INVESTMENT THESIS
Our rating on Anheuser-Busch InBev SA/NV (NYSE: BUD) is BUY. BUD shares have been hit hard by the coronavirus, and results are not expected to completely recover until 2022. We do see the company as a survivor, though. Management has a close focus on costs, and has taken steps to reduce debt, including reducing the dividend once again. From a technical standpoint, since the pandemic lows in March, the outlook has turned more bullish. Yet despite the rally, the shares are still about 50% below their all-time high.
RECENT DEVELOPMENTS
The beta on BUD is 1.13.
The company recently reported 3Q20 results that topped consensus expectations. The consensus had called for underlying EPS of $0.69. Revenue grew 4% organically to $12.8 billion, driven by healthy volume and revenue growth per hectoliter (HL) of 2.3%. Normalized EBITDA declined 8% year-over-year in 3Q as the normalized EBITDA margin narrowed by 188 basis points to 38.2%. For the first three quarters, the company reported underlying EPS of $1.71.
Due to the pandemic, management has decided to forgo the 2020 interim dividend in order to focus on deleveraging commitments.
EARNINGS & GROWTH ANALYSIS
The company’s biggest markets are North America (which accounted for approximately 20% of volume in 2Q20); Middle Americas, or Mexico (22%); South America, or Brazil and Argentina (25%); EMEA (14%); and Asia Pacific (19%). In 3Q, North America saw a volume increase of 1.5%, while South American volume grew 14.7% and Asia Pacific volume grew 0.5%. Volume declined 3% in Middle Americas and 6.5% in EMEA.
FINANCIAL STRENGTH & DIVIDEND
The company’s long-term debt is rated Baa1, with a stable outlook, by Moody’s, and A-, with a negative outlook, by Standard & Poor’s.
The company publishes balance sheet information twice per year. Debt totaled $112 billion, up from $103 billion at year-end. The debt-to-total capitalization ratio at midyear was 62%. EBITDA covered interest expense in the first half by a factor of 3.5. The company’s
AB InBev typically pays dividends semiannually – an interim dividend in November and a final dividend the following April/May. The FY19 dividend was EUR 1.80 per share (or $2.01 based on an average exchange rate of $1.11/euro). Our revised dividend forecasts are $0.57 (reduced from $1.00) for 2020 and $1.00 for 2021.
MANAGEMENT & RISKS
The CEO of AB InBev is Carlos Brito. He has held the job since 2008 and joined InBev in 1989. Fernando Tennebaum became the new CFO in April 2020 after previously holding a range of financial positions at the company.
In addition to organic growth – which for beer, is slow – the company grows via acquisition. Two companies that together owned 40.5% of SABMiller retained stakes in BUD. Restricted shares, representing a 16.5% stake in BUD, are held by Altria Group and BevCo Ltd., a Colombian holding company. While these restricted shares are unlisted, they have voting rights and receive dividends, and are included in the calculation of EPS.
COMPANY DESCRIPTION
Anheuser-Busch InBev SA/NV produces and sells beer, near-beer products, and soft drinks worldwide. The company, whose origins date back more than 600 years, has over 500 beer brands, including Budweiser, Stella Artois, Beck’s, Leffe, and Michelob.
VALUATION
Despite the rally, the shares are still about 50% below their all-time high.
On the fundamentals, the shares are trading at a projected 2021 P/E of 19, below the average multiple of 22 for a peer group of megacap global food and beverage companies (also including Diageo, Coca-Cola, PepsiCo, and Constellation Brands). On price/sales, the current BUD multiple of 2.9 is below the industry average of 4.4. The current yield of about 2.1% is below the group average of 2.4%. We think valuations are attractive, and are raising our 12-month target price to $75.
On December 1 at midday, BUY-rated BUD traded at $67.79, up $1.11.
Source: Argus
