These Scenarios In Asia Could Significantly Impact AB InBev’s Valuation

Anheuser-Busch InBev (NYSE:BUD) is the largest brewer in the world, and continues to get bigger with acquisitions of large breweries such as Grupo Modelo in 2013 and Oriental Brewery last year, as well as small craft breweries such as Elysian Brewing Company and Oregon’s 10 Barrel Brewing in the U.S. last year.  AB InBev is a good example of a steadily growing business, with the company’s stock jumping 16.7% in the last 52 weeks, while the overall S&P 500 Index rose 12.3%. Despite a small 0.6% year-over-year increase in volume sales last year, higher emphasis on premium products worldwide fueled a 5.9% top line growth for the brewer. Going forward, organic growth might be hard to come by, especially in mature developed markets such as North America and Europe, and also as AB InBev already boasts a strong 50+% volume share in most of its top markets.

We have a $122 price estimate for Anheuser-Busch InBev, which is in line with the current market price.

See Our Complete Analysis For Anheuser-Busch InBev

Looking ahead, AB InBev might look to acquire more small breweries and utilize the already established local brand recognition and loyal customer base of these brands to its advantage, thereby adding incremental volume sales. The smaller breweries will in turn leverage AB InBev’s large scale and marketing muscle to boost their distribution, reach, and availability. Here are two scenarios that could have a significant impact on AB InBev’s valuation.

• China Opportunity–

In three of the four largest markets for AB InBev, namely the U.S., Brazil, and Mexico, the brewer has massive volume shares of 46.4%, 68.2, and 57.8% respectively. However, in China — the largest beer market in the world in terms of volumes, and the third largest for AB InBev — the brewer holds a smaller 15.9% volume share. This means that there is still a large growth opportunity for the world’s largest brewer in China, where beer industry volumes are also expected to grow at a fast pace going forward.

Hurt by rough weather conditions and relatively slower economic activity in the latter part of the year, the industry-wide beer volumes in China declined by 4% in 2014. However, AB InBev’s volume growth remained positive at 1.6%, reflecting strong growth in the brewer’s focus brands in the country. The brewer’s core focus group in China comprising Budweiser, Harbin, and Sedrin grew by 7.8% last year, and accounted for approximately 73% of the company’s portfolio in the country. While the 1.6% volume growth figure represents organic growth, volume growth including M&A activities was approximately 9% in 2014. In April 2013, Anheuser acquired four breweries in China, with net beer capacity of roughly 9 million hectoliters, for $439 million, and also acquired Siping Ginsber last year. Anheuser might look to acquire more regional brands to boost its portfolio and penetrate deeper into China. The company improved its market share in the country by 90 basis points to 15.9%, and if we include the recent mergers and acquisitions, the share, in fact, becomes around 16.8%.

Anheuser managed to grow volume sales in China, despite an overall fall in industry-wide volumes. AB InBev could be in good shape to further improve volumes organically in China, once demand for beer starts rising again, as beer penetration is still low in the country and incomes are rising.

China formed 87% of the net volumes last year for AB InBev’s Asia-Pacific division, which forms approximately 12% of the company’s valuation by our estimates. Assuming  more acquisitions of breweries in the country, coupled with strong organic volume growth, pushes the brewer’s Asia-Pacific volumes to 16 billion liters by the end of our forecast period, up from the currently estimated 12 billion liters, and the average revenue per 12 ounce also rises simultaneously, there could be a nearly 11% upside to our current price estimate for the company to over $135. We have assumed a rise in average revenue per 12 ounce and operating margins, as we expect a larger contribution of premium beer sales going forward in China, where presently over 80% of the industry-wide beer volumes are formed by value lager.

• Possible Acquisitions In Asia–

AB InBev’s underlying strategy seems clear — to grow its business organically by focusing on premium beers, especially in emerging markets where disposable incomes are growing, and also acquiring locally established breweries that could leverage AB InBev’s strong distribution channels and marketing muscle to grow even further. Seeing how there might not be a lot of growth potential in mature developed markets, AB InBev could invest further in Asia, apart from China.

Anheuser-Busch InBev reacquired Oriental Brewery in 2014, the largest brewery in South Korea, boosting its presence in the country. Oriental Brewery formed slightly less than 3% of the net beer volumes for AB InBev last year. Oriental Brewery operates at fatter margins than AB InBev, so it fits right into the latter’s strategy of focusing more on premium brands and boosting profitability. 2015 will be the first full year for the South Korean brewery under AB InBev, and this acquisition could have a significant impact on the latter’s Asia-Pacific revenues and margins this year. The beer market in South Korea is expected to grow at a CAGR of 3% through 2017, and given that Oriental Brewery holds a massive 60.4% beer market share in the country, volumes for Anheuser-Busch could increase by even more than presently estimated.

Oriental Brewery stands as an example of AB InBev’s growing ambitions in Asia. Anheuser could look to invest even more in this region, perhaps in India, Indonesia, or Vietnam. The premium beer segment in India has grown at a CAGR of 40% in the last two to three years, and could be a great opportunity for AB InBev and its premium beer brand portfolio. ^[1] On the other hand, Vietnam is one of the largest beer markets in Asia, and is growing each year at approximately 10%. The government is cutting its share in Sabeco, Vietnam’s largest beer producer, to 36%, which presents a solid growth opportunity for both local and foreign brewers to invest in this budding beer market.

Assuming that AB InBev backs its Asian ambitions with more mergers and acquisitions, Asia-Pacific volumes for the brewer could rise to approximately 15 billion liters by 2021, up from our current estimate of 12 billion liters, raising AB InBev’s price estimate by 8% from our current estimate. The forecasts and estimates can be further tampered with on the Trefis website. Remember, the possible Asia acquisitions exclude China. Acquisitions in China and the rest of Asia together make a strong case for almost a 20% jump in valuation for AB InBev.

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1. India primarily beer market; Beers with 5-8% account ABV for 80% share [↩]