DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access 10 June 2014 Americas/ Europe Equity Research Global Beverages Connections Series ABI v AmBev - who wins after the World Cup? ■ Who wins after the World Cup? Whilst Q2 will be another strong quarter for Brazil, helped by the World Cup (Q2 vols +16% so far), we downgrade AmBev to Neutral (new TP BRL18 from BRL20) and establish a preference for ABI (Outperform, new TP €90 from €87), driven by concerns over the medium-term growth outlook in Brazil. For LatAm-focused investors, we believe Mexico and Colombia offer significantly better consumer momentum. ■ Organic growth – concerns over Brazil, ABI more diversified: We believe AmBev's superior growth in recent years has been driven by excessive pricing above CPI, which is unsustainable, in our view. Furthermore, high per capita consumption levels, deteriorating demographics, excise duty risk and a weak macro outlook make Brazil a less attractive market than in the past. We believe ABI benefits from more diversified exposure, with i) upside to Mexico, ii) scope for a US recovery, and iii) strong growth in Asia (including Oriental Brewery synergies). Indeed, we estimate ABI's weighted real GDP growth outlook is higher than AmBev's over the next three years, only seen twice is the past decade, whilst Brazil's growth is expected to lag the wider LatAm region in '14-15E. ■ ABI's capital deployment is much clearer than AmBev's, with scope for a rising dividend payout ratio, supplemented with a share buyback programme in FY15. Furthermore, we expect any significant M&A to be at the ABI level, not AmBev, so the owners capture the full benefits. ■ Food for thought: While AmBev currently generates higher ROIC, on an adjusted basis (excluding goodwill as ABI has been more acquisitive, and penalising AmBev for holding cash), we expect ABI to exceed AmBev's returns over the next couple of years. ■ Valuation: AmBev has underperformed ABI by c30% over the past year and trades at a slight valuation discount; however, this is driven mainly by the broader EM weakness. We see scope for faster EPS growth at ABI (13% EPS CAGR vs 10% for AmBev over FY14-16E), and note ABI still trades at a discount to AmBev on i) our EV/IC vs ROIC/WACC framework and ii) FCF yield (FY15E 5.7% v 5.2% for AmBev). Figure 1: ABI's sales-weighted FY14-16E GDP growth is higher than AmBev's -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% AmBev ABI Source: IMF, Credit Suisse estimates The Credit Suisse Connections Series leverages our exceptional breadth of macro and micro research to deliver incisive cross-sector and cross-border thematic insights for our clients. Research Analysts Sanjeet Aujla 44 20 7888 0353 [email protected]Antonio Gonzalez, CFA 52 55 5283 8921 [email protected]Alex Molloy 41 44 333 05 83 [email protected]Nicolas Sochovsky 44 20 7883 8075 [email protected]Tobias Stingelin, CFA 5511 3701 6301 [email protected]Michael Steib 212 325 5157 [email protected]Armando Perez +52 55 5283 3808 [email protected]
Transcript
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
10 June 2014
Americas/ Europe
Equity Research
Global Beverages Connections Series
ABI v AmBev - who wins after the World Cup? ■ Who wins after the World Cup? Whilst Q2 will be another strong quarter
for Brazil, helped by the World Cup (Q2 vols +16% so far), we downgrade AmBev to Neutral (new TP BRL18 from BRL20) and establish a preference for ABI (Outperform, new TP €90 from €87), driven by concerns over the medium-term growth outlook in Brazil. For LatAm-focused investors, we believe Mexico and Colombia offer significantly better consumer momentum.
■ Organic growth – concerns over Brazil, ABI more diversified: We believe AmBev's superior growth in recent years has been driven by excessive pricing above CPI, which is unsustainable, in our view. Furthermore, high per capita consumption levels, deteriorating demographics, excise duty risk and a weak macro outlook make Brazil a less attractive market than in the past. We believe ABI benefits from more diversified exposure, with i) upside to Mexico, ii) scope for a US recovery, and iii) strong growth in Asia (including Oriental Brewery synergies). Indeed, we estimate ABI's weighted real GDP growth outlook is higher than AmBev's over the next three years, only seen twice is the past decade, whilst Brazil's growth is expected to lag the wider LatAm region in '14-15E.
■ ABI's capital deployment is much clearer than AmBev's, with scope for a rising dividend payout ratio, supplemented with a share buyback programme in FY15. Furthermore, we expect any significant M&A to be at the ABI level, not AmBev, so the owners capture the full benefits.
■ Food for thought: While AmBev currently generates higher ROIC, on an adjusted basis (excluding goodwill as ABI has been more acquisitive, and penalising AmBev for holding cash), we expect ABI to exceed AmBev's returns over the next couple of years.
