The Deal 2011_PIB_July 11

Europe Equity Research 27 April 2011

European Beverages

You get what you pay for

Beverages

Mike J GibbsAC

(44-20) 7325-1205 [email protected]

Matthew Webb (44-20) 7155 6154 [email protected]

Komal Dhillon (44-20) 7325-9555 [email protected]

J.P. Morgan Securities Ltd.

For Specialist Sales Advice, please contact: Natasha Cobden (44-20) 7325 3092 [email protected]

Equity Ratings and Price Targets Mkt Cap Price RatinCompany Symbol ($ mn) Currency Price Cur Anadolu Efes Biracilik ve Malt AEFES.IS 6,987.5 TRY 23.70 OW Anheuser Busch InBev ABI.BR 100,115.5 EUR 42.81 OW Britvic Plc BVIC.L 1,534.5 GBp 390 OW C&C Group GCC.I 1,569.7 EUR 3.33 N Campari CPRI.MI 4,037.5 EUR 4.77 UW Carlsberg A/S CARLb.CO 17,686.1 DKK 593.00 OW Central European Distribution CEDC 752.2 USD 10.52 UW Coca-Cola Icecek AS CCOLA.IS 3,541.5 TRY 21.25 N Diageo DGE.L 49,954.8 GBp 1,207 UW Heineken HEIN.AS 33,994.8 EUR 40.48 N Pernod Ricard SA PERP.PA 25,489.2 EUR 66.00 N Remy Cointreau SA RCOP.PA 3,869.8 EUR 54.72 N SABMiller plc SAB.L 57,426.4 GBp 2,201 OW Coca-Cola Hellenic Bottling Co HLBr.AT 9,941.8 EUR 18.98 N Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 21 Apr 11 except for BritvApr 11],Diageo[20 Apr 11],SABMiller[20 Apr 11].

See page 85 for analyst certification and important disclosures, including non-US aJ.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, invhave a conflict of interest that could affect the objectivity of this report. Investors should consider this repinvestment decision.

• The European beverages sector looks fairly valued in terms of historical forward earnings multiples from an absolute (14.5x 12M forward PE) and 5 year relative perspective (35% premium to market). However we think many of these stocks offer robust and predictable earnings growth in an equity market where our strategists are pointing to leading indicators rolling over and where oil price pressures and GDP growth downgrades may temper near term margin expectations.

• We think the sector offers a powerful combination of well above average exposure to emerging market consumers (over 50% of sector EBIT) and often visible self help stories and we think the input costs pressures are now broadly discounted in earnings expectations.

• We expect a combination of improving volume growth, margin expansion, acquisitions and deleverage to drive robust double digit earnings growth across the sector (16% weighted average in 2011E and 13% in 2012E). The sector offers an average “PEG ratio” in CY12E of 1.2x below those of comparable European food and HPC sectors.

• We also see many of the stocks in the universe as relatively attractive in terms of the opportunities to deploy significant cash generation in the form of enhanced dividends and buybacks and/or M&A. We estimate a weighted average free cashflow yield for the European beverages sector of 6.1% in CY11E and 7.2% in CY12E.

• In terms of upside to our PTs, near term momentum and relative risk we pick Anadolu EFES, ABI, Carlsberg and SABMiller as our key buys in the sector. We would continue to avoid Diageo, Campari and CEDC on a sector relative basis.

CEDC: 2011 guidance looks aggressive – downgrading to Underweight 28 March 2011 Diageo: Be careful what you wish for: moving to Underweight 27 Jan 2011 Turkish Beverages: Initiating with Overweight recommendations 15 Dec 2010 European Beverages: back to the basics in beer part 2: where will the cash go 2 Dec 2010

g Price TargetPrev Cur Prev

n/c 27.80 25.80n/c 50.00 51.00n/c 440 450n/c 3.50 n/cn/c 4.65 4.30n/c 670.00 625.00n/c 10.00 n/cn/c 21.00 18.60n/c 1,120 n/cn/c 41.00 n/cn/c 66.00 62.00n/c 52.00 n/cn/c 2,400 2,290n/c 20.00 21.00

ic[20 Apr 11],Carlsberg[20 Apr 11],CEDC[20

nalyst disclosures. estors should be aware that the firm may

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Mike J Gibbs (44-20) 7325-1205 [email protected]

Table of Contents Executive Summary .................................................................3 Our key buys are Anadolu EFES, Carlsberg, SABMiller and ABI .............................................................................................5 Valuation: You get what you pay for.....................................11 The key drivers of growth......................................................22 Cashflow is available for investment or distribution...........38 Revenue growth expectations by region..............................43 Company Profiles...................................................................49

Anadolu Efes ........................................................................50 Anheuser Busch InBev ........................................................51 Britvic ....................................................................................52 C&C Group............................................................................53 Campari .................................................................................54 Carlsberg...............................................................................55 CEDC .....................................................................................56 Coca-Cola Hellenic...............................................................57 Coca-Cola Icecek..................................................................58 Diageo ...................................................................................59 Heineken ...............................................................................60 Pernod-Ricard SA.................................................................61 Remy Cointreau SA..............................................................62 SABMiller ..............................................................................63

Valuation Methodology and Risks ........................................64

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Executive Summary • Whilst we believe the European beverages sector looks fairly valued in terms of

recent historical forward earnings multiples from both an absolute (14.5x 12M forward PE) and relative perspective (35% premium to European market on 12M forward PE) we do think many of these stocks offer robust and predictable earnings growth in a European equity market where our strategists are pointing to leading indicators rolling over and where oil price pressures and GDP growth downgrades may temper near term margin expectations. The sector offers an average “PEG ratio” in CY12E of 1.2x below that of the comparable European food and HPC sectors.

• We think the European Beverages sector still offers a powerful combination of well above average exposure to emerging market consumers (over 50% of sector EBIT) and often visible self help stories and we think the input costs pressures are now broadly discounted in earnings expectations.

• With still rising consumer demand in emerging markets we would continue to favour those stocks with greater proportionate exposure to these regions. Conversely whilst our strategists point to an improving picture in the core of Europe we think demand in the “periphery” could still be lackluster and we would try to avoid those stocks with more exposure to markets like Spain, Greece, UK and Ireland. These markets in our view are also those where the companies’ pricing power is weakest. On this basis we still see SABMiller, ABI, Carlsberg, Anadolu EFES, Coca Cola Icecek and Remy Cointreau as the most attractive stocks from a fundamental growth perspective with Diageo, Heineken and C&C Group as the least well placed.

• We expect a combination of improving volume growth, margin expansion, broadly favourable currency movements (for ABI, SABMiller and Carlsberg though not for Diageo and Pernod Ricard), acquisitions and deleverage to drive robust double digit earnings growth across the sector (16% weighted average in 2011E and 13% in 2012E).

• We also see many of the stocks in the universe as relatively attractive in terms of the opportunities to deploy significant cash generation in the form of enhanced dividends and buybacks and/or M&A.

• We continue to believe free cashflow yields generally look attractive and we see limited downside risks to these cashflows. We estimate a weighted average free cashflow yield for the European beverages sector of 6.1% in CY11E and 7.2% in CY12E.

• We have revised the common WACC assumptions in our DCF models to reflect a lower long term beta and higher cost of equity across the sector, a common capital structure assumption as well as updating specific risk premia, currency assumptions/movements and other “market values”. Our DCF derived PTs for ABI (€50), Britvic (440p) and CCHBC (€20) move slightly down with an uplift to Carlsberg (DKK 670), SABMiller (2400p), Anadolu EFES (TRY 27.8), Coca Cola Icecek (TRY 21), Pernod Ricard (€66) and Campari (€4.65). Elsewhere our PTs are unchanged.

