Xavier Brun is the head of European equities at Trea Asset Management, a Spanish investment house that manages 4.6 billion euros.
In his 2018 annual commentary, Brun called the year an “obscured” one, saying no one could tell what would happen next. But he advised investors not to let ignorance make them fall into mediocrity: “Although it is not known what will happen, we must be prepared.”
About Anheuser-Busch InBev
Price: €67.37 (Feb. 7)
Market capitalization: €131.3 billion
Adjusted net debt: €108.73 billion
Adjusted price-earnings ratio: 12.0
Brun had this to say about the investment:
"The history of the Belgian brewer AB InBev has its origins in 1366 in Belgium. Like the Roman empire history, its expansion took a few years, starting in 1987. In that year, it merged with the also Belgian Piedboeuf, to create Interbrew. In 2004, it joined forces with the Brazilian AmBev to become the InBev leader. That same year, Carlos Alves de Brito takes the reins of the company as CEO, a position he currently holds. During his mandate it merges with the American Anheuser-Busch in 2008 and with the British-South African SAB Miller in 2016 to become what it is today: AB InBev.
The result of all these deals has been world leadership. It produces more than 30% of world beer, ahead of Heineken (with 9%), China Resources (6%) or Carlsberg (6%). It has more than 500 brands (such as Coca Cola), including Corona, which is sold in more than 120 countries, Stella Artois and Budweiser, in more than 90. It has 7 of the 10 most valuable brands of beer in the world.
The sales figure in 2017 amounted to more than 56,000 million dollars, more than the 32,000 million of Coca-Cola. Its main markets are the United States (2% of sales), Brazil (13%), the European region and the Middle East (18%) and China (10%).
The operating margin (Ebit) has been around 30% in the last 10 years, higher than its competitors Heineken (14%) and Carlsberg (12%). Even superior to Coca-Cola (23%)."
Top sales beers by sales:
So, why is Mr. Market punishing AB InBev with a much lower valuation than its competitors?
|Million Euros||AB Inbev||Coca Cola||Heineken|
|Ebit Margin 2017||30.4%||21.2%||15.3%|
|Est PE 2019||15.6||22.3||17.9|
|Est EV/EBIT 2019||14.4||22.3||14.9|
Brun pointed out three main reasons for the market distrust of AB InBev that pushed its stock down 40% from top to bottom in 2018: lower beer consumption (in the U.S. and in China), the artisan beer boom and debt acquired for the purchase of SAB Miller.
"a) Lower beer consumption
The drop in consumption in the United States, Brazil and China made the focus on the brewer and its capacity to handle this situation. The result has been remarkable, for example:
- In the US, sales have remained constant, despite the drop in volumes. And they have even increased margins thanks to their focus on premium brands.
- In China, volume decreases are focused on the lower segment, where it is not present after the regulator forced it to sell SAB Miller's stake in Snow. On the other hand, volumes have increased in the Premium part. This is why sales and margins increase much more than volumes in the country.
- Sales of the main brands in the first nine months of 2018 exceeding 7.7%, with Budweiser + 6.4%, Stella Artois + 5.7% and Corona + 10.6%.
b) Craft Beer (Craft Beer)
The market share of this type of beer stands at 20% in the US and only 0.5% in China. Analysts punish Ab InBev for not being present in this segment. Well, in the US they have bought more than 15 companies that produce this type of beer. If one of these craft brands wanted to grow, it should go with the distribution leader: AB InBev. For its part, in China, craft beers can only be sold in the city / region where they are produced. In contrast, AB InBev, when importing this beer takes the status of imported beer and can sell throughout the country. Facilitating the creation of a brand.
In October 2016 AB InBev paid more than 100,000 million dollars to acquire SAB Miller. This forced it to leverage for a similar amount and put the net debt at 108,500 million dollars at the end of 2016. This resulted in a net debt / ebitda ratio of 5.1x. Too high for the new 2018 standards, the market thinks.
But to know if it is too much or not, we have to see its capacity to manage it.
The CEO, Carlos Brito already has experience navigating in these seas of debt. In 2008 the debt increased to 57,000 million (4x net debt / EBITDA) for the purchase of Anheuser Busch. As well, in 2012 the ratio was already at levels of 2.4x and in 2015 the company had delivered 40,000 million dollars in dividends and reduced debt by 15,000 million.
Now that we have seen that experience is not a problem, let's go to the ability to pay. Today, the company is able to generate 11,000 million dollars in free cash flow. This amount could be adjusted upwards due to: greater synergies due to the merger with SAB Miller, ability to improve margins in certain regions and by reducing costs thanks to higher productivity. The result would be a cash generation capacity of more than 13,000 million dollars per year. Although in reality, the underlying problem lies in the fact that the debt is denominated in dollars and euros, but more than 50% of the cash flow comes from countries with different currency.
But it would be useless if the maturity of the debt were close, making it impossible to generate enough free cash to be able to face the payment. Well, in the next 10 years, the amount to pay annually is in the range of 5,000-7,000 million dollars, much lower than cash it generates. In addition, the total debt has an average maturity of 12 years, its average cost is 3.61%, and 90% of this is at a fixed rate. Just drop the dividend in half (which you have already done) you would be able to release enough money to repay the debt for years to come."
The current price-earnings ratio of the S&P500 is close to 17x. Brun argued that if Anheuser-Busch is valued with a price-earnings of 18x (a small premium to the index valuation and a discount to the average of 20x for the company for the last 18 years), and 2017 free cash flow of nearly $11 billion is taken into account, the result is a capital valuation of $198 billion. For comparison, its current market valuation is $149.6 billion, giving a 25% discount for a business that will continue to compound over time.
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