- North America constitutes 31% of the Trefis price estimate for Anheuser-Busch InBev's stock.
- Latin America West constitutes 21% of the Trefis price estimate for Anheuser-Busch InBev's stock.
- Latin America North constitutes 16% of the Trefis price estimate for Anheuser-Busch InBev's stock.
WHAT HAS CHANGED?
Impact of Coronavirus
AB InBev has lost 58% of its stock value since the beginning of 2020 till March 2020. The increasing number of Coronavirus cases outside China caused mounting concerns of a global economic slowdown. The stock declined sharply considering the impact that the virus outbreak and a broader economic slowdown could have on total consumption/consumer spending and the global food and beverage industry. Lower demand is likely to, in turn, lead to lower revenues in 2020. Lower revenue and cash generation could make debt servicing slightly challenging for the company in the near term. But the stock has recovered 50% since March and currently stands at $53 per share. This was mainly due to liquidity and stimulus measures announced by various economies and gradual lifting of the lock down. We believe that the stock could go up further by about 15% in the absence of a sharp spike in cases and another lock down.
AB InBev's revenues declined by 10.4% in 2020 compared to the previous year, driven by restrictions related to the Covid-19 pandemic. Total volume decreased 5.5%, while revenue per hl
declined by 5.2%. The company reported a loss of $0.33 per share in 2020 compared to a profit of $4.41 per share in 2019, mainly due to the top-line decline and lower operational leverage, especially in the first half of the year.
Anheuser-Busch's APAC Listing
Ab InBev raised $5 billion by listing its Asia-Pacific operations in Hong Kong in September 2019, in what was the second-biggest IPO of 2019, behind Uber. The company's primary reason for this listing was healthy growth seen and expected in China and other emerging markets in Asia.
Anheuser-Busch and SABMiller combination is about opening opportunities in emerging markets
AB InBev completed its over $100-billion merger with SABMiller in October 2016, creating a beer behemoth with the combination of the world's highest-selling brewers. The merger was focused on potential growth opportunities in emerging markets, especially Africa. AB InBev had no meaningful presence in Africa, while SABMiller had a leading >30% market share in the continent prior to the combination.
According to AB InBev, beer volumes in Africa are expected to grow by 44% from 2014 to 2025, nearly three times the forecast global rate. Africa, as a percentage of net global beer volumes, is estimated to reach over 8% by 2025, up from 4.4% in 2000.
Acquiring a beer business that is already well established in Africa made sense because of the relative difficulty in setting up a business in the continent. The beer market in Africa is still relatively nascent, and as disposable incomes increase and the beer-drinking culture spreads, beer volume sales are expected to rise. With strong distribution channels and a strong brand image, SABMiller brought in an opportunity for AB InBev to increase the reach and availability of its globally renowned brands, such as Budweiser and Corona.
AB InBev divests SABMiller's businesses in crucial markets to appease regulators
AB InBev has now raised ~$27 billion from divestments of SABMiller's interests in the U.S., China, and Europe, recovering more than one-fourth of the money it paid to acquire the world's second-largest brewer.
In the U.S., SABMiller sold its 50% voting interest and 58% economic interest in MillerCoors to Molson Coors, its partner in the joint venture, for around $12 billion. The deal gives Molson Coors the global rights to the Miller brand, and also the right to continue selling brands it currently holds in its portfolio in the country (MillerCoors), including Peroni and Pilsner Urquell.
In China, AB InBev sold SABMiller's 49% in its joint venture called CR Snow, with China Resources Enterprise, which has a leading >20% volume share in the country's beer market, for $1.6 billion.
In Europe, AB InBev sold certain of SABMiller's premium European brands including the Peroni and Grolsch brands, and related businesses to the Asahi Group for ~$2.9 billion, and also agreed to sell a group of SABMiller's Central and Eastern European brands for around $7.8 billion to the Asahi Group.
Softness In The U.S. Market
BUD has been witnessing a soft market in the U.S., with industry volume declines exacerbated by market share declines. The company estimates that industry Sales-to-Retailers (STRs) in the United States declined by 1.8% in 2018, while BUD's STRs were down 2.7%. The company's Above Premium brand portfolio had another strong year, gaining 90 bps of market share. Michelob Ultra led this growth, continuing its run as the top share gainer in the U.S. Looking ahead, we expect the overall North American revenues to increase going forward, led by its Above Premium segment.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Anheuser-Busch InBev that present opportunities for upside or downside to the current Trefis price estimate:
North America EBITDA Margin
North America EBITDA Margin has witnessed a slight pressure in recent years as a result of increased costs and foreign currency translations, as well as the addition of Global Export and Holding companies in the Trefis estimates. In 2018 the margin faced pressure due to an increase in the price of commodities and higher distribution expenses. The figure stood at 34.3% in 2020.
Going forward, Trefis expects margins to grow only marginally through the end of the forecast period. However, if margins rise to 40% on favorable product mix and improved operational efficiencies, there could be an over 7% upside to our current price estimate for Anheuser-Busch InBev.