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• In terms of upside to our PTs, near term momentum and relative risk we pick Anadolu EFES, ABI, Carlsberg and SABMiller as our key buys in the sector. We would continue to avoid Diageo, Campari and CEDC on a sector relative basis.

• The volume picture in the mature alcoholic beverages markets in N America and W Europe is improving though still with ongoing channel shift from on trade to off trade. We estimate US beer volumes are still falling low single digit offset by positive pricing. US spirits volumes are firmly in growth but price/mix is still pedestrian. We have some concerns that consumer demand in the UK and peripheral Europe may lurch down again through 2011. Almost all key emerging markets are showing strong growth.

• In most key beer markets pricing is robust though Europe (both West and East) is still lagging. We believe mix is generally a positive but with limited impact on revenue growth.

• We continue to believe that “through the cycle” the organic top line of both beers and spirits is comparable (at mid single digit or better depending on weighted inflation) but that, in the absence of “excess” cost inflation, the brewers can consistently expand organic margins at a faster rate than spirits.

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Our key buys are Anadolu EFES, Carlsberg, SABMiller and ABI We believe the European beverages sector looks fairly valued in terms of historical forward earnings multiples from both an absolute and relative perspective. We think this is justified given the robust earnings growth prospects with the sector offering a CY12E “PEG ratio” of just 1.2x with relatively low earnings risk. We also think free cashflow yields look attractive and again we see limited downside risks to these cashflows.

In terms of upside to our PTs, near term momentum and relative risk we pick Anadolu EFES, ABI, Carlsberg and SABMiller as our key buys in the sector. We would continue to avoid Diageo, Campari and CEDC on a sector relative basis.

Anadolu Efes (OW; TP TRY 27.80) • At 16.0x CY12E PE Efes now trades at only a slight premium to SABMiller

15.4x and ABI 14.2x, despite its faster top line growth, and a discount to comparable “emerging market”brewers such as AmBev 17.6x and Modelo 20.9x.

• We expect volumes in the Turkey beer business (49% of FY10 group EBITDA) to grow in MSD in the medium term. The International beer business (30% of FY10 group EBITDA) is set to benefit from a recovery in the Russian beer market, further market share gain in this market and growth in its other markets albeit from a low base. Efes’s 50.3% equity share in CCI (21% of FY10 group EBITDA) provides long term volume growth potential that is unparalleled in our beverages universe.

• Our April 12E DCF and SOTP derived PT moves up to TRY 27.8 to reflect an assumed lower specific risk premium.

Carlsberg (OW; TP DKK 670) • Although we are cautious on Carlsberg ahead of its Q1 results (due on 11th May)

given limited margin expansion, it remains one of our top picks on a medium and long term view. We see continued scope for further margin expansion in Western Europe over the medium term (of c.100bps p.a.) as Carlsberg continues its efficiency programmes. In Russia we believe that beer consumption will at least recover the 15% of cumulative volume lost in 2009 and 2010 over time, and that Carlsberg’s market share will resume its long-term growth pattern from 2011 onwards.

• Carlsberg trades on only 11.9x CY2012E PE, a 14% discount to the sector on 13.9x with only Britvic and CEDC on lower multiples and at the very lowest end of the global beer peers. We think that this multiple undervalues Carlsberg’s earnings growth prospects: we forecast 19% clean EPS growth in 2011 and 17% growth in 2012. Our April 12E DCF derived price target rises from DKK625 to DKK670 to reflected updated net debt assumptions.

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SABMiller (OW; TP 2,400p) • In our view SABMiller’s superior long-term growth prospects fully support the

stock’s premium rating with 85% of group EBIT arising in emerging markets, visible in the strong 3% volume growth in each of the last two quarters. We also see scope for further EBIT margin expansion to 23.3% in FY14E from 20.1% in FY10 driven given pricing power provided by the company’s dominant market shares and from the Business Capability Programme which has a “hard” target of $300m of annual savings by FY14E.

• We think the premium rating is also supported by the nature of the shareholder register with Altria, the Santo Domingo family and the South African investor base accounting for over 60% of the equity.

• SABM trades on 15.4x CY2012E, a 10% premium to the sector on 13.9x. Our April 12E DCF derived price target rises from 2290p to 2400p to reflect updated currency, minority valuations and debt assumptions.

Anheuser Busch InBev (OW; TP €50) • We still see further capacity for ABI to show positive earnings surprise over the

medium and long term from multiple catalysts. These include a recovery in US beer volumes, the resumption of margin expansion in Brazil, continuing rapid profit growth in China, ongoing fixed cost reduction and most importantly, from the deployment of the massive cashflow post de-leverage in the form of a rising dividend and/or further M&A. We do not think our forecasts of 9.5% organic EBITDA growth in FY11E followed by 8.0% in FY12E are ambitious in this context and given the average 10% that this combination of assets has generated over the last decade.

• For Q111E due on 4th May we expect ABI to show barely any organic volume growth. However, with robust pricing and mix, together with ongoing cost cutting, limited input cost impact and an “easy” comp on marketing spend, we expect high single digit organic EBITDA growth.

• ABI trades on a PE of 14.2x in line with the sector despite faster earnings growth of 16% against the sector 13%. Our April 12E SOTP derived price target is €50 (was €51) as we mark to market currency, minority and associate valuations.

Britvic (OW; TP 440p) • We see Britvic as a very cheap stock, both in absolute terms and relative to the

sector. Moreover, we do not think that there has been any fundamental change to a business model that has produced a clean EPS CAGR of over 20% during the last four years. This model is based on driving market share gains through product and packaging innovation, supplemented by expansion into new markets.

• However rising input costs up 9-11% in GB and Ireland in FY11 led to a profit warning in Feb 2011 now in our and consensus estimates. For FY12E Britvic has guided to a mid single digit increase in input costs across the business as a whole. Britvic believes that a further 3% price increase would allow it to maintain its cash gross margin and deliver a 50bps expansion in its EBIT margin in combination with cost saving measures. However, this would leave it vulnerable to further input cost inflation, as we believe that it would be very difficult to achieve a price increase of over 3%.

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• Britvic trades on 8.7x CY12E PE, broadly in line with the long-term “normal” forward PE range of 8x-11x. These multiple represents a c.38% discount to the European beverages sector. Our April 12E DCF-derived price target falls from 450p to 440p as we update our medium term cashflow forecasts and mark to market balance sheet liabilities.

Coca Cola Icecek (N; TP TRY 21.0) • With the prospect of sustainable double-digit volume growth, we believe CCI

offers the most attractive long term revenue growth opportunity in our beverages universe. We also see some scope for margin expansion, particularly in the international business as newly-acquired operations are integrated into the CCI network and as they benefit from economies of scale.

• In FY11E we forecast volume growth of 12.1% comprising of 10% growth in Turkey and 18.4% in international markets and sales growth of 15.9% with price/mix growth of 4% in Turkey. We estimate a flat “clean” EBITDA margin of 10.6% in FY11. If the global price of sugar remains at its current high levels, we believe there is a risk that the Turkish government will increase the price of sugar post general elections in June 2011.

• CCI is currently trading on a 2012E PE of 18.4x against the European beverages sector at 13.9x. Given the short term headwinds, we believe CCI is currently trading at an appropriate level. Our April 12E DCF derived price target moves up from TRY 18.6 to TRY 21 to reflect a lower assumed specific risk premium.

Remy Cointreau (N; TP €52) • Cognac is still an industry where the mix continues to rapidly improve both in

terms of product and geography and pricing is running ahead of inflation. We estimate China is now around 30% of RC’s profit with sales growth running at around 30%. We also see RC as the best way to play recovery in on trade demand for spirits in the US. We still think price and mix in cognac can fuel gross margin expansion ahead of spirits peers and allow reinvestment back into sales capability and marketing ahead of sales growth.