■ Valuation: AmBev has underperformed ABI by c30% over the past year and
trades at a slight valuation discount; however, this is driven mainly by the broader EM weakness. We see scope for faster EPS growth at ABI (13% EPS CAGR vs 10% for AmBev over FY14-16E), and note ABI still trades at a discount to AmBev on i) our EV/IC vs ROIC/WACC framework and ii) FCF yield (FY15E 5.7% v 5.2% for AmBev).
Figure 1: ABI's sales-weighted FY14-16E GDP growth is higher than AmBev's
Table of contents Key charts 2 1) Cautious on Brazil 6 2) ABI has other growth drivers 12
Potential upside risks to Mexico 13 Modelo working capital opportunity is understated 15 US recovery potential, A&P step-up is welcome 16
3) Capital deployment 18 ABI has clear balance sheet priorities 19 AmBev also has scope to raise cash returns 20 However, ABI has more M&A optionality than AmBev 21
4) Returns 22 Valuation 24 Risks to our view 26 AmBev (ABEV3.SA): Downgrading to Neutral 27 Anheuser-Busch InBev (ABI.BR): Other value drivers at play beyond Brazil 29 Company overviews 31
10 June 2014
Global Beverages 6
1) Cautious on Brazil Introduction
In this report, we establish a preference for AB InBev (ABI) over its Brazilian listed
subsidiary AmBev considering the organic growth outlook and capital deployment
opportunities of both entities tied in with our returns analysis and valuation.
In spite of Ambev remaining a best-in-class operator among global brewers, we believe
the strong tailwinds seen in the first half of 2014 have mostly played out (World Cup, easy
Figure 38: …however, on a proportionately consolidated
basis (adjusting for ABI's 62% ownership in AmBev),
Brazil is c18% of ABI's sales ABInBev 2013 sales split (AmBev proportionately consolidated)- %
Brazil
24%
Hila-Ex
2%
LatAm South
7%
Canada
4%US
30%
Mexico
11%
Europe
10%
Asia-Pac
12%
Brazil
18%
Hila-Ex
1%LatAm South
5%
Canada
3%
US
35%
Mexico
12%
Europe
12%
Asia-Pac
14%
Source: Company data Source: Company data
10 June 2014
Global Beverages 13
Potential upside risks to Mexico
Figure 39: Over half of the $1bn cost synergy target has
been achieved …. Modelo cost synergy phasing
Figure 40: Even after $1bn of targeted synergies,
Modelo’s cost per hl would be c15% higher than the
Brazilian beer business – a further 5$ per hl cost decline
implies $200m savings, now embedded in our forecasts Modelo v AmBev $ cost per hectolitre
7540
210
135
120
420
0
100
200
300
400
500
600
700
800
900
1,000
Jan-May 13 Jun-13 Q3 13 Q4 13 Q1 14 Remaining
synergy
target
0
10
20
30
40
50
60
70
80
90
100
Modelo Modelo post $1bn
synergy
AmBev
Source: Company data Source: Company data, Credit Suisse research
We estimate $500m revenue synergy potential (not incorporated in our forecasts) driven
by;
■ Global roll-out of the Corona brand—$350m ($1bn sales)
■ Market share and premiumisation in Mexico—$125m
Figure 41: ABI increased Budweiser export volumes by
75% 2009-12 (after acquiring the brand in A-B acquisition) Budweiser export volumes in mhl
Figure 42: At 4mhl outside of Mexico, Corona is just 25%
of Budweiser volumes. ABI has rolled out in Canada from
March 2014, with Brazil to follow in H2 2014 (post World
Cup) Corona global brand penetration opportunity - %
0
2
4
6
8
10
12
14
16
18
20
2009 2010 2011 2012
0
2
4
6
8
10
12
14
16
18
20
Corona Budweiser
5x
Source: Company data Source: Company data
10 June 2014
Global Beverages 14
Figure 43: We estimate $350m opportunity from taking
Corona global by 2016 (assuming similar pace of rollout
of Budweiser following AB deal) – i.e. 10mhl increase –
Corona's distinct brand positioning should ensure little
cannibalisation Corona global brand penetration opportunity - %
Figure 44: Premium beer volumes in Mexico are low by
international standards (global avg 13%) – an opportunity
for ABI to penetrate its Bud Light and Stella Artois brands Premium beer volumes as % of total
ABI ex soft drinks - $m $ per hl Corona
Volume - mhl 344 10
Net revenue 34,474 100 1,002
EBIT 11,988 35 348
0%
10%
20%
30%
40%
50%
60%
Mexico Paraguay Uruguay Brazil Japan Russia Argentina US Belgium Germany UK France
Source: Company data Source: Company data
Figure 45: Following expiry of ABI’s transitional supply
agreement with Constellation (in 2016) pro forma capacity
utilisation drops to 60%, which could leader to further
cost savings or support revenue synergies (taking
advantage of low shipping rates in Mexico) Mexico peak capacity utilisation - %
Figure 46: Biggest opportunity for Bud brands lies in
northern Mexico, which is a Heineken stronghold Mexico market share by region (shaded areas are Heineken strongholds)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FEMSA Modelo - reported Modelo -
underlying
Modelo - pro
forma
Modelo's pro-forma underlying capacity utilisation will drop to 60%
North
<50% market share
North-west
<50% market share
South
<50% market share
Central
>50% market share
West
>50% market share
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
10 June 2014
Global Beverages 15
Modelo working capital opportunity is understated
