JEAN PIERRE VERSTER: Off to the bar fridge I go
Companies producing alcoholic beverages have been hit hard by lockdowns, but continue to offer attractive opportunities
With South Africans returning to their local liquor stores this week, retailers have had to stock up on the most popular brands of beer, wine and spirits.
Local favourites including Klipdrift and Richelieu brandies, Amarula, Hunter’s Dry and Savanna ciders, JC le Roux and wines including Nederburg, Two Oceans and Durbanville Hills are all owned by locally listed Distell.
Most brands, however, are owned by global multinationals.
Let us start at the beer fridge.
Following its acquisition of SABMiller, AB InBev is the largest brewer in the world, with brands including Budweiser, Stella Artois, Corona (outside of the US) and Castle.
But high debt levels due to the takeover, combined with weakness in emerging markets since 2016, has put pressure on AB InBev’s profitability.
The company’s primary listing is in Belgium, with a secondary listing in Joburg.
It is actively trying to address its weak balance sheet, having recently sold a minority stake in its Asia-Pacific business for $5bn.
And in a further step towards cutting debt, AB InBev announced this week that it had concluded the sale of its Australian business to Japanese brewer Asahi for $11bn in enterprise value. But debt is still uncomfortably high and we believe AB InBev’s current valuation does not offer a margin of safety.
While South Africans remain fixated on their two locally listed players, there is, in fact, a bigger universe of options out there.
You might not have heard of Molson Coors, but this US-listed brewer bought the Miller brands in 2016, and also owns Coors and Carling Black Label.
The shares have been under a lot of pressure over the past four years, dropping in price from over $100 a share to under $40.
With high debt levels and with the pandemic having a short-term negative effect on alcohol consumption, Molson Coors is in a tight spot.
Constellation Brands, listed in the US, owns the beer brands Corona (in the US) and Modelo.
It also owns an extensive wine repertoire and niche spirits brands. The company has recently diversified into the medical marijuana sector, investing $8bn in Canada-listed Canopy Growth Corp. The weed sector has come off its highs — excuse the pun — so Constellation’s steep investment in this sector is yet to pay off.
Dutch brewer Heineken owns the Amstel brand and brews Windhoek Lager in SA under licence from Namibia Breweries.
Danish brewer Carlsberg is another major international brewer worth mentioning. Both Heineken and Carlsberg have taken a significant knock recently as on-premises consumption is hit by less activity in restaurants, pubs and sports venues.
Moving to the spirits aisle, the dominant player is London-listed Diageo. With brands including Smirnoff, Johnnie Walker, Bell’s, Tanqueray, Captain Morgan and Baileys, it might be a good idea to buy this share as a hedge against increasing liquor prices.
Diageo also owns Guinness and Kilkenny.
If bourbon is more your taste, consider shares in US-listed Brown-Forman. It owns Jack Daniel’s and a portfolio of other whiskeys.
The business was founded by George Garvin Brown in 1870 and the Brown family are still the majority owners.
The largest family-owned spirits company in the world is Bacardi, headquartered in Bermuda, with Cuban roots. It bought the tequila brand Patrón for $5.1bn from hair-care entrepreneur John Paul DeJoria in 2018 and owns more than 200 other brands, including Bacardi, Grey Goose and Bombay Sapphire.
The other major player in the spirits market is Paris-listed Pernod Ricard. It owns Chivas Regal, Jameson, Absolut, Olmeca, Havana Club, Martell, Beefeater and Kahlúa.
Its smaller French rival, Rémy Cointreau, specialises in the brandy variety named after the commune of Cognac.
Italy’s Davide Campari-Milano is another large publicly traded European spirits company worth mentioning.
Bartenders would know its brands from cocktail ingredients — Campari, Aperol, SKYY and Cinzano. The popular Aperol Spritz has been a big boost to its growth over the past few years.
If there’s still space in your trolley, check out the three major Japanese companies — Asahi, Kirin and Suntory.
Not only do they own major Asian beer brands and most Japanese whisky labels, but Suntory also owns Kentucky bourbon champion Jim Beam and a plethora of other Western spirits brands.
And for the wine lovers, there are some shares to match your palates too. Take your pick between Treasury Wine Estates, listed in Australia, and Vina Concha Y Toro, listed in Chile.
Companies producing alcoholic beverages have been hit hard by lockdowns around the world, but continue to offer attractive investment opportunities for the discerning investor.
The overindebted players might experience further trouble, but those with solid balance sheets will emerge even stronger from the crisis.
Due to strong loyalty to their brands, these companies can continue to raise prices at a rate above inflation and thereby grow profits at a healthy clip into the foreseeable future.
Our top pick in the sector is one whose products you will not find on a local shelf.
Royal Unibrew is Denmark’s second-largest brewer, with its craft brands growing particularly strongly in the Baltic countries. And they are experiencing strong growth in their low-and no-alcohol brands as drinkers shift towards healthier alternatives.
South Africans should be eager to not just buy alcohol companies’ products, but their shares too!
- Verster is CEO of Protea Capital Management
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