• We assume that RC will use the proceeds from the proposed disposal of champagne to acquire premium brands to set alongside the existing portfolio and leverage the distribution platform.

• Our April 12E DCF derived PT is unchanged at €52. Remy Cointreau trades at CY12E PE of 17.5x and EBITDA of 11.9x against the European beverages sector at 13.9x and 9.3x respectively. The company also trades on a slight premium to LVMH at 17.1x (Bloomberg consensus). With good pricing power and sales momentum in Asia, RC remains our favoured play in spirits.

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Pernod Ricard (N; TP €66) • We continue to prefer PR to Diageo based on its consistently superior organic

growth record driven by its more attractive geographical exposure, specifically to China and India. We expect 5.1% organic sales growth in FY11E and +5.8% in FY12E (to June) as Europe moves back into growth and Americas and Asia accelerate. For FY11E we think PR will come in close to guidance of 7% organic EBIT growth as any positive gross margin surprise is reinvested back into A&P behind the brands and structure costs leverage is limited, but in FY12E we expect to see an acceleration to 9.1%.

• For Q311E we expect some 1.8% organic sales growth. The comp period was up 15.5% in large part driven by the absence of the huge destocking seen in the prior Q109 comp.

• We expect PR to reach the 4.0x net debt/EBITDA target around calendar end 2011 and that PR’s level of gearing will start to be seen by investors as more of a benefit than a risk which is gearing high single digit EBIT growth into mid double digit earnings growth in FY12E and FY13E. We now assume a slightly higher cost of debt tof reflect assumed refinancing of bank debt which leads to a 1% downgrade in FY12E and FY13E EPS estimates.

• PR trades on a CY12E PE multiple of 12.9x for 16% EPS growth compared to Diageo on 13.5x but with 10% growth. Our April 2012E DCF derived PT moves up from €62 to €66 to reflect the roll forward of our estimates and net debt assumptions.

Heineken (N; TP €41) • Heineken reported very strong Q111 organic volume growth of 5.5% and EBIT

(beia) growth of 20%+. However, this level of growth will likely not be repeated through the rest of the year. Volume comps will not be as easy in subsequent quarters and muted pricing/mix will only recover the expected low single digit per hl input cost inflation. This will leave the remaining €160mn of TCM cost savings that we estimate in FY11E (as well as the annualised impact of those savings secured last year notably in Q410) to fund the planned uplift in marketing spend (we estimate 50bps relative to sales). This we see as a recipe for c. 7% organic EBIT growth (excluding the FEMSA assets) and low double digit organic net profit growth.

• Heineken still has significant exposure to markets where consumer demand could take another lurch down (we estimate periphery Europe and UK is over 25% of Group EBIT). In our view the lower level of organic profit growth compared to the high single digit or double digit organic growth we expect from the other brewers warrants a lower valuation multiple.

• Heineken trades on a CY12E PE multiple of 12.8x for 7% EPS growth compared to ABI on 14.2x for 16% growth and Carlsberg on 11.9x for 17% growth. Our April 2012E DCF derived PT is unchanged at €41.

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Coca-Cola Hellenic (N; TP €20.00) • We expect rising disposable income, positive demographics and increased

product availability in CCH’s emerging markets to drive mid single digit volume growth. However, established markets still account for a majority of the company’s profitability and growth in markets, such as Greece, Ireland and the Czech Republic, is expected to be hindered by austerity measures, low consumer confidence and overall slow economic recovery.

• Additionally, we expect rising sugar, juice and oil prices to put pressure on the company’s margins in the latter half of 2011 and going into 2012, although this should be offset by enhanced restructuring programmes which could boost 2011 EBIT by €43-48m and 2012 onwards by €55-65m. We have updated our FY11E and FY12E EPS estimates to reflect this latest guidance.

• CCH is currently trading at a CY12E P/E of 12.7x below the sector at 13.9x but an EV/EBITDA multiple of 7.6x is in line with comparable CC bottlers. Our April 2012E DCF derived PT is now €20 (from €21).

C&C Group (N; TP €3.50) • We expect the cider business in GB to move back into mid single digit volume

growth for FY11E, driven by strong off trade growth, offset in part by continuing decline in volumes in Ireland, though with an improving price/mix outlook as the comps ease in 2H11E. With a slight uplift in underlying cider margins and the FY contribution from the Tennents and Gaymers businesses in line with expectations this should leave C&C on track to deliver EBIT in line with the €104m we now forecast for FY11E.

• Thereafter we think C&C should be able to drive an improvement in revenue growth in GB in a still buoyant cider market and to deliver on the synergy targets across the now much broader brand and distribution platform. On the other hand the risk in Ireland in our view is of another lurch down in demand making it ever more difficult for management to hold the profit base stable despite the further headcount rationalisation.

• C&C trades on 11.9x CY12E PE a discount to the sector at 13.9x which we think fairly reflects its lower growth prospects and still very substantial exposure to Ireland (over 40% of forecast EBIT). If the prospectively ungeared balance sheet were used to fund further earnings enhancing M&A or a return to share buyback then this multiple might look more attractive but there is no clear visibility on balance sheet strategy in our view. Our April 2012E DCF based PT is unchanged at €3.50.

Campari (UW; TP €4.65) • Campari continues to deliver robust sales growth, ahead of larger spirits peers,

underpinned by continuing growth in aperitifs in Italy, its spirits platform in the US and the benefits of its enhanced brand and distribution platform following recent acquisitions. Moreover it still has at least €500mn of debt capacity to make further brand acquisitions. Management is still looking to drive MSD organic sales and EBIT growth in the medium term.

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• In FY11 we expect an organic sales increase of 6.9%, gross margin to expand with continued mix improvement and organic CAAP growth of 8.6%. However, these will be offset by increased A&P spend to 18% of sales to leave organic EBIT growing at some 7% and only limited margin expansion.

• Campari is currently trading on a CY12E PE of 14.6x at a premium to the European beverages sector at 13.9x and its large cap spirits peers Diageo at 13.5x and Pernod Ricard at 12.9x. We do not believe this premium is warranted given Campari’s similar growth prospects. Our April 12E DCF derived PT moves to €4.65 from €4.3 to reflect our updated capital structure assumptions with a WACC of 8.9% vs 9.2% previously.

Diageo (UW; TP 1,120p) • We continue to see Diageo’s growth rate lagging its peers, as it has over the last

decade. Through FY03 to FY08, the “boom” years for premium spirits, Diageo delivered an average 6-7% organic sales growth but only managed to “add” another c.100 bps of growth at the organic EBIT level. We believe that the scope for cost savings is inherently limited by the nature of the spirits cost base.

• Diageo has largely pursued an “organic” growth strategy over the last decade but we think investors are now expecting further activity, particularly with the pending spin-off of Fortune Brands’ non-spirits businesses and the intended disposal of the Stock spirits business in Poland. We forecast 3% organic sales growth for Diageo’s Q311E.

• Our April 12E DCF derived PT is unchanged at 1,120p. Diageo trades on 13.5x CY12E PE, a small discount to the sector on 13.9x and a premium to the closest peer Pernod-Ricard on 12.9x. We currently see calendarised EPS growth of 8% in CY11E followed by 10% in CY12E compared to 16% and 13% for the sector, respectively.

CEDC (UW; TP $10) • Although we back CEDC to navigate its way through its current issues, we

believe that the share price still does not fully reflect the risks involved, and assumes too rapid a recovery. We believe that the operational assumptions underlying CEDC’s 2011 guidance are too aggressive. Our more conservative assumptions produce a 2011 EPS forecast of $0.84, 27% below the mid point of CEDC’s $1.05 - $1.25 guidance range. We are 13% below CEDC’s 2011 guidance at the EBIT level (JPM $183m, CEDC guidance $211m) and 12% below at the EBITDA level (JPM $201m, CEDC guidance $229m).