Figure 47: Modelo’s cash conversion cycle is relatively
poor at c100days Grupo Modelo historical cash
conversion - days
Figure 48: Modelo’s working capital opportunity lies in
stretching payables and to a lesser extent in more
efficient inventory management, 2012 Cash conversion breakdown for Modelo, AmBev and ABI
0
20
40
60
80
100
120
140
160
2006 2007 2008 2009 2010 2011
-250
-200
-150
-100
-50
0
50
100
150
Days inventory Days receivable Days payable
Modelo AmBev ABI
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
Figure 49: Modelo’s working capital opportunity lies in
stretching payables and to a lesser extent in more
efficient inventory management in $millions, unless otherwise stated
Figure 50: 2009-11 group WC inflow was c5x higher than
the $500m working capital target for A-B in $millions, unless otherwise stated
2012E 2016E change
Days inventory 105 80 -25
Days receivable 30 25 -5
Days payables -27 -185 -158
Cash conversion - days -27 -185 -158
Inventory 902 518 -385
Trade receivables 1,434 1,471 37
Trade payables -229 -1,197 -968
Working capital 2,107 791 -1,316
0
500
1,000
1,500
2,000
2,500
A-B WC target 2008 2009-11 WC inflow
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research
10 June 2014
Global Beverages 16
US recovery potential, A&P step-up is welcome
Figure 51: ABI's US volumes have been weak in recent
years… ABI US beer volume growth -%
Figure 52: US beer industry volumes are closely
correlated with the unemployment rate… US beer volume growth v unemployment rate (1990-2003) -%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
2009 2010 2011 2012 2013
R² = 0.5125
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3% 4% 5% 6% 7% 8% 9% 10%
Source: Company data Source: Beer Institute, Bureau of Labour statistics
Figure 53: We expect the US unemployment rate will
continue to decline… US unemployment rate - %
Figure 54: ABI has previously acknowledged US labour
force participation is an important driver of industry
volumes – we note stabilisation in the past few months,
our economists US labour force participation rate - %
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
61.0%
62.0%
63.0%
64.0%
65.0%
66.0%
67.0%Ja
n-0
8
May
-08
Sep
-08
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
Jan-
11
May
-11
Sep
-11
Jan-
12
May
-12
Sep
-12
Jan-
13
May
-13
Sep
-13
Jan-
14
May
-14
Source: Bureau of Labour statistics, Credit Suisse estimates Source: Bureau of Labour statistics
Figure 55: US price/mix is decelerating due to softer
brand mix (tough comps) and negative package mix
(rollout of aluminium cans) from new innovations... ABI US net revenue per hectolitre - %
Figure 56: …however, such innovations are accretive to
gross profit margins ABI US gross margin change - bps
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
Price Mix
-100
-50
0
50
100
150
200
Q1 13 Q2 13 Q3 13 Q4 13 Q1 14
Source: Company data Source: Company data
10 June 2014
Global Beverages 17
Figure 57: Co plans to significantly step up marketing
spend in FY14, particularly to capture growth in the on-
premise – the correct decision for the medium-term health
of the business ABI North America organic revenue v sales & marketing spend - %
Figure 58: If sustained, we believe this could help improve
recent market share losses ABI US market share trends - bps
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2009 2010 2011 2012 2013 Q1 14
Organic revenue Sales & marketing expenses
-70
-60
-50
-40
-30
-20
-10
0
2010 2011 2012 2013 Q1 14
Source: Company data Source: Company data
Figure 59: Whilst not yet a trend, recent May data shows
the highest monthly share gain in the Bud Light brand
franchise in over 3 years ABI US Bud Light market share trends - bps
Figure 60: US beer prices are among the lowest globally
on a GDP per capita basis, suggesting room for continued
pricing (particularly following 2008 industry
consolidation) Global beer prices ($ per litre) v GDP per capita at purchasing power parity ($)
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
01-J
an-1
0
01-A
pr-1
0
01-J
ul-1
0
01-O
ct-1
0
01-J
an-1
1
01-A
pr-1
1
01-J
ul-1
1
01-O
ct-1
1
01-J
an-1
2
01-A
pr-1
2
01-J
ul-1
2
01-O
ct-1
2
01-J
an-1
3
01-A
pr-1
3
01-J
ul-1
3
01-O
ct-1
3
01-J
an-1
4
01-A
pr-1
4
R² = 0.6373
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
0 10,000 20,000 30,000 40,000 50,000 60,000
US
Source: Nielsen Source: Euromonitor, Credit Suisse research
Figure 61: US beer prices have historically lagged CPI by
c80bps p.a. as, before industry consolidation, the focus
on family-run brewers was market share (sometimes at
the expensive of profitability) US beer prices v CPI (1952 = 100)
Source: Thomson Reuters
10 June 2014
Global Beverages 18
3) Capital deployment We believe capital deployment (either through enhanced cash returns or M&A) will be key
to the investment case in these stocks. We believe that ABI has a clearer capital
deployment policy than AmBev, with scope for a rising payout ratio, share buybacks and
further M&A.
