Anheuser-Busch InBev Is Still Reasonable Value After A Tough 2020

by The Compound Investor

Despite being a disappointing performer, I remain a big fan of Budweiser and Stella Artois owner AB InBev (BUD). I know that may sound daft given its ongoing struggle to digest the $110b purchase of SABMiller a few years ago, and that’s before even mentioning the woeful stock returns in that time too. Ultimately the SAB deal has left AB InBev with a bloated balance sheet that is taking longer than expected to bring under control. COVID popping up when it did has not made things any easier of course, while the stock was not particularly cheap at the time of the deal either. All of this has further pressured shareholder returns.

Operationally, the brewer also faces its headwinds. Craft beer and changing consumer tastes are posing an obvious issue in the US, putting pressure on lager volumes and brands like Bud Light and Budweiser. The company has responded by beefing up its non-lager offering, including hard seltzers and various craft & specialty products, as well as its premium offering, which includes brands like Michelob Ultra and Michelob Ultra Pure Gold. Still, North America has largely been characterized by low single digit volume declines and a relatively static top line. Foreign exchange has been a massive problem too due to its emerging footprint.

The above notwithstanding, AB InBev remains a money spinner with very good exposure to faster growing parts of the beer world. I mean, over 60% of EBIT comes from Central America, South America and Asia Pacific. BUD commands huge shares in many of those markets, especially in countries like Brazil via its 62% share of Brahma owner Ambev. It remains very well placed in a host of African countries too following the SAB deal. Now, the cost advantages that come with this lead to very high profit margins versus peers, and hopefully good growth prospects on top. Beer consumption in many of those emerging markets remains well below levels in developed markets.

A Tough 2020

2020 was clearly a year to forget for AB InBev, especially the first half. COVID came at a bad time for the firm – with the pandemic simply one more setback on top of the issues mentioned above. The on-trade was obviously hit badly in a bunch of markets, while currency headwinds also hit the reported USD numbers. Note that the US dollar only represents around a third of sales here.

(Source: AB InBev FY20 Results Presentation)

In terms of the hard numbers, the company sold just under 531 million hectoliters in total last year. That was down around 5.7% on the 561 million hectoliters sold in 2019. That obviously reflected a brutal on-trade environment in a host of markets, including in Europe where lockdowns were harsh. On-premise activity makes up around 30% of the company’s business there. to boot. Similar story in Central America, which accounts for just under 25% of total volume. Authorities in Mexico even shut down the firm’s beer production for a couple months in Q2 as part of their COVID measures, ultimately contributing to the 10% volume decline in the region. Asia Pacific likewise saw double digit volume declines, though North and South America held up better, especially the latter.

Overall, headline sales fell circa 10% to $46.9b last year, albeit that includes the hit from currency. Profit fell even further thanks to the significant fixed cost deleveraging in the business. Normalized EBIT fell to $12.7b from $16.4b in 2019, with cash generated from operations falling just over $3b to $10.9b. That led to free cash flow of around $7.2b, a circa 20% fall versus 2019 levels. The firm reports Q1 2021 results later next week.

Progress On Debt Reduction

The poor 2020 put a dent in the deleveraging plans due to the profit collapse. Debt reduction was already taking longer than hoped for after the SABMiller deal, and that ultimately contributed to the first dividend cut back in 2018. The firm then followed that up with more cuts last year in response to the COVID shock. That was a prudent measure given the uncertainty and so on, but no doubt it further contributed to a ‘lost cause’ feeling among previously loyal supporters of the stock.

Still, the dividend cut applicable to the final 2019 payout saved the firm around $1.1b in cash terms. Management also canceled the 2020 interim dividend, with that worth another $1.9b in saved cash outflow. The deal to sell the Australian subsidiary, Carlton & United Breweries, to Japanese firm Asahi Group also went through, netting the firm around $10.8b or so in cash.

All said and done, the above was good for more than $12b in debt reduction. Net debt registered around $83b at year end, still equal to a chunky looking 4.8x 2020 normalized EBITDA because of the profit collapse, but another several billion in organic net debt reduction, plus rebounding EBITDA, should see that improve this year. Also, very little of the firm’s debt is due within the next five years. Most is due after 2030.

Reasonable Value Right Now

AB InBev stock closed yesterday around the $70.35 mark. It has gained a little over 40% since the last time it featured here almost 11 months ago. At the time, the then share price worked out to around 13.5x pre-COVID underlying EPS of circa $3.63. Yeah, that valuation may have reflected a horrible 2020/21 outlook, but it still looked like a very good long-term deal. That ultimately led to its inclusion in the Coffee Can Portfolio, albeit at a higher cost basis in the mid-$50s area.

Most of the damage here occurred in the first half of last year. Second half performance was much better with volume growing 1.8%. That was boosted by low single digit revenue per hectoliter growth, bringing second half sales growth to 4.4%. The firm declared a final 2020 dividend of €0.50 per share.

Analysts expect sales to rebound circa 9% to the $51b mark this year. EPS estimates land in the $3 area, putting the stock at a tentative PE of 23. Obviously 2021 will still be a bit messy given the renewed COVID waves and ongoing hit to the on-trade. The PE fades down below 20 for what will hopefully be more normalized post-COVID earnings in 2022 and 2023. Given the current share price, sales growth in the low single digit area seems enough to make that work out. That strikes me as a low hurdle to clear in terms of decent future returns (notwithstanding the poor recent history).

The Bottom Line

The upshot for investors is that AB InBev remains decent value, in my view. The hit from COVID, plus the debt hangover from the SAB deal, make the stock look much worse than it is, while the strong performance since last coverage reflects an incredibly subdued starting point. A sub-20 PE based on tentative post-COVID earnings still only requires quite modest revenue growth to justify. Given its strong emerging market footprint, AB InBev should be able to deliver this.


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