• CEDC has not yet set a date for its Q1 results. We believe that the company’s operational performance will be severely hampered in H1 by the re-licensing of the Russian spirits industry, and that this will start to show through in the Q1 figures. We value CEDC on a PE and EV/EBITDA basis against the sector peers applying a 25% discount. This, together with our DCF analysis, drives our unchanged April 12E target price of $10.

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Valuation: You get what you pay for Sector rotation towards defensives may continue Our European strategists continue to favour cyclical over defensive stocks with OW recommendations on Mining, Industrials, Insurance, Autos and Banks and Underweight on Telecoms, Healthcare and Utilities, and still see rising equity markets on a 6-12 month view. There is evidence of economic recovery broadening to small businesses, labour market and credit activity. Record low credit yields and functioning markets are a support, delinquencies continue to move lower and bank lending standards are easing. Earnings may pause but still remain on an uptrend, the DM inflation backdrop is favourable and the yield curve is steep.

However, ahead of the Q1 earnings season they have recently upgraded Consumer Staples from UW to N and downgraded Consumer Discretionary from OW to N. Whilst still seeing cyclical margin upside and advising buying into any dips, our strategists do see near term headwinds for market earnings expectations from the latest oil price spike and from recent downgrades in US GDP growth expectations. This adds to the expected sector rotation which has followed the apparent peaking of lead indicators such as ISM.

Our global strategists are also pointing towards rising headwinds from US growth downgrades, higher commodity driven inflation and peripheral Europe debt burdens which may continue to temper enthusiasm for riskier assets. On this basis they now recommend investors to be underweight Cyclical vs Defensive equity sectors but to stay overweight EM vs DM equities.

European Beverages has significant EM exposure and pricing power We think Staples, and especially Beverages, still offers a powerful combination of well above average exposure to emerging market consumers and often visible self help stories and we think the input costs pressures are now broadly discounted in earnings expectations. The global Food CPI-PPI spread is already now at the 2008 peak and some spot commodity prices have stabilized or turned. In Beverages we think the proportionate input cost pressures are less marked (as reflected in recent guidance) and these pressures can be passed on in the form of price increases in many key markets.

We believe European beverages stocks, with very predictable double digit earnings growth in 2011 and 2012, are in a sweet spot in terms of this near term rotation as well as longer term fundamental growth opportunities. Whilst the absolute and relative earnings multiples are not optically cheap (14.5x 12M forward PE, a 35% premium to European markets) this is not excessive relative to recent history (from 2005) and remembering that the capital base of this sector is now fundamentally different from previous “cycles”.

Overall the European beverages listed companies have a very significant exposure to EM when compared to their staples peers and the overall European equity market. We estimate around 50% of sales in our Beverages universe (above other staples sectors) are generated in EM with more of EBIT as in many key markets margins in EM are actually higher than in DM.

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Whilst fears of rising inflation may lead to action which crimps volume demand in EM we do think this makes it relatively easy to pass on input costs pressures in many of these markets. This dynamic is most relevant for the brewers. We have recently seen robust price rises in some EM for example by ABI in Brazil. Overall we think the key to understanding the impact of input cost pressures across the sector in 2011 and especially 2012 lies less in the magnitude of these pressures but more in the ability of the companies to pass these pressures on with price rises in their key markets.

Table 1: European equity sectors emerging markets proportion of sales Overall Europe 20% Energy 23% Chemicals 28% Cons Mat 32% M&M 35% Cap Goods 21% Transport 13% Autos 21% Cons Durables 32% Media 13% Retailing 10% Hotels, Res & Leisure 11% Food & Stap Retail 17% Food, Bev & Tob 36% HH & Pers Prod 22% Health Care 23% Banks 20% Div Fin 19% Insurance 16% Real Estate 7% Sw & Svs 10% Tech Hdwr 56% Semicon & Semicon Eqp 48% Telecons 16% Utilities 5%

Source: Bloomberg, Worldscope

With still rising consumer demand in emerging markets we would continue to favour those stocks with greater proportionate exposure to these regions. Conversely whilst our strategists point to an improving picture in the core of Europe we think demand in the “periphery” could still be lackluster and we would try to avoid those stocks with more exposure to markets like Spain, Greece, UK and Ireland (which are still our strategists’ least favorite markets from an equity perspective as well). These markets in our view are also those where the companies’ pricing power is weakest.

On this basis we still see SABMiller, ABI, Carlsberg, Anadolu EFES, Coca Cola Icecek and Remy Cointreau as the most attractive stocks from a fundamental growth perspective with Diageo, Heineken and C&C Group as the least well placed.

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Table 2: European Beverages profit by market, forecast year one Pernod

Ricard Diageo Remy

Cointreau Campari SABMiller ABI Carlsberg Heineken C&C

Group Britvic UK 6% 10% 8% 1% 1% 3% 10% 56% 79% Iberia 6% 5% 2% 1% 3% 9% France 10% 1% 3% 0% 8% 5% 14% Germany 3% 1% 3% 7% 2% 2% 2% Italy 2% 2% 1% 44% 1% 0% 5% Ireland 2% 4% 0% 0% 1% 44% 6% Other 3% 2% 7% 2% 1% 2% 22% 8% 1% Western Europe 32% 25% 24% 55% 2% 5% 38% 40% 100% 100% Russia 2% 1% 3% 2% 2% 1% 45% 2% Other CE Europe 1% 1% 1% 1% 13% 8% 8% C&E Europe 3% 2% 4% 3% 15% 1% 53% 10% US 22% 35% 26% 35% 14% 45% 7% Canada 2% 4% 1% 0% 6% North America 24% 39% 27% 35% 14% 51% 0% 7% Brazil 2% 2% 1% 4% 34% Venezuela 1% 4% Mexico 2% 2% 16% Other LatAm 1% 2% 31% 7% 2% Latin America 6% 10% 1% 4% 31% 41% 0% 18% S Africa 1% 2% 23% 2% Nigeria 6% 15% Other Africa/ME 5% 12% 5% Africa/ME 1% 13% 0% 0% 35% 0% 0% 22% China 11% 1% 30% 2% 1% 4% 1% Japan 1% 1% S Korea 4% 2% 1% Other Asia 8% 1% 3% 1% 5% 2% Asia 24% 4% 35% 0% 3% 1% 9% 3% Australasia 5% 2% 1% 2% Duty Free 5% 5% 8% 1% Other 10% 7% 9% 3% 0% 0% 0% 0% Total 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% EM total 33% 29% 39% 7% 84% 43% 62% 53% 0% 0% Source: J.P. Morgan estimates

There are still opportunities to invest or distribute free cashflow We also see many of the stocks in the universe as relatively attractive in terms of the opportunities to deploy significant cash generation in the form of enhanced dividends and buybacks and/or M&A. The major European brewers are degearing rapidly following very large scale acquisitions in 2008 with ABI having already increased its dividend payout ratio and Carlsberg examining the opportunity to enhance the distribution to shareholders we believe.

There are current “live” opportunities in brewing such as the Fosters beer business and Schincariol in Brazil. In spirits the spirits business of Fortune Brands post the break up of the Group might offer an opportunity. Diageo has recently acquired Mey Icki in Turkey and is set to expand its EM distribution platform. The owner of Stock Spirits, the leader in vodka in Poland, is looking to sell. Campari still has balance sheet capacity of c €500mn and Remy Cointreau will likely reinvest the disposal proceeds from champagne into acquisition of premium brands. C&C Group will shortly move into a net cash position.

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Earnings growth ahead of other staples sectors Large cap beverages still generally trade at PE discounts to their food, and parity with their HPC, peers despite higher earnings growth and therefore lower PEG ratios. Dividend yields are generally lower which we think has historically reflected both ownership structures but also the greater proportionate opportunity historically to invest cashflow in acquired growth.