AmBev's balance sheet continues to build up cash…
Following the acquisitions of Anheuser-Busch (2008), Grupo Modelo (2013) and Oriental
Brewery (2014), we estimate ABI's balance sheet will de-lever to 1.5x net debt/EBITDA in
FY15E, below its target capital structure of 2x.
We note that ABI has allowed the AmBev vehicle to deleverage since the
Interbrew/AmBev merger in 2004, into a net cash position (2013 cR$9bn net cash or -0.5x
net cash/EBITDA), with ABI ex AmBev leveraging up to acquire Anheuser Busch.
Figure 62: ABI's balance will be below 2x net debt/EBITDA
by FY15E ABInBev net debt/EBITDA - x
Figure 63: AmBev has de-leveraged into a net cash
position AmBev net debt/EBITDA - x
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
-1.0
-0.5
0.0
0.5
1.0
1.5
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 64: ABI ex AmBev has been the main debt vehicle ABI ex AmBev net debt/EBITDA - x
Figure 65: Bulk of ABI's debt is held in USD and EUR,
despite Brazil accounting for c33% of EBIT ABI 2013 net debt split post hedges - %
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
US dollar65%
Euro27%
Brazilian Real3%
Canadian dollar
3%
Other2%
Source: Company data, Credit Suisse estimates Source: Company data
10 June 2014
Global Beverages 19
Why isn't AmBev's balance sheet more leveraged?
There are two main reasons why AmBev's balance isn't leveraged despite ABI's apparent
currency mismatch.
■ Brazilian debt financing is more expensive: From ABI's perspective, the cost of
debt financing in Brazil (c7.4% post-hedges) is significantly higher than in the
US/Europe (c4% post hedges) – as such, despite cash flow mismatch, the company
prefers to borrow in US$ or euros. Indeed, ABI raised $45bn of relatively expensive
US dollar denominated debt during the financial crisis to complete the Anheuser-
Busch acquisition.
■ Tax shield is replicated through dividend payout: In the mid-1990s, to incentivise
corporates to de-risk their balance sheets by holding less debt, the Brazilian
government allowed companies to pay interest to shareholders as return on equity
capital at the official long-term interest rate (5%) – these payments are considered as
dividends, whilst at the same time are also deductible for corporate tax purposes
(although subject to a withholding tax of 15%); therefore, they create a tax shield for
corporates for the benefit of equity holders, without having the need to hold debt.
Figure 66: Cost of debt is much higher in Brazil versus USD and EUR ABI 2013 cost of debt by currency (post hedges) - %
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Brazilian Real US dollar Euro Canadian dollar
Source: Company data, Credit Suisse research
ABI has clear balance sheet priorities
As ABI's balance sheet de-levers to below 2x net debt/EBITDA in FY15E, we expect
excess cash to be returned to shareholders through a combination of dividends and share
buybacks, in the absence of further M&A.
Dividends – Brazilian owners likely to be keen on further ABI payout ratio
ABI has gradually raised its payout ratio to 58% since the dividend cut in FY08 to fund the
acquisition of Anheuser-Busch, a level that is now in line with its consumer staples peer
group.
However, we expect the payout ratio to increase. We believe the Brazilian owners of ABI
(combined ownership of 20.62%) would appreciate larger dividends particularly as their
US-based private equity vehicle (3G Capital) has been active in large scale deals in recent
years with the acquisition of Burger King in October 2010 and Heinz in June 2013.
We believe they would use cash flow from ABI's dividends (c$1bn in FY13) to help fund
further acquisitions in the consumer and retail sectors. Nevertheless, we acknowledge that
other sources of funding for 3G are also available (Berkshire Hathaway has participated in
recent transactions, and leverage can be used as well).
10 June 2014
Global Beverages 20
ABI targets a 3-4% dividend yield – assuming the midpoint (3.5%), the implied payout ratio
is over 70%.
