Carlos Brito. Picture: BLOOMBERG/DARIO PIGNATELLI
Carlos Brito. Picture: BLOOMBERG/DARIO PIGNATELLI

There hasn’t been much froth on the AB InBev share price in recent months.

Investor sentiment had gone flat as analysts feared digesting SABMiller was proving tougher than expected. Could it be that this acquisition machine had bitten off more than it could chew?

The share price slid south as concerns grew that untapped African and Asian markets would have to compensate for the steady degradation of the group’s two most important profit sources, the US and Brazil.

There was a growing fear that the world’s dominant beer group was a one-trick pony — relying on post-acquisition cost-cutting to grow profits. The SABMiller deal meant this particular strategy had run out of road; from here on there could only be a few bolt-on acquisitions.

AB InBev would have to learn some new tricks.

The better-than-expected financial 2017 results appear to have settled some of the jitters, at least for now. An overwhelming 27 of the 37 analysts covering AB InBev rated it a "buy" and expected the share to gain 21.9% in a year.

A further eight analysts are recommending a "hold" and just two have tagged it a "sell".

The share price, which had moved off its two-year low in the week before the results were released, ticked up nicely on last week’s announcement.

It is now 9% off that low in mid-February but is still 33% below its May 2016 high.

A forward p:e rating of 21 — down from a too-steep 26 — has helped the "buy" recommendations, but more significant seems to be the perception that everything, except the US, is back on track.

Nedbank, which is expecting modest volume and revenue growth over the next few years, reckons that cost savings and deleveraging will help to deliver high single-digit profit growth.

"AB InBev arguably offers one of the highest quality and most defensive earning streams available to global investors," say Nedbank analysts.

There is a risk from rising global interest rates but long-term investors should not see this as too daunting for a management team with a record of creating shareholder value.

JPMorgan is more restrained and believes the era of above-average growth is behind the beer giant. "AB InBev used cheap debt to consolidate the global beer industry, which historically led to superior pricing power and, combined with superior execution on integration and cost-cutting, resulted in well above-average profit growth."

Scope for continued cost-cutting will need more volume growth than the group achieved in 2017 when overall organic volumes were only up 0.2%. For now it seems the better and faster than expected benefits from the SABMiller acquisition swayed most analysts.

In the coming years AB InBev will need to settle the US bogey, which has dogged it for the past decade. It seems much too comfortable with the poor level of returns.

Of course none of the big players has managed to get volume growth out of the US since Anheuser-Busch invested a fortune in marketing in the 1990s and early 2000s.

AB InBev is far too cost-sensitive to have continued this strategy, after acquiring Anheuser-Busch in 2008, which is probably why much of the growth potential has been sucked up by craft beers.

Even without volume growth the US is a profit pool that is too attractive not to get right. In 2017 AB InBev continued to not get it right. The slight increase in gross margins will not be sufficient to counter the worry of a 1.8% revenue decline on a 3.3% drop in volume.

There was evident relief that Brazil seemed to have turned around or at least stabilised.

This is not only AB InBev’s "home" but is its second-most important market after the US, accounting for 15% of group sales.

The collapse in 2016 — beer volumes and market share were down — led to top management losing their bonuses that year.

Though it managed a 24% improvement in earnings before interest, taxation, depreciation and amortisation in the fourth quarter of 2017, not everyone believes it has turned the corner.

JPMorgan thinks the market is too optimistic about Brazil.

With little excitement expected from the two traditional stalwarts it may indeed be down to the "emerging" markets to justify expectations for above-average profit growth from the group. The good news is that China was one of the star performers.

Though volumes were sluggish, revenue grew significantly on the back of increases in premium and super-premium brands.

In SA, zone president Ricardo Tadeu is hoping growth in the premium segment of the market, where the group is pushing its international brands such as Stella Artois and Corona, will make up for lacklustre volume increases.

Longer term, Tadeu predicts Africa will be the most important driver of volume growth for the group.

Analysts who have not been discouraged by the less-than-grand delivery on expectations from Africa believe urbanisation on the continent could also deliver on margin growth.

That would be a great new trick for the group.

One local fund manager who is still in shock over Steinhoff said AB InBev was too expensive to be enticing at this stage.

"I’m sceptical about the long-term benefits of big mergers, I’m prepared to wait a year or two to see how this pans out."

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