job in his nine years as head of Unibrew. In the third quarter of 2016, revenues were flat at 1.7 billion krone due to mediocre summer weather. Flat revenues and the departure of Brandt sent the stock price south. The price went from 335 krone in September to 246 krone in December. Talk about value investing. September would have been a great time to buy shares.

Michael Rasmussen of ABG Sundal Collier is not so impressed with Unibrew. He thinks the stock is fully valued and that revenues will hardly budge over the next couple of years. The company has a contract with Finnish grocery chain SOK that could end later in 2017. The contract comes up for periodic renewal and probably will be renewed. ABG downgraded shares to a hold from buy. They have a target price of 315 krone, which would still be a profit from where it is currently trading.

The biggest issue as far as the American investor is concerned is the stock does not have an ADR. It does not even trade over the counter. You have to buy shares in Denmark. We were the first firm on Charles Schwab's platform to buy shares. Can you imagine that? The size of Schwab's holdings and we were the first buyers? The shares are identified as K1171Y104. Heineken (HEINY) and Carlsberg at least trade over the counter in the U.S. and InBev has an ADR.

We spoke with CFO Lars Jensen and asked if there was any chance of an ADR or pink sheet in the U.S. He said Unibrew had no such plans. He also confirmed that the SOK contract is up for renewal.

So as you can imagine, no U.S.-based researchers cover Unibrew. You cannot even find it on Seeking Alpha or other internet sites. There are European-based banks that provide research, but this is beyond the scope of most American investors other than large institutional money managers and hedge funds.

I do not know if Unibrew would ever sell out. Many Scandinavian companies are controlled by foundations and families who have held shares for many years. They have no interest in giving up the family dynasty. Unibrew is similar in that regard with many companies in that region that are controlled by groups that also have many other holdings throughout Europe. Think of another Danish company that will never sell and is part of a web of holdings-Lego.

If history repeats itself, Unibrew will make more acquisitions. It is difficult to make a model of unknown acquisitions, but you can bet there will be a few a year. There will also be divestments.

In summary, brewers just do not trade this cheaply. There are only a few brewers left after all of the consolidation. The drivers of the stock price are valuation, profitability metrics and growth. As the company is quite small, acquisitions really drive sales and earnings. The stock should probably trade at a P/E of 25. Why 25? Based on profitability and growth compared to its peers. If this occurred, the stock would be trade at 367, which would be a 24% increase.

Disclosure: We own shares.

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About the author:

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

Visit Holmes Osborne, CFA's Website

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