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Why AB InBev’s share price has staggered since September IPO

AB InBev’s [ABI] share price slumped 11% to $73.68 – taking around $19.4bn off its valuation - after it said operating profits fell 2.6% to $4.1bn in the third quarter on Friday (25 October).

As a result, it now expects to see moderate growth rather than the expected strong profits and revenues for the full year.

The brewer, which has increasingly focused on developing markets after struggling sales of its core Bud and Bud Light beers in the US, said in maiden results from its Asian unit – Budweiser APAC – that Chinese volumes fell 5.9% year-on-year amid the Government putting a curfew on the sale of alcoholic drinks.

 

 

South Korean sales also slumped hit by price hikes, which AB said would be reversed. The Hong Kong subsidiary’s share price fell 2.2%.

Demand in Brazil faltered as it also raised prices there, despite an economic slowdown. Its strategy of selling more affordable beers in other developing markets such as Argentina and South Africa also hit figures.

In addition, it recorded a drop in volumes in the US where it lost market share.

Overall, revenue growth for the quarter of 2.7% fell short of analysts’ forecasts of 4.7%, according to the Wall Street Journal, with volume growth also missing expectations. Earnings per share came in at $1.51, compared with forecasts of $1.27 compiled by the FT.

The company also flagged up higher commodity costs relating to malt barley and currency headwinds notably from the Brazilian real. An increase in promotions in China also battered margins.

The disappointing performance came after a stellar second quarter when AB InBev toasted beer sales rising at their fastest pace in more than 5 years.

“Whilst the third quarter has a number of timing issues on the cost side, it is uncharacteristic of ABI to miss on margins,” Jefferies analyst Edward Mundy said. “Growth in the second quarter was arguably overinflated through advanced shipments in China and Australia, and now they are seeing the reversal of this.”

“Growth in the second quarter was arguably overinflated through advanced shipments in China and Australia, and now they are seeing the reversal of this” - Jefferies analyst Edward Mundy

 

 

Appetite for products remains healthy

But there are some reasons to remain merry. Those strong sales from the previous quarter show that underlying appetite for its products remain healthy. In addition, the brewer said in its third quarter results that following disposals such as listing the minority stake in its Asia business, and selling its Australian division, net debt was on track to be less than four times EBITDA by the end of this year – 12 months ahead of target.

 

Market cap €143.975bn
PE ratio (TTM) 15.58
EPS (TTM) 4.72
Operating Margin (TTM) 32.51%

AB InBev share price vitals, Yahoo Finance, 28 October 2019

 

The company is also fully aware of changing consumer tastes and is responding accordingly. It has identified new healthier drinks such as hard seltzer – lower calorie carbonated alcoholic drinks - as well as craft beers that appeal more to younger customers. 
Regarding emerging markets, AB isn’t alone in facing woes in the Americas with rival Heineken [HEIA] also seeing sales fall in that market.

AB’s shares have also soared, prior to Friday, by 43.5% year-to-date beating Heineken’s 18% climb in the same time. According to Market Screener the mean consensus amongst analysts on AB InBev is outperform with an average target price of $104.36.

“AB InBev is a fundamentally attractive business - but it's impossible to miss the debt pile that's a legacy of the group's 2016 acquisition of SABMiller,” Hargreaves Lansdown wrote in a note. “Recent currency and commodity headwinds have increased costs and hurt margins. Additionally, further debt reduction could soak up cash for years to come.”

However, it added that if investors and traders can see past the debt shaped ‘millstone’ there is hope. “Footholds in less-developed markets from Latin America to Sub-Saharan Africa mean there's scope for huge volume growth in the years ahead. In developed markets a trend towards more premium products presents the opportunity to boost both margins and revenues.”

“Footholds in less-developed markets from Latin America to Sub-Saharan Africa mean there's scope for huge volume growth in the years ahead. In developed markets a trend towards more premium products presents the opportunity to boost both margins and revenues” - Hargreaves Lansdown

 

A Seeking Alpha report also highlighted AB’s world market leader position and large distribution networks. “Gradually, the SAB merger seems to be paying off and the joint venture between Anheuser and Tilray, Fluent Beverage Company, has already announced its plans to commercialize non-alcohol CBD-infused beverages in Canada,” it said. “It remains a value company but don't expect any price jumps in the short term. The global headwinds do not vanish so quickly and will last for an uncertain time. But in the long-term prices have been reached again, which are quite attractive for the purchase of an entry position or a repurchase.”

So, there could be an opportunity here for investors to pick up shares, which may get weaker in the short-term but have long-term support. A dividend yield of 2.18% is another reason to get a round in.

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