SABMiller

Stock price: p1957
Conclusion: A slow start which was expected. We keep our EPS and valuation range unchanged at p1900-p2000 per share. We think Heineken offer better upside potential in the sector.

Q1 ended 30 June: lager and soft drinks volume down 1%. No guidance given for F11.

Notwithstanding a slow start, we expect volumes to turn positive this year
-the slight decline in Q1 was expected. The timing of Easter (South Africa), poor weather and excise increases (Colombia, Eastern Europe) held volume back in Q1.
-Volume growth resumed in June.
-We think +1.9% is still feasible owing to positive volumes in Africa (+7% in Q1), South Africa (flat Q1), Latam (+1%) and Asia (+4%) which will offset further decline in Europe (-9% in Q1) and in the US (-2.4% in Q1).

Positive pricing and lower input costs bode well for margin
-Management confirmed positive pricing combined with some reductions in raw material input costs early this year. We look for +2.5% price increases vs +3.9% last year.
-In addition, costs savings at MillerCoors added to the business capability programme should help to accelerate margins gains (+110bp on our estimates vs +30bp in F10)
We expect EPS to reach $1.76 in F11 and $2.04 in F12.

SABMiller trades at 17.6xP/E based on 2010 estimates, implying 12% premium to Heineken. We think SABMiller’s premium fairly reflects its exposure to emerging markets.

SABMiller

Stock price: p1861
Conclusion: SAB Miller’s exposure to emerging market seems fairly reflected in the stock price. We are seeing better upside elsewhere, based on our valuation range of p1900-p2000 per share.

FY2010 results: Sales up 4% (including share of associate and JV revenue) to $26.3bn (+4% organic). EBITA (+6% organic) EPS adjusted +17%. No guidance given for FY 2011.

Looking for 4% organic growth in FY11, more balanced between volume and pricing.
-We forecast volume to pick up to 1.9% despite further decline expected in Europe (-1.5%) and in the US (-1%). Latam, Africa (including South Africa) and Asia (volume +3-5%) should more than compensate for the absence of recovery in developed markets. Management expects growth to be skewed towards H2, as H1 will be impacted by early Easter sales combined with cold weather across the North Hemisphere.
-Pricing impact (+2.5%) could be less pronounced than last year (up 3.9%). Mainstream beer remain under pressure, notably in the US but also in Africa. Management looks on balance confident about pricing in the US. SAB should benefit from greater room of manoeuvre at the top end of the market.
-Local premium beer should continue to expand at a faster rate than the rest of the portfolio,in Asia (+37% CAGR F07/F10), Latam (+14% CAGR), South Africa (+13% CAGR), Africa (+9% CAGR). Local premium brands are priced 10-20% above mainstream and provide higher margins.

EBITA margins gains could accelerate in F11 (+110bp vs +30bp in F10).
-F10 headwinds to reverse. According to management, raw materials increased 4% last year, driving COGS up 3%. We estimate the negative impact at around 100bp of sales, implying 130 bp of underlying gain in margins.
-First, pricing should increase while raw material and COGS could be flat to marginally down according to management.
-Second, costs savings are on track. MillerCoors is expected to deliver $750m by end of 2012, implying further $340m by end of 2012 (SAB share around $200m). Business capability programme could start to provide savings estimated at $60m this year ($300m by F14).
-Conversely, margin recovery in Africa might be held back by higher fixed costs related to investments in new capacities and lower margins from newly acquired businesses. As to South Africa, although we expect SAB to benefit from the Soccer World Cup, we think that it will have to further increase marketing spending to protect its market share.
-Based on current rates, Rand/USD impact could be slightly positive for F11.

Business Capability Programme cost treatment.
SAB has started a plan to streamline procurement, supply chain, distribution, finance and human resources by deploying global IT system and regional operational platforms. The programme will take four years and cost $800m.
-SABMiller is treating 100% of the costs as exceptionals items which, we feel, tend to flatter EBITA and adjusted EPS growth.
-We think that half of it should be considered as ongoing operating IS/IT costs included in EBITA and adjusted EPS calculation.
As a result, we estimate adjusted net earnings for F10 at $2387m (vs $2509m reported) and EPS at $1,53 (vs $1,60 reported).
We include $115m and $70m costs in our F11 and F12 earnings estimates (EPS F11 $1,76 +15% and EPS F12 $2,04 +16% respectively).

SABMiller trades at 15.7xP/E based on calendar 2010 estimates, implying almost 10% premium to peers. The comparison in terms of FCF yield is even less favourable. We think ABInbev and Heineken offer better value in the beer sector.

SAB Miller

Stock price: p1790
Conclusion: Trading update for Q3 leads us to maintain our estimates and valuation unchanged (p1800-p1900). Stock looks fairly priced.

Trading update Q3: lager volumes stable (down 1% first nine months)

SAB Miller’s stable volumes result from a mixed bag: growth in emerging markets, Latin America (+4%), Africa except SA (+7%) and Asia (+5%) offset by decline in developed markets (Europe -2%, US -3.6%) and in South Africa (-4%).
These numbers confirm that the industry continues to struggle with depressed volumes in mature markets. However, top line growth is not what investors in the beer sector are currently looking for. Future EPS growth in the industry will be rather driven by costs savings programmes coupled with synergies from consolidation. As to SAB Miller, margins will be enhanced thanks the implementation of a new restructuring programme ($300m savings by 2014+$350m working capital release) combined with the synergies related to MillerCoors integration.

