Anheuser-Busch InBev: More On The Value Case

by The Compound Investor

I wanted to add some more meat to Sunday’s post on Anheuser-Busch InBev (BUD). Broadly speaking, two things have bugged me with this stock. The first is that the pre-SABMiller acqusition profit targets proved wildly optimistic. I mean, I just went over an old research note from the merger which forecast circa $21,000m in profit from operations (“EBIT”) by 2019. The actual figure for last year clocked in at around $16,100m.

The second thing is the debt load, which has obviously remained stubbornly high. Indeed, we have seen both dividend cuts and asset sales aimed at bringing it down. The analyst who drew up that research note expected net debt to fall to around 2.9x EBITDA by 2019. The actual figure for last year clocked in at around 4.5x EBITDA.

As you’d expect, one of the knock on effects of that is higher than forecast interest payments. The beer giant paid $4,450m in interest last year according to its cash flow statement. By way of comparison, the aforementioned research note predicted total net finance costs of around $3,200m for 2019. That’s over a billion dollars which, after deducting tax, would drop straight down to the bottom line. I know debt reduction isn’t the highest returning activity, but a billion dollars or so in extra pre-tax profit is not exactly small beer either (no pun intended).

Debt

That said, the company did make strides in getting it under control last year. It announced a deal to divest Carlton & United Breweries (its Australian subsidiary) to Japanese brewer Asahi for circa AUD$16,000m. Call it around $10,500m in US dollars. That deal should complete pretty soon.

In addition, the company raised just over $5,500m last September from a minority IPO of Budweiser APAC, its Asia Pacific subsidiary, which is now listed on the Hong Kong Stock Exchange. Anheuser-Busch InBev retains ownership of around 87% of that business.

Now, the company’s balance sheet held around $105,000m worth of debt net of cash & equivalents at the start of 2019. Net debt currently stands at $84,000m according to management, although that does include the proceeds from the not-yet-completed sale of its Aussie business.

Anyhow, the reduced interest expense associated with that debt reduction is actually fairly significant. I mean, the company currently pays somewhere in the region of 3% to 4% per annum to service its debt. If net debt is around $20,000m lower, then we could be looking at $800m or so in extra pre-tax profit just from lower interest payments. The company could also realistically pay down another $10,000m or so over the next couple of years from free cash flow, if not more. That quickly adds up to over a billion dollars in extra profit.

Valuation

Here’s where things might get interesting for prospective investors. As I mentioned a few days ago, that big 17% drop last week put the shares at circa $58.40 apiece. They are actually a bit lower right now – just under $55.55 each in early trading as I type. Analysts expect 2021 net profit to clock in at just under $10,000m. Let’s call that $5.00 on a per-share basis – with that based on 1,985 shares outstanding. As a reminder, underlying earnings came in at around $8,100m last year.

So, how realistic are those growth estimates? Well, it looks like a decent chunk can be realized just through the saved interest expense mentioned above. Management also forecasts modest EBITDA growth this year – somewhere between 2% and 5% to be exact. Assuming that proves accurate, then back of the envelope calculations put the shares at circa 11x forward earnings. For an ultra-profitable consumer staples company, that looks like a good deal to me.

Note

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