Table 3: European sectors EPS growth estimates EPS Growth Estimates (%)

2010e 2011e 2012e 2013e Europe 36.9% 13.9% 12.6% 7.8% Energy 39.7% 18.6% 10.4% 4.1% Chemicals 58.6% 9.9% 9.9% 7.6% Cons Mat -16.7% 23.5% 28.7% 14.7% Met&Min 148.1% 54.3% 12.8% -1.4% Cap Goods 40.5% 20.7% 15.3% 11.8% Transport 241.7% -10.7% 19.4% 13.3% Automobile - 13.3% 20.5% 12.5% Cons Durables 62.6% 9.0% 14.7% 10.6% Media 15.2% 7.3% 9.2% 7.9% Retailing 16.8% 3.8% 12.7% 11.2% Hotels,Rest&Leis -4.5% 18.4% 13.0% 11.8% Food Drug Ret 10.6% 14.0% 12.8% 11.9% Food Bev&Tob 10.0% 6.9% 10.7% 8.8% HPC 22.3% 7.1% 8.6% 8.7% Healthcare 11.8% 0.9% 4.6% 5.7% Banks 131.7% 28.0% 23.9% 12.6% Div Fin 23.1% 17.2% 12.1% 11.2% Insurance 2.2% 9.7% 13.7% 5.9% Real Estate 6.5% -0.2% 5.9% 6.2% Software 19.3% 12.2% 14.3% 10.9% Tech Hardware 7.7% 5.1% 17.4% 11.6% Semicon - 40.9% -0.1% 8.6% Telecoms 2.7% 3.5% 4.6% 5.3% Utilities -5.0% -4.9% 8.1% 2.7%

Source: IBES, MSCI, Datastream

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Table 4: European sectors valuation metrics 12m Fwd P/E Cycle-adj P/E 2-year out P/E

Last Median

% to median Last Median

% to median Last Median

% to median

Europe 10.9 13.1 21% 15.8 21.0 33% 9.6 12.0 25% Energy 9.4 13.3 41% 16.0 18.1 13% 8.5 12.9 52% Chemicals 13.4 13.7 2% 29.2 17.3 -41% 11.8 12.5 6% Cons Mat 14.0 11.9 -14% 15.7 17.1 9% 11.3 10.7 -6% Metals&Mining 8.7 11.2 28% 22.4 16.5 -26% 8.0 10.4 31% Capital Goods 13.2 13.7 4% 23.9 22.3 -7% 11.6 12.0 4% Transport 12.4 14.0 13% 19.1 22.9 20% 10.6 12.1 14% Automobile 8.8 11.6 32% 17.2 12.9 -25% 7.3 9.4 29% Cons Durables 15.8 15.7 -1% 33.9 35.3 4% 13.9 13.6 -2% Media 12.0 16.9 41% 19.0 28.6 50% 10.9 14.7 34% Retailing 14.6 16.1 10% 22.8 24.9 9% 12.9 14.0 9% Hotels,Rest&Leis 13.3 15.3 15% 15.8 22.2 40% 12.2 13.5 11% Food&Drug Ret 11.6 14.8 28% 20.8 27.5 33% 10.0 13.2 31% Food Bev&Tob 14.4 14.9 4% 26.1 22.6 -13% 13.0 13.7 5% HPC 15.6 21.0 35% 25.7 22.3 -13% 14.0 18.9 35% Healthcare 10.7 17.4 62% 20.8 26.9 29% 10.0 15.7 57% Banks 9.0 11.2 24% 9.7 14.8 53% 7.5 10.0 34% Insurance 9.3 11.2 20% 11.3 35.5 213% 8.1 10.4 28% Real Estate 17.8 20.4 15% 15.6 28.6 84% 16.7 18.8 13% Software&Svs 15.5 25.4 63% 32.1 35.5 10% 13.7 19.8 45% TechHardware 13.6 17.8 30% 12.7 23.9 89% 11.9 15.5 31% Semicon 14.0 20.1 44% 45.4 25.6 -44% 13.5 16.9 25% Telecoms 10.4 14.0 35% 17.7 22.6 28% 9.8 12.3 26% Utilities 11.8 13.3 13% 16.6 20.9 26% 10.8 12.2 13% Cyclicals 12.1 14.7 21% 22.6 20.5 -9% 10.0 12.7 27% Defensives 12.0 15.2 27% 20.8 24.7 19% 10.5 13.7 31% Cyc. vs Def. 1.01 0.97 -5% 1.1 0.8 -28% 1.0 0.9 -4% Source: IBES, MSCI, Datastream

Table 5: European beverages universe multiple comparisons

Price Mkt. Cap. P/E EV/EBITDA Dividend Yield FCF Yield EPS Growth Calendarised Ccy Price Target Rating $ mn 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012EAnadolu Efes TRY 23.70 27.80 OW 7,035 18.8x 16.0x 10.2x 9.0x 2.3% 2.7% 4.0% 4.6% 13.7% 17.4%AnheuserBusch InBev EUR 42.81 50.00 OW 99,881 16.4x 14.2x 10.4x 9.3x 1.6% 1.9% 7.3% 8.8% 19.7% 15.6%Britvic Plc £/p 390.00 440.00 OW 1,540 9.9x 8.7x 7.9x 7.2x 4.6% 5.3% 4.1% 4.6% 0.4% 13.0%C&C Group EUR 3.33 3.50 N 1,849 12.7x 11.9x 9.0x 8.3x 2.6% 2.8% 6.4% 7.5% 10.7% 6.6%Carlsberg DKr 593.00 670.00 OW 17,676 13.9x 11.9x 7.9x 6.9x 1.0% 1.2% 8.6% 10.0% 18.6% 16.6%CEDC USD 10.52 10.00 UW 753 12.6x 9.1x 9.7x 8.3x 0.0% 0.0% 7.5% 8.8% 52.3% 37.8%Coca-Cola Hellenic EUR 18.98 20.00 N 9,740 14.5x 12.7x 8.3x 7.6x 0.0% 0.0% 0.6% 0.6% 12.5% 14.0%Coca-Cola Icecek TRY 21.25 21.00 N 3,583 22.7x 18.4x 12.9x 10.7x 1.3% 1.6% -0.6% 1.0% 15.8% 23.5%Davide Campari EUR 4.77 4.65 UW 4,010 15.6x 14.6x 10.6x 9.9x 1.4% 1.5% 6.4% 7.6% 11.3% 6.8%Diageo £/p 1207.00 1120.00 UW 49,531 14.9x 13.5x 10.9x 10.0x 3.5% 3.7% 6.2% 6.7% 7.6% 9.8%Heineken EUR 40.48 41.00 N 33,867 13.7x 12.8x 9.6x 8.0x 2.1% 2.3% 7.9% 8.1% 15.0% 7.1%Pernod Ricard EUR 66.40 66.00 N 25,324 14.9x 12.9x 12.7x 11.3x 2.0% 2.3% 6.1% 7.2% 12.9% 15.5%Remy Cointreau EUR 54.72 52.00 N 3,770 20.9x 17.5x 14.0x 11.9x 2.8% 3.1% 4.1% 5.1% 25.0% 19.4%SABMiller £/p 2201.00 2400.00 OW 57,627 17.2x 15.4x 10.2x 9.2x 2.4% 2.7% 4.1% 5.6% 15.9% 11.8%Weighted average 15.8x 13.9x 10.5x 9.3x 2.1% 2.3% 6.1% 7.2% 15.6% 13.1%Source: Datastream, J P Morgan estimates Prices as at cob 21 April 2011 except Britvic, Diageo, SABMiller, CEDC all 20 April

Robust double digit net profit growth expected … In Table 7 below we summarise the headline growth that we expect for the European beverages companies including the impacts of currency and scope changes as well as organic growth. Generally we expect volume growth to accelerate in 2011 and 2012, which together with robust pricing and improving mix, should underpin at least mid single digit sales growth.