Figure 67: ABI's current payout ratio is 58% (note, in FY
2007, it was raised to 80%, which was signalled to be the
'new normal') ABI 2000-13 dividend payout ratio - %
Figure 68: ABI has scope to raise its payout ratio towards
the high-end of large-cap consumer staples peers ABI 2013 dividend payout ratio vs other large cap staples - %
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
40%
45%
50%
55%
60%
65%
70%
Source: Company data Source: Company data
Share buybacks
However, given the cash generation of the group, a steadily increasing payout ratio still
implies a leverage ratio below 2x net debt/EBITDA. As such, we expect ABI to supplement
a higher payout ratio with a share buyback programme from FY15 (c2% EPS accretive) –
in aggregate, we believe the company can return $12bn to shareholders in FY15E, or c7%
of its market cap.
AmBev also has scope to raise cash returns
According to its charter, AmBev has a minimum payout ratio of c40%; however, the total
payout ratio has been significantly above this level, averaging c.62% in the past few years.
Figure 69: AmBev historical payout ratio AmBev total payout ratio - % (dividends + buybacks + IOC)
Figure 70: The company has only paid out c28% of its
dividends in interest on capital AmBev dividends, IOC, and buybacks – BRL billions
0%
20%
40%
60%
80%
100%
120%
140%
160%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0
1
2
3
4
5
6
7
8
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Share buyback
IOC
Dividends
Source: Company data Source: Company data
10 June 2014
Global Beverages 21
We believe there is scope for AmBev to raise its cash return profile over the next few
years, particularly following its share-swap merger last year, which boosted its equity base
and, in turn, allows it to pay a higher amount of interest on capital.
Indeed, we estimate AmBev could in principle payout R$5.6bn interest on capital in FY14E,
more than double the IOC paid in 2013.
Raising interest on capital payments has significant implications for AmBev's tax rate. As
we mention above, these payments are tax deductible.
However, even if AmBev pays out the maximum IOC, it would still be building up cash as
the IOC is capped at 50% of net income, indicating scope for further cash returns through
share buybacks or ordinary dividends.
We believe AmBev buybacks would be preferable for ABI, as it would be able to raise its
stake in AmBev (assuming ABI does not participate in the buyback programme); ABI also
benefits from a lower minority interest charge, whereas there is no benefit to ABI from
AmBev returning cash through normal dividends
However, given the FCF generation of the business, even if AmBev returns c100% of its
earnings to shareholders, the business still holds a significant proportion of cash on the
balance sheet. We do not believe AmBev will reduce this cash pile meaningfully by
returning it to shareholders as this would begin to impact ABI's leverage ratio (given ABI
fully consolidates AmBev in its financial statements), and could limit the payout to ABI
shareholders (given its optimal leverage ratio is 2x net debt/EBITDA).
However, ABI has more M&A optionality than AmBev
ABI has outperformed its consumer staples peers over the past decade in large part driven
by generating shareholder value through M&A. ABI has tended to be the main acquisition
vehicle, with AmBev being used to consolidate some assets in LatAm and Caribbean
(principally Quinsa in Argentina and CND in Dominican Republic). We would expect any
future deals to be carried out by ABI, as the controlling shareholders would achieve 100%
of the potential upside.
10 June 2014
Global Beverages 22
4) Returns AmBev generates higher returns than ABI…
At first glance, AmBev's post tax return on invested capital (32% in FY13) far exceeds that
of ABI (c12%), given;
■ ABI has been much more acquisitive than AmBev – as such, goodwill generated on
these deals has diluted their returns (goodwill accounts for c80% of ABI's invested
capital vs c60% from AmBev in FY13)
■ AmBev generates higher EBIT margins than ABI (44.2% for AmBev v 32.5% for ABI in
FY13)
However, we make the following adjustments to gauge the underlying returns for both
companies, and to calculate the return on incremental invested capital;
■ Adjustment 1: We remove goodwill and intangibles assets for both companies – ABI
has been more acquisitive than AmBev.
■ Adjustment 2: We penalise both companies for holding cash by including this in the
invested capital base, as it generates little return for shareholders (note, on this basis,
cash represents c24% of ABI's invested capital ex goodwill vs c35% for AmBev).
Ambev's reported returns are expected to remain above ABI's, but after making the
above adjustments (stripping out goodwill and taking into account that there is
lower visibility with respect to capital allocation and uses of cash for AmBev vis-à-
vis ABI), the returns of the holding company (ABI) could surpass those of the
LatAm subsidiary (AmBev) in a couple of years
Indeed, even if we assume AmBev returns all its net profit over the next few years (so its
2013 balance sheet cash of R$11bn is maintained), then we would still forecast returns for
both companies to converge over the next three years.
