How the froth vanished from AB Inbev
The share plunged after sales growth and earnings were lower than expected and the market was spooked by AB InBev’s debt
In their fast-paced account (The Beer Monopoly) of the consolidation of the global beer industry that led to the creation of AB InBev, authors Ina Verstl and Ernst Faltermeier describe how critics accused the Brazilian company InBev, which was leading the process, of not being brewers but bankers.
The recent slump in the AB InBev share price, which suffered its sharpest fall in a decade on the day it released its third-quarter figures, suggests some investors may now be worried about its status both as a banker and as a brewer.
The 50% cut in dividend, needed to reduce debt levels, was traumatic, but had been flagged by management weeks earlier, so was not unexpected.
What was unexpected was the sales growth of just 4.5% to $13.3bn — lower than the $13.97bn that analysts had been encouraged to target for the three months to end-September. Also disappointing was the 7.5%, against an expected 11%, increase in earnings before interest, tax, depreciation and amortisation (ebitda) as the owner of brands such as Budweiser, Castle, Stella Artois and Corona struggled with higher input costs.
Investors across the globe sold the share, and the price dropped to a 12-month low of $74. This means the AB InBev share is 30% down on the year’s high, touched in January, and is way off the record high of $122, reached in 2015 shortly after the $107bn bid for SABMiller was announced.
Verstl says investors are probably responding to the belief that there’s going to be little, if any, growth in the global beer market for the foreseeable future. "[InBev] is highly dependent on emerging markets, [and] the Fed’s decision to hike US interest rates means we have entered a problematic era for emerging markets," she says.
The stance of the US Federal Reserve has underpinned weak economic conditions and volatile-to-weak currencies in emerging markets, which represent a double whammy for the beer giant.
There was ample evidence of both in the just-released figures. Sales in two of the group’s key emerging markets, SA and Brazil, were particularly disappointing, and were worsened by frail currencies.
In SA, April’s VAT increase and numerous petrol price increases have been cited as reasons behind weak consumer demand.
Management says the low single-digit volume decline was caused primarily by stock shortages due to supply constraints, which are expected to improve as the group heads into its fourth-quarter high season. Castle Lite has been particularly affected by the out-of-stock issue.
AB InBev, which bought SABMiller in 2016, is growing its premium and super-premium portfolio by triple digits in SA, and in August had an estimated 24% of that market.
In Brazil volumes have fallen by 3.3% as negative consumer confidence and weak disposable income knocked demand.
But even in the US sales have been sluggish and margins squeezed as consumers continued to switch from traditional big-name beer brands to craft beers or spirits.
Trevor Stirling, an analyst at Sanford C Bernstein, says the market seems to be spooked by the level of debt, which soared to $108bn thanks to the SABMiller acquisition. "Four years ago everyone was relaxed about debt," says Stirling, adding that it was always going to take 10 years to cover the cost of capital. He describes the level of cost synergies that have already been achieved from the merger and the "costs takeout" as "astonishing".
Investors may have been expecting a repeat of the debt-reduction miracle which the company pulled off after InBev’s audacious debt-funded $53bn acquisition of Anheuser-Busch in 2008, which pushed debt to a dangerous 4.7 times ebitda.
By the end of 2012 debt levels had been reduced to a comfortable 1.9 times ebitda.
Stirling says the board kept the dividend payout too high for too long and had to cut it to reduce the gearing. He dismisses speculation that the board will resort to selling assets to cut debt.
Razeen Dinath, head of equity research at Cadiz Asset Management, welcomed the decision to cut the dividend payment. He says it is unrealistic to expect a high rate of growth from a mature company. "The share is trading on a p:e of 17, which is attractive for a well-managed, low-growth, consumer-staple company. So, at the current share price we’re happy to own a piece of this business on behalf of our clients."
Verstl says the maturity profile of the bonds, which extends to 2058, means there’s no serious debt pressure on the group. She believes the board delayed cutting the generous dividend because the group’s major shareholders (Brazilian 3G and Belgian Interbrew) are keen to have access to cash to invest in nonbeer businesses. "They have made huge gains on their AB InBev investment over the past 10 years, but they realise the beer game is over, and so it’s no longer their major concern; they want to diversify," says Verstl, who adds that being a global beer player is still a remarkably profitable proposition.
"It’s just that the very easy days of global beer are over." She agrees with Dinath that the share price drop takes the rating to a more realistic level, given the less exciting growth outlook.