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We expect currency impacts to be fairly muted and only Britvic to see a material boost from acquisitions. Underlying volume growth will be significantly faster for Anadolu EFES and for Coca Cola Icecek.

We continue to see margin expansion across our universe drivinghigh single digit EBIT growth. However this margin expansion may prove more muted than in 2009 and 2010 as the benefits from cost savings, past M&A and an input cost tailwind fade. Whilst we would expect robust pricing and improving mix to broadly offset input cost pressures in 2011 we may be too sanguine around this interplay into 2012 if these pressures continue and as hedges roll forward. We continue to favour those stocks exposed to markets where background inflation is higher and with more benign competitive landscapes which allows cost pressures to be more easily passed on (such as ABI, Anadolu EFES, Carlsberg, CC Icecek, Remy Cointreau and SABMiller).

We see the greatest capacity for margin expansion at Carlsberg, Remy Cointreau, ABI and SABMiller. The fastest EBIT growth, alongside Remy Cointreau, is coming from the Turkish beverages stocks driven by volumes.

As we move into 2012E we see the gap in terms of EBIT growth that we have seen over the past 3 years between beer and spirits companies closing.

We still see strong cash generation and consequent deleverage “gearing up” this EBIT growth to drive double digit earnings growth across the sector with 16% weighted average in 2011E and 13% in 2012E. If we strip out the Turkish stocks, CEDC and CCHBC, this still leaves us with 15% EPS growth in CY11E followed by 12% in the next year. This 15% growth in 2011E is unchanged from our forecast growth for the comparable sector a year ago. This reminds us just how robust the growth is generally across the sector and, perhaps more prosaically, how predictable.

… with a sector PEG ratio of 1.2x This level of earnings growth effectively equates to a PEG ratio of 1.2x in 2011E (1.1x if we strip out our “CEEMEA” coverage) with we would contend lower than average market risk.

We also note that the earnings growth we expect for most of the companies in our space in 2011E is broadly unchanged from our expectation a year ago. Any reduction in the growth rate is largely explained by a higher base from CY10 rather than any significant shift in expectations either to the positive or negative. We still see very healthy double digit growth across the universe. This we think reflects the very significant exposure to growth in emerging markets across our universe where volumes and pricing is still very strong. Our expectations for growth in North America have edged up a little. However, in Western Europe our expectations for demand have generally moved downwards (notably for Diageo) though cost cutting will have blunted the impacts on margins notably at Heineken.

What is most interesting however is that, despite the fact that the negative impact from input cost inflation will have increased over the last year given rising spot prices, this has not really eaten into earnings growth for this year. This is partially a function of hedging profiles (so consensus must be careful, if spot prices start moving up again, not to ignore the 2012 impact) but also reflects an improving volume and robust pricing outlook to offset this negative.

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The notable exception to this is Britvic where input cost pressure, (and equity issue to fund the acquisition in France), have led to a significant downgrade in our EPS expectations.

Table 6: Growth rates by income statement line for European beverages companies Calendarised data

Net sales EBITDA EBIT Net Income 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E

Anadolu Efes 11.4% 11.9% 16.1% 12.3% 8.9% 13.9% 12.9% 17.4% AnheuserBusch InBev 5.8% 5.4% 8.9% 7.6% 9.9% 8.0% 20.8% 15.6% Britvic Plc 13.1% 4.4% 9.5% 9.5% 5.9% 11.6% 14.1% 13.5% C&C Group 5.4% 2.1% 6.3% 3.3% 6.8% 4.7% 11.9% 7.0% Carlsberg 6.5% 4.1% 9.9% 8.3% 12.2% 9.9% 18.7% 16.7% CEDC 32.8% 3.6% 38.5% 11.8% 42.8% 12.9% 54.2% 37.8% Coca-Cola Hellenic 4.5% 6.4% -0.5% 6.7% 3.6% 10.1% 3.6% 12.6% Coca-Cola Icecek 15.9% 15.6% 16.3% 21.5% 13.6% 19.3% 20.3% 23.5% Davide Campari 7.0% 6.6% 9.4% 6.4% 8.6% 6.8% 11.3% 6.8% Diageo 4.0% 4.7% 6.1% 6.7% 6.0% 6.6% 8.3% 10.2% Heineken 5.7% 2.1% 9.8% 5.3% 12.0% 5.7% 16.6% 7.2% Pernod Ricard 6.5% 6.9% 8.3% 9.3% 8.7% 9.8% 12.9% 15.5% Remy Cointreau 9.0% 7.3% 17.9% 14.3% 19.0% 15.3% 25.2% 19.4% SABMiller 6.8% 6.4% 10.7% 8.1% 12.1% 9.0% 16.6% 12.2% Source: J.P. Morgan estimates.

Table 7: European beverages calendarised EPS growth forecasts for 2011E in March 2010 and March 2011

CY11E EPS growth Apr-11 Mar-10

AnheuserBusch InBev 19.7% 14.0% Britvic Plc 0.4% 9.1% C&C Group 10.7% 12.9% Carlsberg 18.6% 18.7% Davide Campari 11.3% 12.2% Diageo 7.6% 7.7% Heineken 15.0% 15.4% Pernod Ricard 12.9% 14.8% Remy Cointreau 25.0% 19.9% SABMiller 15.9% 16.6% Weighted average - all 15.6% 14.1%

Source: J.P. Morgan.

Sector trading at 135% PE relative to market The current 35% PE premium to the European market is ahead of the average 10% premium since 2000. However we would contend that given the very significant expansion of the equity and capital base of the sector driven by consolidation over the last decade this comparison is misleading in our view. If we take 2005 as a base following significant prior year transactions which we think significantly accelerated the earnings power of the sector (most notably from the merger of AmBev and Interbrew) the average premium moves to 25%.

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Figure 1: Europe Consumer Staples 1 Yr Fwd P/E relative to MSCI Europe

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Absolute multiples suggest fair value for sector The absolute 12-month forward sector multiple is 14.5x according to Datastream consensus and 14.9x pro forma on our estimates. This is close to the average 15.3x multiple since 2000 and in line with the 14.9x average since 2005.

However we would point to the high single digit free cashflow yield that we see for many of our companies. Our capex and working capital estimates have fallen much faster than underlying EBITDA in the last 2 years and we think that this underpins attractive cashflow-based valuations for longer term investors. We estimate a weighted average free cashflow yield for the European beverages sector of 6.1% in CY11E and 7.2% in CY12E.

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Figure 2: 12 month forward P/E for European beverages sector, consumer staples sector and MSCI Europe

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Changes to equity WACC assumptions and price targets • In order to rank our recommendations we try to divide our universe roughly into

tertiles based on upside/downside to our DCF derived price targets. In our DCF assumptions we use a common “base” cost of equity cross the universe and a common capital structure. We then adjust the cost of equity to include specific liquidity and “domicile” risk premia.

• However, we also incorporate an overlay to capture near term price and earnings momentum, an assessment of absolute value relative to history, expected catalysts and real and potential M&A, which has loomed large in the sector over many years. In theory the absolute level of upside does not matter as we rank our Overweight and Underweight recommendations relative to the sector.

• The key inputs in our previous DCF models were a risk free rate of 3.45%, a beta of 0.9 and an average equity risk premium (ERP) of 7.2%. We derive these inputs from Bloomberg for the individual stocks and then use weighted sector averages. We compare this with our strategists’ view of risk free rates and country risk premiums across Europe. This was based on data derived in March 2010.

