Anheuser-Busch InBev (AB InBev) reported 3Q21 results on Thursday (28 October). The results exceeded Bloomberg consensus analyst expectations and drove the share price of the company’s secondary listing in South Africa (SA) up 13.5% on the day. However, the Group’s share price in its primary listing (Belgium) retreated c. 1.5% after the SA market closed.
Figure 1: AB InBev share price performance on the day of the release of its results (primary vs secondary listings)
Source: Anchor, Bloomberg
Thursday’s move takes the share price back to the level it was trading at the beginning of August (see Figure 2).
Figure 2: AB InBev share price is now back to the level it was at around the beginning of August 2021
Source: Anchor, Bloomberg
The share price weakness since the beginning of August has been a function of:
- Weak currencies in its key emerging markets (EMs) – the Brazilian real, for example, is down 10% since the beginning of August.
- Rising prices for its key commodities, including aluminium and barley.
The positive surprises driving the share price action on 28 October included:
- Stronger-than-expected revenue growth in AB InBev’s key EMs:
- Middle America (c. 30% of EBITDA) – US$3.16bn vs US$2.98bn expected.
- South America (c. 20% of EBITDA) – US$2.46bn vs US$2.08bn expected.
- Upgraded FY21 EBITDA guidance: Previously the company had forecast 8%-12% growth, but its guidance is now for 10%-12% growth. The mid-point of the new guidance range is about 1.5% ahead of consensus estimates.
- Altria announced that it has no intention of selling its 10% stake in AB InBev: The lock-up on Altria’s holding expired earlier this month (on 10 October) and there has been speculation that Altria would sell down its AB InBev stake and use the proceeds to buy back its own shares. However, Altria used the earnings call to announce that it had no intention of selling its stake in AB InBev.
Outlook
- AB InBev has not issued any guidance beyond the end of 2021, but it has made it clear that its process of mechanically hedging currencies and commodities 12M forward means that a lot of the recent weakness in EM currencies and strength in commodity prices will start to impact the Group’s earnings negatively in 2H22.
- In its key LatAm markets, AB InBev has started to push prices higher to recover some of the negative effects of higher input costs and weaker currencies, and the rollout of business-to-business (B2B) and direct-to-consumer technology gives it the required data to achieve a better pricing balance without sacrificing volumes. Thus, it is less likely to make the same mistakes that it made in 2016 when AB InBev pushed prices to defend margins and lost meaningful volumes. The company is much more likely to tolerate cyclically lower margins for an extended period this time around to protect its volumes and market share.
- AB InBev also announced that a capital markets day will take place on 6 December. However, given its high levels of leverage (4x net debt/EBITDA), it has extremely limited capital allocation flexibility (it just passed on an interim dividend), so it is unclear to us what positive surprises could come from that event. It will likely just be an opportunity to reiterate its current strategy of:
- Growing its “beyond beer” range (which currently accounts for only c. 3% of total revenue but is expected to grow by a compound annual growth rate [CAGR] of 45% over the next 3 years, which would see it account for c. 7% of revenue by 2024).
- Pushing premiumisation: Its more profitable premium beers have grown from 24% to 30% of total revenue over the past c. 3 years
- The Group is also gaining scale in digital platforms for B2B and direct-to-consumer to give it better margins, more efficiency, and better data on its consumers.
Valuation
The share is trading on 21.4x FY22 EPS estimates, which is at the average of where it traded since its merger with SAB.
Figure 3: AB InBev’s P/E is at the average of where it has traded since the SAB merger
Source: Anchor, Bloomberg
Figure 4: AB InBev’s 3Q21 positive earnings surprise resulted in analysts revising their FY21 EPS forecasts c. 1.4% higher
Source: Anchor, Bloomberg
Figure 5: Nothing in AB InBev’s 3Q21 earnings release or subsequent webinar has convinced analysts to tweak their FY22 EPS forecasts
Source: Anchor, Bloomberg
Conclusion
- The violent share price reaction to AB InBev’s small earnings beat (and the subsequent announcement removing the threat of the Altria overhang), indicates to us that sentiment towards the company was overly negative.
- In our view, the company is executing well and making progress in strategies (Beyond Beer, premiumisation, and digitalisation) that will enhance its margins over the long term, which should also drive margins structurally higher over time (though likely at an immaterial rate for the next couple of years).
- The company’s outsized exposure to EM currencies and commodity input prices means that margins will be cyclical, and we are likely at the lower end of the range. Unfortunately, the rolling hedges mean that margin upside is likely at least 12 months away, though we imagine that the share will get the benefit of the doubt as soon as we start to see moderating commodity prices and strengthening EM currencies, which appear close to peak headwind levels. Once these headwinds reverse, the company could see a period of double-digit earnings growth for a couple of years, which, combined with improving sentiment towards the share, is likely to drive strong share price gains. The share price rally on 28 October has pre-empted some of that and the market likely needs to see a clear turnaround in EM currencies and a normalisation in commodity input prices before re-rating the share further from here. Next year will see elections in some key LatAm markets and it appears to us that Brazil (c. 15% of EBITDA) in particular could have an acrimonious set of elections which may weigh on the currency.
- The company’s excessive leverage means it has limited capital allocation flexibility and raises the opportunity cost of holding the share (single-digit earnings growth with no meaningful dividend yield or share buybacks) while waiting for a turnaround in EM currencies and commodity prices.
- We are getting closer to a decent entry point for the company, but after the share price moves on 28 October, we think it makes sense to be patient and wait for a better entry point.