SAB Miller trades at 16.2x P/E based on 2010, implying 10% premium to the sector. Our DCF points to the high end of our valuation range (p1800-p1900). We see more upside left for Heineken and ABInbev.

SAB Miller

Stock price: p1786

Conclusion: We think that SAB Miller’s exposure to emerging markets and a possible deal with Femsa are largely priced in. We revise our valuation range to p1800-p1900 following the announcement of a new restructuring programme .

H1 results: sales down 6% reported (+3.1% organic), EBITA down 2% reported (+10.7% organic), EPS up 6% reported.

Comparing apples with apples.
SAB Miller reported 3.1% organic growth (mostly pricing) in H1, which is much better than the flattish numbers published by peers. Mature markets account for only 44% of SAB volume versus 50-70% for peers. We expect SAB to continue to outperform the category thanks to continuing growth in Latin America, Africa, notably South Africa and Asia.
Notwithstanding superior revenue growth, SAB is expanding operating profit , excluding currency impact, at a slower pace than competitors. This is partly due to the impact of supplier contracts and hedging programme which are limiting the benefits of lower spot commodity prices. Input costs should start to ease in H2 and next year. In addition, SAB suffers from margin erosion in South Africa owing to intense competition and increased marketing spending. Last, competitors reap the fruits of massive cost cutting programmes.

H2 growth will largely depend on forex.
Management warned that both pricing and margin will face a tougher comparison base in the last six months of F10. The good news should come from forex, based on current exchange rate. We estimate that H2 could be boosted by the strength of the ZAR , COP and EUR versus USD. In H1, negative currency impacted sales by 9.5% and EBIT by 12%. As a result, reported EPS excluding exceptionals could increase by 19% in Fiscal 10. Forex should again positively impact H1 F11 results.

The announcement of a new restructuring programme ($800m cost between F10-F13) in addition to the MillerCoors costs savings is good news. According to management, this business capability programme will help to streamline procurement, finance and HR functions and install regional platforms to run sales, distribution and supply chain. Management expects to save $300m by 2014 and deliver $350m of working capital release between F10 and F12, while the synergies related to MillerCoors will achieve $700m by F12 ($365m left for F11 and F12).
For the next two years, the impact on margins will depend on the retention rate of these savings. Assuming 50% rate, we estimate the impact on group margins at around 50bp and 70 bp respectively.

SAB Miller trades at 16.5x P/E and 10x EV/EBITDA based on cal F10. Our DCF confirms a valuation range of p1800-p1900. Upside risks would come from the acquisition of Femsa, which looks feasible given SAB Miller’s financial flexibility.

SAB Miller

Stock price: p1641
Conclusion: Despite further slowdown in Q2, a weaker dollar added to a stronger rand lead us to upgrade our valuation range to p1500-1600. The stock seems fairly priced based on fundamentals. The upside risk could come from a deal with Femsa…

H1 trading update: Sales down 1% like for like in volumes (flat in Q1), earnings in line with management expectations..

Q2 numbers have shown further slowdown in sales (almost 2% decline), reflecting tough trading in many SAB markets.
The trend worsened in Latam (-2%), South Africa (-4%), Africa (growth slowing to 2%) and remained fairly stable in the US (down 1%). Europe was the exception with a slight improvement (-5% vs -7% in Q1).
H2 should benefit from easier comparison, leading to stable volume coupled with price/mix impact estimated at 2-3%.

Bottom line should be helped by two factors:
1) costs savings derived from the MillerCoors’ JV estimated at $290m by end of March 10 vs $78m the year before
2) the weakening of the dollar and a stronger rand are good news for SAB. A weak dollar, the currency in which raw material are purchased, will reduce local input costs. Simultaneously, the appreciation of the rand will further increase the contribution from South Africa.

SAB trades at 17.6x and 16.1x P/E based on our F9 and F10 estimates, which is not cheap compared with 16.5x and 14.5x average for beverages. FCF yield of around 4-5% compares with 8% for most brewers.

The upside could come from a deal with the Mexican brewer Femsa. Femsa confirmed that “it is in discussions with several parties to explore opportunities involving its beer business”. The wording suggests various options: the sale of Femsa beer or a business alliance which would provide greater scale and opportunites. The two obvious partners could be SAB or Heineken. SAB’s room for manoeuvre looks greater thanks to a lower net debt/EBITDA multiple (2x end of March 2009).

SAB Miller

Stock price:1220p
Conclusion: Fairly priced

Preliminary 2009 results (end of March): Sales up 9% like for like, up 6% reported including JV to $25,3bn. EBITA flat and adjusted net earnings down 4% to $2bn.

We expect fiscal 2010 to be affected by weakening demand in key regions ( Latin America, notably Colombia and Peru, Eastern Europe and Africa, notably South Africa) and lower organic lager volumes, vs flat volumes last year. Price increases impact (+9% in fiscal 09) should also decelerate over the course of the year, as management might have less room for manoeuvre to increase prices in a tougher environment. Last, forex will have a negative impact on reported numbers. Sales could decline by 5% in fiscal 2010. Margins will remain under pressure, due to a higher COGS and negative forex impact. The good news should come from the US, where MillerCoors network integration is ahead of schedule with $238m in synergies expected by the end of 2009 vs $78m realised since July 2008. EPS could decline by 4%, while FCF could remain stable, helped by lower capex and improved working capital management.

SABMiller trades at 13,6x P/E and 9,3x EV/EBITDA which seems fair. In addition,our DCF confirms that the stock looks fairly priced.