• We are now backing out a very slightly lower risk free rate at 3.4%, a lower beta at 0.75 and a higher equity risk premium of 8.8%. Our strategists have derived a “modified” risk free rate of 3.16% after stripping out the “periphery” countries. Our assumed risk free rate is higher to reflect the slightly different country mix (based on domicile) that we have. We now use a longer term beta derived from Bloomberg based on a 10 year history for each stock (or less in the case of more recent flotations) and averaged across the sector. We think a beta of 0.75 is a better reflection of the relative risk of this universe compared to our previous assumption based on 2 years of history. The 8.8% average risk premium we use is based on our strategists’ model for total European cost of equity. The net effect of these updated assumptions is a minimal increase in overall cost of equity across the universe.

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• We continue to “cap” the level of financial leverage at an “optimal” ratio of 30% debt/market cap which was based on average capital structures pre 2007 in the sector and equates to the current forward average across the sector. This slightly “penalizes” those companies with slightly higher financial leverage – notably Pernod Ricard and Britvic. In the case of Britvic we do not think investors see the company as over geared and with Pernod Ricard we think the point of maximum concern about the level of leverage is now behind us.

• Our “optimal” capital structure assumptions conversely “benefits” Diageo, CCHBC, Campari, and SABMiller. However the impact here on our DCF valuation is relative muted with “actual” forward capital structures at c. 20% debt/market cap for these companies and we think reflects the markets’ view of the appropriateness of their capital structures. In other words we do not think these companies are typically seen as undergeared by investors with the exception perhaps of SABMiller and in the case of Campari and Diageo there is a clear intention to make further acquisitions.

• Our assumption does however have a meaningful impact on our valuation of Remy Cointreau and more markedly C&C Group. In the case of the former this suggests to us that the market is actively assuming the now strongly recovering cashflow (and any proceeds from the champagne disposal) will be reinvested to at least match current returns. In the case of C&C Group which will turn net cash in FY12E as cashflow adds to the spirits disposal proceeds we think there is a clear presumption that this will be “reinvested” into further M&A.

• We use 3 or 4 years of explicit forecasts depending on the year end and a medium term “fade” period through to 2020. We continue to fade down the top line growth across this period to our assumed perpetuity growth rate with broadly constant margins, tax rates and capex, depreciation and working capital ratios in the fade period.

• In addition to some changes to our earnings forecasts (for C&C Group) we have also updated our DCF models for currency (where share price and reported currency are different) and the market or derived value of minorities, associates and joint venture interests, as well as pension and other liabilities. This is of particular relevance for ABI and SABMiller but this “mark to market” has minimal impact on our DCF valuations.

• Our DCF derived PTs for ABI (€50), Britvic (440p) and CCHBC (€20) move slightly down with an uplift to Carlsberg (DKK 670), SABMiller (2,400p), Anadolu EFES (TRY 27.8), Coca Cola Icecek (TRY 21), Pernod Ricard (€66) and Campari (€4.65).

• We continue to incorporate a further 100 bps of “liquidity” risk premium for our small-mid cap stocks, namely Britvic, C&C Group, Campari and Remy Cointreau. We also add a higher risk premium (100bps) at Carlsberg to reflect the specific risk from their substantial exposure to Russia, for CCHBC (100bps) to reflect its mix of business and Greece domicile and now for C&C Group (100bps) to reflect the Irish exposure and domicile. We also assume an additional risk premium for our “pure” EM plays, CEDC (200bps), Anadolu EFES (250bps) and Coca Cola Icecek (250bps).

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• We do note that in part the value in brewers reflects the compounding of their more “operationally geared” cashflows over time and has been a generic feature in our DCF models historically. We would remind investors that part of this “valuation gap” may reflect the fact that we, and consensus we think, have historically underestimated both the capex and M&A cashflows required in the near term to support the medium and longer term top line growth for brewers. However with now arguably a more “mature” brewing industry following years of consolidation we think our assumptions are reasonable.

• For the spirits companies a key driver historically of the value in DCF models lies in the working capital assumptions that we apply and in particular the scale of investment in maturing inventory. Deriving a steady state relationship in terms of the inventory investment requirement is very difficult in our view given limited visibility and the fact that the “cycle” here operates over a multi year period. What we can say though is that the growth in emerging markets is leading to a requirement for new inventory to be laid down after a decade (1997-2006) of relatively muted investment. Scarce aged inventory can be rationed in the short term by pushing up prices for “superior” quality products but longer term we see this inventory investment as a constraint on the cashflows of notably Remy Cointreau and Pernod Ricard.

Table 8: Changes in ratings, target prices and WACC assumptions, ranked by upside/downside to target prices

Rating Currency Price New PT Old PT Upside/

Downside WACC Perpetuity

growth rate Anadolu Efes OW TRY 23.7 27.8 25.8 17% 9.8%* 3.0%* Anheuser Busch InBev OW EUR 42.81 50 51 17% 8.5% 1.50% Carlsberg OW DKr 593 670 625 13% 8.8% 1.50% Britvic Plc OW £/p 390 440 450 13% 8.8% 1.00% SABMiller OW £/p 2201 2400 2290 9% 8.7% 1.75% Coca-Cola Hellenic N EUR 18.98 20 21 5% 8.4% 1.50% C&C Group N EUR 3.33 3.5 3.5 5% 9.0% 1.25% Heineken N EUR 40.48 41 41 1% 8.2% 1.25% Pernod Ricard N EUR 66 66 62 0% 8.1% 1.50% Coca-Cola Icecek N TRY 21.25 21 18.6 -1% 10.3% 4.50% Davide Campari UW EUR 4.77 4.65 4.3 -3% 8.9% 1.50% CEDC UW USD 10.52 10 10 -5% 11.0% 1.50% Remy Cointreau N EUR 54.72 52 52 -5% 8.4% 2.50% Diageo UW £/p 1207 1120 1120 -7% 8.4% 1.50% Source: Datastream, J P Morgan estimates Prices as at cob 21 April 2011 except Britvic, Diageo, SABMiller, CEDC all 20 April * WACC and perpetuity growth rate is for Turkey beer business only

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The key drivers of growth In brewing the pace of volume decline in mature markets is easing with many key emerging markets still showing robust growth. Pricing momentum should still be sufficient to recover rising input costs in 2011. Cost saving programs and synergy capture, as well as volume recovery, will continue to fuel high single digit organic EBIT growth, accentuated by further financial de-gearing for the international brewers.

In spirits emerging markets are still the main drivers of overall volume growth but pricing, which is a bigger driver of margin expansion, is still muted in mature markets. US recovery, if maintained, and Asia acceleration could however drive modest upgrades in our view.

Brewers still have more margin levers … but the growth gap is closing We have compared the organic growth seen by our “international” companies across the last four years. This is based on either company disclosure or our best estimates and is calendarised to allow comparison.

We can see that, for the spirits companies, organic volumes fell in 2008 and especially 2009 as demand slowed and the supply chain contracted. This led to organic EBIT decline despite reduced marketing investment in 2009. In contrast for the brewers whilst volume growth also dried up in 2009, price/mix proved to have been more robust. Organic EBIT growth in 2009 rebounded to the levels of the 2007 “cyclical peak” as the hit to margins from input pressures, most acute in 2008, eased and the benefits of synergy capture and cost savings programmes were realised.

In 2010 spirits volumes bounced back, in part a function of the prior year comp but the price/mix dynamic was muted and margins constrained by the need to re-invest back into marketing. For the brewers the price/mix momentum eased as hedged input costs “deflated” but this latter together with cost savings and synergies still delivered better margin expansion than spirits (with the exception of Carlsberg impacted by Russia).

Whilst this very broad brush commentary ignores all sorts of geographical and company specific dynamics we do think that this supports our view that “through the cycle” the organic top line of both European listed beers and spirits companies is comparable (at mid single digit or better depending on weighted inflation) but that, in the absence of “excess” cost inflation, the brewers can consistently expand organic margins at a faster rate than spirits.

