JOHANNESBURG - AB InBev was one of the weakest performers on the JSE in the last few months.
The weak performance was driven by lower revenue guidance by management, and the consumer staples sector is underperforming the market due to the robust performance and large sector weightings from the technology counters.
The majority of the downward price movement occurred directly after their third-quarter results were released on October 25, 2019. The share price dropped 10percent on the day. Since then, the share has remained mostly flat - it declined by 20percent in rand and 13percent in US dollar terms over the past quarter.
The results were disappointing, raising concerns whether AB InBev can consistently grow volume and profit. Management lowered top-line growth expectations to “below inflation” from “above-inflation” due to softer macroeconomic conditions. Earnings expectations declined by 8percent and 5percent respectively for the next two financial years.
The four years since its listing on the JSE gave investors a negative 42percent return. Dismal, to say the least. AB Inbev is the largest beer brewer in the world, and the time for beer is not over since beer has been bringing people together for thousands of years, to this day. AB Inbev has excellent brands that stood the test of time, and they brew the best beers using the finest natural ingredients. Their diverse portfolio of more than 500 beer brands includes global brands like Budweiser, Corona, Stella Artois, Becks and Castle.
Their brewing heritage dates back more than 600 years, spanning continents and generations. From their European roots at the Den Hoorn brewery in Leuven, Belgium. To the pioneering spirit of the Anheuser & Co brewery in St Louis, US. To the creation of the Castle Brewery in South Africa during the Johannesburg gold rush. To Bohemia, the first brewery in Brazil.
They are geographically diversified with a balanced exposure to developed and developing markets, AB Inbev have 175000 employees based in nearly 50 countries worldwide. For 2018, AB InBev’s reported revenue was $54.6 billion (R785.5bn) (excluding joint ventures and associates). A force to be reckoned with.
Management is expecting top-line growth and total costs to grow below inflation due to softer macroeconomic conditions, (prior guidance indicated above inflation revenue growth), with headwinds faced continuing into their fourth quarter, which will put pressure on the earnings before interest, tax, depreciation and amortisation margin (Ebitda). AB Inbev has an optimal capital structure of net debt to Ebitda of 2 times, and it is expected that this ratio will be below four times soon. This expectation was moved forward due to the listing of Budweiser Apac, as the proceeds are being used to deleverage at a faster pace. The market remains concerned regarding the pressure on margins due to the weaker volumes and softer consumer demand.
Despite the short-term headwinds that the group is currently facing, it seems like AB InBev holds value at current price levels. Presently, the share trades at a discount to its peers, trading on a forward Price/Earnings ratio of 17.3 times, below its five-year average of 21.5 times.
The market always gives you another chance to buy a share, and maybe this is the case for AB Inbev.
Amelia Morgenrood is a PSG Wealth financial adviser based in Pretoria. Views are of the author and not necessarily the general view of the entire PSG entity. AB Inbev shares are held on behalf of clients.
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