Figure 71: AmBev's return on invested capital far exceeds
ABI AmBev vs ABI post-tax return on invested capital – including goodwill, excluding cash - %
Figure 72: Following adjustments (ex goodwill &
intangibles, including cash), AmBev's returns are still
higher, driven by higher margins and invested capital
turns AmBev vs ABI 2013 post-tax return on invested capital – excluding goodwill, including cash - %
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
ABInBev AmBev
ABI AmBev
Invested capital pre-adjustments
Tax rate 16.6% 17.8%
EBIT margin 32.9% 44.2%
Invested capital turns (inc intangibles/ ex cash) 0.43 0.88
ROIC - % 11.8% 32.1%
Invested capital post-adjustments
Tax rate 16.6% 17.8%
EBIT margin 32.9% 44.2%
Invested capital turns (ex intangibles/ inc cash) 2.06 1.73
ROIC - % 56.4% 62.8%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
10 June 2014
Global Beverages 23
Figure 73: We expect ABI's underlying returns to exceed AmBev over the next two years AmBev vs ABI post-tax return on invested capital – excluding goodwill, including cash - %
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
ABInBev AmBev AmBev (maintain 2013 cash)
Source: Company data, Credit Suisse estimates
In the following section, we assess ABI's and AmBev's returns in the context of their
respective cost of capital and EV/IC valuations.
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Global Beverages 24
Valuation ABI has outperformed AmBev since January 2004 (in $ terms). Over the past 12 months,
ABI has significantly outperformed as AmBev has de-rated from a c30% EV/EBITDA
premium to trade at a slight discount.
We believe some of this underperformance is driven by weakness in the broader emerging
market indices – whilst AmBev has also de-rated relative to the Brazilian equity market, we
note its 12m forward P/E now trades in line with its historical average premium (10 years).
Figure 74: Over the long term, ABI has slightly
outperformed AmBev, and by c30% over the past 12m ABI v AmBev $ share price performance (Jan 2004 = 100)
Figure 75: AmBev has de-rated to trade at a slight
valuation discount to ABI (historically both stocks have
traded at parity on EV/EBITDA) ABI v AmBev 12m forward EV/EBITDA - x
0
100
200
300
400
500
600
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
AmBev ABI
60
70
80
90
100
110
120
130
140
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Source: Thomson Reuters Source: Thomson Reuters
Figure 76: This has been driven partly by recent
weakness in emerging market indices EM v DM staples relative 12m forward P/E
Figure 77: AmBev has also de-rated relative to the
Brazilian equity market; however, it is now back at its
historical average premium AmBev 12m forward P/E relative to Brazilian MSCI
60
70
80
90
100
110
120
130
140
150
Jan-0
5
Jul-0
5
Jan-0
6
Jul-0
6
Jan-0
7
Jul-0
7
Jan-0
8
Jul-0
8
Jan-0
9
Jul-0
9
Jan-1
0
Jul-1
0
Jan-1
1
Jul-1
1
Jan-1
2
Jul-1
2
Jan-1
3
Jul-1
3
Jan-1
4
80
130
180
230
280
330
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Source: Thomson Reuters Source: Thomson Reuters
10 June 2014
Global Beverages 25
ABI is cheaper than AmBev on FCF yield
Furthermore, with superior cash conversion driven by working capital savings and lower
capex requirements, we note ABI has a higher FCF yield than AmBev (even after fully
adjusting for ABI's minority interests in AmBev) – it is this FCF yield which also sets ABI
apart from its wider European consumer staples peer group.