Anheuser-Busch InBev is the world’s largest brewer by volume and one of the world’s top five consumer products companies by revenue. It produces, markets, distributes, and sells over 500 beer and other malt beverage brands. Some of its beer brands include global brands such as Budweiser, Stella Artois, and Corona (not in the U.S.), international brands such as Hoegaarden, Leffe, and Beck’s, and popular local brands such as Bud Light, Brahma, and Antarctica. The company also produces and distributes soft drinks, particularly in Central and South America and Africa, and other near-beer products, such as Lime-A-Rita and other Rita family products in the United States and Mexico; MixxTail in China, Argentina, and other countries; and Skol Beats in Brazil
Inbev was formed in 2004, combining the Belgian company Interbrew and the Brazilian company Ambev, which, in turn, was comprised of the brewers Brahma and Antarctica. In 2008, InBev and Anheuser-Busch came together to form Anheuser-Busch InBev, with around $54.8 billion required to fund the deal. As a result, the company opted for a formal divestiture program, including the sale of stakes in the brewers Tsingtao and Oriental Brewery, in order to reduce the debt taken on for the combination of Anheuser-Busch and InBev.
In June 2013, the company completed the acquisition of leading Mexican brewer Grupo Modelo, in a deal valued at $20.1 billion. With this combination, Anheuser further grew its presence in Mexico, the world’s fourth-largest profit-pool for beer manufacturers, and could benefit from the expected growth of Corona, Grupo Modelo’s popular flagship beer, around the world. However, Anheuser-Busch InBev transferred the operations of the Mexican Piedras Negras brewery and sold the exclusive rights to market and sell Corona as well as some other beers made by Grupo Modelo in the U.S. to Constellation Brands, as part of an antitrust agreement with the country's Justice Department.
On 7 October 2016, BUD acquired control of SABMiller, and on 10 October 2016, it completed the business combination. The transaction was valued at a gross purchase consideration of USD 114 billion.
SOURCES OF VALUE
Budweiser is one of the top-selling beers in the United States. Globally, Budweiser volumes have grown every year since 2010. Budweiser sales outside the United States represented over 70% of global Budweiser volume in 2018, driven by strong growth in Asia, Brazil, and Europe. Budweiser was a sponsor of the 2014 and 2018 FIFA World Cup and has confirmed its sponsorship of the 2022 FIFA World Cup.
Increasing disposable incomes to boost demand for premium beer Budweiser
The global beer brand Budweiser has a premium brand positioning worldwide. With an increase in disposable incomes, consumers might shift to more expensive beer brands, boosting the brewer's volumes as well as revenues per unit volume.
- Increasing disposable incomes and falling unemployment rates should boost sales of premium beers going forward, thereby improving the average revenue generated by breweries. The unemployment rate in the US fell to below 4% in Dec 2018. Per capita disposable income in the country, which grew by 2.9% between 2004-2014, is expected to grow at a CAGR of 3.6% through 2024.
- The consumption of beer in Brazil is slowing down, hampered by the ongoing slowdown in the economy, high unemployment rates, and a fall in personal disposable income. Looking ahead, the industry is expected to grow at a CAGR of 1% between 2016 and 2021, with a recovery seen post-2018.
- Despite a tough comparison, revenue in China grew by 8.3% in FY 2018, driven by volume growth of 2.5% and revenue per hl growth of 5.6%. The High End company recorded high double-digit volume growth, led by the strong performances of Corona, which became the number one imported beer, and Hoegaarden. Moreover, the e-commerce business had a stellar year, with high double-digit volume growth. The market share of the company continued its strong rise to over 20% in an industry that underwent a modest recovery after a decline in 2017. The margins also improved, driven by premiumization and productivity gains. Looking ahead, the prospects of the company look positive in the country, as it occupies a place in the faster-growing premium and super-premium segments, as well as the online channels.
Brazil in recovery mode
Recession in Brazil previously helped consumer spending, especially on beer. In Brazil, volume performance remained under pressure due to a challenging consumer environment, with declining real disposable income and the increase of the unemployment rate to its highest level since 1995. According to BUD, the beer industry volumes declined by approximately 5.3% in the year ended 31 December 2016 compared to the same period last year, and that its market share declined by 120 bps to 66.3%, based on AC Nielsen data.
However, AB InBev has looked to maneuver through this period of low customer confidence and weak economic conditions by focusing on creating value and protecting profitability in the country. The company has emphasized sales of returnable glass bottles (RGBs), which have made their way back in off-trade channels. RGBs are cheaper and attract customers who are looking for smart choices in terms of purchasing, in a weak spending environment in Brazil, where disposable incomes are falling. Although RGBs negatively impact top-line growth, they are accretive to margins, thus helping AB InBev protect its profitability. Providing customers affordable options seems like a solid strategy for AB InBev, which is battling slowing consumption in Brazil. The company is now in recovery mode in the country, spurred by a positive mix, RGBs, and easier foreign currency comparisons.
Diversifying beer portfolio
Flavored beer is an area that can provide growth for the company going forward. BUD has witnessed considerable success in this category in emerging and developed markets. For example, in South Africa, Flying Fish grew volumes in 2018 by recruiting females and younger LDA (legal drinking age) consumers into the beer category and grabbing share from cider. In Western Europe, Cubanisto, a rum-flavored premium beer, grew its top-line in FY 2018 by successfully competing against spirits in the nightlife occasion category. The company is also trying to make in-roads in the craft beer industry, with partnerships with almost a dozen craft breweries. The company's craft portfolio is growing ahead of the industry, driven by organic growth, as well as expanded distribution. Even in France, its Leffe brand has grown to become the number one beer brand by penetration.
Synergies from SABMiller acquisition
Anheuser completed its target of $3.2 billion in synergy benefits one year ahead of schedule, and with $750 million more in savings than initially planned.