Figure 78: ABI trades on a higher FCF yield than AmBev AmBev vs ABI FY15E FCF yield - %
Figure 79: ABI vs European peers ABI vs European consumer staples FY15E FCF yield - %
EBIT 15,394 17,529 18,447 20,380 Net interest (190) 245 744 1,076 Cash taxes paid — — — — Change in working capital 99 (364) 381 542 Other cash & non-cash items (2,361) 1,452 (2,472) (2,941) Cash flow from operations 12,942 18,861 17,100 19,057 CAPEX (3,659) (3,704) (3,743) (3,955) Free cash flow to the firm 9,283 15,157 13,357 15,101 Acquisitions — — — — Divestments — — — — Other investment/(outflows) 486 (4,289) (66) (91) Cash flow from investments (3,173) (7,993) (3,809) (4,046) Net share issue/(repurchase) — — — — Dividends paid (7,154) (9,900) (10,534) (11,706) Issuance (retirement) of debt (238) (151) (890) — Other 237 151 890 69 Cash flow from financing activities
(7,155) (9,900) (10,534) (11,706) Effect of exchange rates — — — — Changes in Net Cash/Debt 2,614 968 2,756 3,305 Net debt at start (6,307) (8,921) (9,889) (12,645) Change in net debt (2,614) (968) (2,756) (3,305) Net debt at end (8,921) (9,889) (12,645) (15,950)
Balance sheet (R$ m) 12/13A 12/14E 12/15E 12/16E
Assets Cash and cash equivalents 11,827 12,643 14,509 17,745 Accounts receivable 5,490 6,239 6,632 7,211 Inventory 2,836 3,201 3,386 3,666 Other current assets 656 746 793 862 Total current assets 20,809 22,829 25,320 29,484 Total fixed assets 14,006 15,616 17,011 18,578 Intangible assets and goodwill 30,238 29,544 29,544 29,544 Investment securities 26 52 52 52 Other assets 4,006 4,355 4,625 5,022 Total assets 69,085 72,397 76,551 82,680 Liabilities Accounts payable 15,270 16,020 16,979 18,379 Short-term debt 1,041 275 186 180 Other short term liabilities 1,042 5,232 5,603 6,192 Total current liabilities 17,353 21,527 22,768 24,750 Long-term debt 1,865 2,479 1,678 1,616 Other liabilities 5,642 5,664 5,867 6,174 Total liabilities 24,860 29,670 30,313 32,540 Shareholders' equity 42,993 41,544 45,055 48,957 Minority interest 1,232 1,183 1,183 1,183 Total equity & liabilities 69,085 72,397 76,551 82,680 Net debt (R$ m) (8,921) (9,889) (12,645) (15,950)
EBIT 14,203 16,235 17,730 19,271 Net interest (1,917) (1,582) (1,628) (1,687) Cash taxes paid — — — — Change in working capital 478 213 571 181 Other cash & non-cash items 1,100 1,035 (184) 413 Cash flow from operations 13,864 15,901 16,489 18,178 CAPEX (3,869) (4,000) (4,136) (4,293) Free cashflow adj. (1,042) (2,063) (2,235) (2,500) Free cash flow to the firm 8,953 9,838 10,119 11,385 Acquisitions (17,538) (5,480) — — Divestments 4,288 150 150 150 Other investment/(outflows) 6,838 — — — Cash flow from investments (10,281) (9,330) (3,986) (4,143) Net share issue/(repurchase) 73 300 300 300 Dividends paid (6,253) (6,994) (8,111) (8,423) Issuance (retirement) of debt — — — — Other (6,227) (98) (6,500) (7,000) Cash flow from financing activities
(12,407) (6,792) (14,311) (15,123)
Effect of exchange rates — — — — Changes in Net Cash/Debt (8,824) (221) (1,808) (1,089) . Net debt at start 30,463 39,287 39,508 41,316 Change in net debt 8,824 221 1,808 1,089 Net debt at end 39,287 39,508 41,316 42,405
Balance sheet (US$ m) 12/13A 12/14E 12/15E 12/16E
Assets Cash and cash equivalents 9,839 4,839 4,839 4,839 Accounts receivable 5,694 6,000 6,210 6,433 Inventory 2,950 3,032 3,229 3,438 Other current assets 207 207 207 207 Total current assets 18,690 14,078 14,485 14,917 Total fixed assets 20,889 23,331 24,249 25,130 Intangible assets and goodwill 99,265 102,878 102,467 102,028 Investment securities — — — — Other assets 2,822 2,854 2,879 2,904 Total assets 141,666 143,141 144,079 144,979 Liabilities
Accounts payable 16,474 17,833 18,771 19,750 Short-term debt 7,852 4,852 4,852 4,852 Other short term liabilities 1,301 1,301 1,301 1,301 Total current liabilities 25,627 23,986 24,924 25,903 Long-term debt 41,274 39,495 41,303 42,392 Other liabilities 19,457 19,507 19,607 19,757 Total liabilities 86,358 82,988 85,834 88,052 Shareholders' equity 50,365 54,649 52,083 50,059 Minority interest 4,943 5,504 6,163 6,867 Total equity & liabilities 141,666 143,141 144,079 144,979 Net debt (US$ m) 39,287 39,508 41,316 42,405
Sanjeet Aujla, Antonio Gonzalez, CFA, Alex Molloy, Nicolas Sochovsky, Tobias Stingelin, CFA, Michael Steib, Armando Perez and Kieran McGrath each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for AmBev (ABEV3.SA)
ABEV3.SA Closing Price Target Price
Date (R$) (R$) Rating
11-Aug-11 48.31 59.97 O *
18-Mar-12 14.60 N
02-Apr-12 *
28-Mar-13 16.60 N
09-Aug-13 *
25-Sep-13 20.00 O
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N EU T RA L
3-Year Price and Rating History for Anheuser-Busch InBev (ABI.BR)
ABI.BR Closing Price Target Price
Date (€) (€) Rating
13-Feb-12 49.13 52.00 N *
20-Mar-12 54.60 56.00
10-Jul-12 64.00 67.00
20-Sep-12 67.04 70.00
28-Feb-13 71.76 80.00 O
07-Mar-13 72.75 90.00
02-May-13 72.85 88.00
20-Jan-14 76.12 87.00
* Asterisk signifies initiation or assumption of coverage. N EU T RA L
O U T PERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
10 June 2014
Global Beverages 36
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd Oct ober 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
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Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 44% (53% banking clients)
Neutral/Hold* 40% (49% banking clients)
Underperform/Sell* 13% (47% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individua l factors.
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Price Target: (12 months) for AmBev (ABEV3.SA)
Method: Our discounted cash flow to firm (DCFF) analysis, based on an estimated 14.0% weighted average cost of capital (WACC, in BRL, nominal) and a 9.2% terminal growth rate. Our R$18 per share price target implies a 2014 EV/EBITDA multiple of 13.9x.
Risk: Risks to our R$18 target price include the following: (1) additional excise taxes in the future, which could increase retail prices and reduce volumes, (2) future M&A activity in Latin America.
Price Target: (12 months) for Anheuser-Busch InBev (ABI.BR)
Method: We roll forward our adjusted present value (APV) and now assume ABI maintains net debt/EBITDA at 2x over the medium term. Our key assumptions include: Revenue growth as per our forecast out to 2018E, then declining to a terminal growth rate of 2.5% in 2028 (year 15); Margins growing at 10bps per annum in 2018-27E; Minority valuation taking current market valuation of the c38% of AmBev which is not owned by ABI; and ABI maintains medium term net debt/EBITDA at 2x, in line with its stated target. We estimate the value of the tax shield to be $23bn on this basis.
10 June 2014
Global Beverages 37
Risk: Risks to our target price include i) lower than expected unemployment in the US ii) unfavourable weather conditions in Brazil iii) pace of synergy delivery in Mexico.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (ABI.BR, HEIN.AS, SAB.L, DGE.L, IMT.L, BATS.L, NESN.VX, DANO.PA, BEIG.DE) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (ABI.BR, HEIN.AS, DGE.L, IMT.L, NESN.VX) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (HEIN.AS, DGE.L, IMT.L, BATS.L, NESN.VX, DANO.PA) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (DGE.L, NESN.VX) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (ABI.BR, HEIN.AS, DGE.L, IMT.L, NESN.VX) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ABI.BR, HEIN.AS, SAB.L, DGE.L, PERP.PA, IMT.L, NESN.VX, BEIG.DE) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (HEIN.AS, DGE.L, IMT.L, BATS.L, NESN.VX, DANO.PA) within the past 12 months
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (SAB.L, NESN.VX).
Credit Suisse has a material conflict of interest with the subject company (NESN.VX) . Credit Suisse assisted Nestlé in the strategic review of its personal care strategy and options for its 30% shareholding in L'Oréal.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ABEV3.SA, ABI.BR, HEIN.AS, CARLb.CO, SAB.L, DGE.L, PERP.PA, IMT.L, RB.L, HNKG_p.F, BATS.L, NESN.VX, UNc.AS, DANO.PA, BEIG.DE) within the past 12 months
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Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (DGE.L, IMT.L).
The following disclosed European company/ies have estimates that comply with IFRS: (ABI.BR, HEIN.AS, CARLb.CO, SAB.L, DGE.L, PERP.PA, IMT.L, RB.L, HNKG_p.F, BATS.L, NESN.VX, UNc.AS, DANO.PA, BEIG.DE).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (HEIN.AS, DGE.L, NESN.VX) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
Tobias Stingelin, CFA & Armando Perez each certify that (1) The views expressed in this report solely and exclusively reflect my personal opinions and have been prepared independently, including with respect to Banco de Investimentos Credit Suisse (Brasil) S.A. or its affiliates ("Credit Suisse"). (2) Part of my compensation is based on various factors, including the total revenues of Credit Suisse, but no part of my compensation has been, is, or will be related to the specific recommendations or views expressed in this report. In addition, Credit Suisse declares that: Credit Suisse has provided, and/or may in the future provide investment banking, brokerage, asset management, commercial banking and other financial services to the subject company/companies or its affiliates, for which they have received or may receive customary fees and commissions, and which constituted or may constitute relevant financial or commercial interests in relation to the subject company/companies or the subject securities.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research
10 June 2014
Global Beverages 38
analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Casa de Bolsa Credit Suisse (Mexico), S.A ............................................................................................ Antonio Gonzalez, CFA ; Armando Perez
Banco de Investments Credit Suisse (Brasil) SA or its affiliates. ....................................................................................... Tobias Stingelin, CFA
Credit Suisse Securities (Europe) Limited........................................................ Sanjeet Aujla ; Alex Molloy ; Nicolas Sochovsky ; Kieran McGrath
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
10 June 2014
Global Beverages 39
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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments. When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.