Having said that the EBIT growth gap is narrowing and, in the absence of further M&A, that part of the gap which came from multi-year synergy capture by the brewers has also waned.

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Table 9: Calendar 2010 estimated organic growth for major European beverages companies Volume Price/Mix Revenues EBIT Anheuser Busch InBev 2% 2% 4% 13% Carlsberg 0% -3% -3% 1% Heineken -3% 1% -2% 9% SABMiller 2% 3% 5% 9% Diageo 4% 1% 5% 5% Pernod Ricard 6% 2% 8% 9% Remy Cointreau 4% 5% 9% 10% Campari 5% 3% 8% 9% Source: J.P. Morgan estimates, Company data.

Table 10: Calendar 2009 estimated organic growth for major European beverages companies Volume Price/Mix Revenues EBIT AnheuserBusch InBev -1% 3% 3% 21% Carlsberg -4% 4% 0% 28% Heineken -5% 5% 0% 14% SABMiller -1% 4% 4% 11% Diageo -4% 0% -4% -1% Pernod Ricard -6% 1% -5% -2% Remy Cointreau -13% 4% -9% -5% Campari -3% 3% 0% 6% Source: J.P. Morgan estimates, Company data.

Table 11: Calendar 2008 estimated organic growth for major European beverages companies Volume Price/Mix Revenues EBIT AnheuserBusch InBev 5% 2% 7% 2% Carlsberg 2% 6% 8% 7% Heineken 4% 4% 8% 9% SABMiller 3% 5% 8% 5% Diageo -1% 6% 5% 5% Pernod Ricard 2% 4% 6% 8% Remy Cointreau -1% 4% 3% -6% Campari 3% 2% Source: J.P. Morgan estimates, Company data.

Table 12: Calendar 2007 estimated organic growth for major European beverages companies Volume Price/Mix Revenues EBIT AnheuserBusch InBev 6% 2% 8% 20% Carlsberg 11% -1% 11% 27% Heineken 7% 1% 7% 20% SABMiller 8% 2% 10% 10% Diageo 3% 5% 8% 9% Pernod Ricard 8% 3% 11% 17% Remy Cointreau 3% 5% 8% 17% Campari 7% Source: J.P. Morgan estimates, Company data.

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We see similar revenue growth opportunities in beer and spirits Measuring the overall growth of global premium spirits (i.e. stripping out “local” brands and segments) is difficult given different potential definitions of the addressable market but if we compare Pernod Ricard’s estimate of sales volume growth in “international” spirits in the period 1999-2008 with Plato Logic estimates of volume growth in beer globally volume growth rates look comparable to us with an average of around 2%. Of course this gives us no insight into different markets and portfolios but, on the face of it, we do not see international spirits globally as a faster growth industry than beer albeit there are pockets of very rapid growth in markets like China off a relatively small volume base.

Measuring sales value growth in each industry is also difficult but we do not think across the cycle there will be a substantial difference in average price/mix across the globe between beer and spirits though price/mix does intuitively feel more “cyclical” in spirits and we think more “geared” to overall levels of inflation. However we cannot find a way to prove this. What we do know is that for both industries price/mix is a more powerful driver of gross margin than volume, and that this is even more true for spirits than for beer.

Figure 3: Global beer consumption vs GDP growth 1986-2010E

-1%

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1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F 2010F

Beer grow th GDP grow th

Source: Plato Logic, Bloomberg, IMF

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Figure 4: Global premium spirits value vs GDP growth 1999-2008

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Figure 5: Global beer industry profit growth 1997-2009E

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Our organic growth assumptions For the beverages stocks we expect a return to more robust organic volume growth in 2011 of an average 2-3% driven by improvement in some of the more mature markets and continuing strong growth in emerging markets. Carlsberg, driven by recovery in the Russian beer market, and SABMiller, given its broad exposure to emerging markets, should show even faster volume growth. We expect robust pricing in most emerging markets given background inflation but with more limited achieved pricing in mature markets notably in Western Europe and US spirits. Geographical mix will continue to be a major influence on Group revenue per unit.

Overall this should translate to very high single digit and perhaps double digit organic EBIT growth for the brewers in 2011 driven by broadly positive operational gearing, pricing and cost savings which should offset the low single digit input cost increases we expect. The absence of scale cost savings opportunities and still muted pricing in some markets, together with marketing reinvestment, will leave the spirits companies still posting slightly slower EBIT growth but the gap is closing.

• ABI. We expect c. 3% organic volume growth in FY11E and FY12E as the US beer market “normalises” and with an average of mid single digit growth across the EM platforms. ABI has already guided to revenue per hl growth ahead of inflation in FY11E which we think underpins our 3% assumption fading to 2.5% in FY12E. Even with continued investment behind the brands and gentle input cost inflation we still think ABI can drive double digit EBIT growth in FY11E (11.8%) and we fade to 8.4% in FY12E given this robust revenue picture and continued cost savings. We think it could be better.

For Q111E due on 4th May we expect ABI to show barely any organic volume growth (as already indicated at the FY110 results) with North America still down low single digits and LatAm North up very slightly given the tough comp (14%), the impact of the price uplift in Q410 and unfavourable weather impacts notably on soft drinks. However robust pricing and mix should deliver c. 4% organic revenue growth and, with ongoing synergy capture and cost cutting, limited input cost impact and an “easy” comp on sales and marketing spend in LatAm and Europe we expect high single digit organic EBITDA growth.

• Carlsberg. For Carlsberg we expect a very significant bounceback in organic volumes in FY11E to c. 6% as Russia returns to growth though the geographical mix effect of this “recovery” will hold back revenue growth. Whilst we do not expect any margin expansion in Eastern Europe, given high single digit input cost inflation, cost cutting in NW Europe and strong growth in Asia should still fuel double digit EBIT growth. In FY12E whilst top line organic growth should normalise we a return to margin expansion in Eastern Europe should again underpin c. 10% organic EBIT growth.

Carlsberg is scheduled to report Q1 results on 11th May. We expect a mixed quarter, with very strong growth in both volumes and pricing in Russia to drive 42% revenue growth (against easy comps in both cases) offset by muted margin expansion as Carlsberg faces higher input costs and increased investment in the Carlsberg brand and its Russian business. We expect slight margin erosion in NW Europe from 5.6% to 5.5% with margins in Eastern Europe rising to 15.0%. At the Group level we expect 12% sales growth and 25% operating profit growth.

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• Heineken. For Heineken we see a return to organic volume growth of c. 2% in FY11E and FY12E as Eastern Europe and Americas move back into low single digit volume growth to augment the still strong volume growth in Asia and Africa and with the declines in Western Europe ameliorating. We see some muted price/mix improvement to drive low single digit organic revenue growth. With the pace of TCM cost savings easing, price rises recovering input cost inflation and reinvestment back into the brand portfolio we would not expect the 9% organic EBIT growth of 2010 to be repeated in FY11E and FY12E despite the improving volume picture but we do think mid single digit growth is underpinned.

Heineken reported stronger Q111 organic volume (5.5% vs JPMCE 3.9% and Bloomberg consensus 2.1%) and EBIT (beia) growth (20%+ vs JPMCE “double digits”) than we expected. However, Heineken reiterated that this level of growth should not be extrapolated through the rest of the year.

• SABMiller. For SABMiller we see robust organic volume growth of 2.5% in FY11E (to March) accelerating to 4% in FY12E. This is driven by the very robust high single digit growth in Africa and Asia. In FY11E this will be partially offset by a decline in the US and Europe but as these regions return to growth in FY12E and with some acceleration in LatAm we see SABMiller continuing to offer the fastest volume growth in our “international” universe. Robust price/mix broadly matching CPI within markets will be partially offset by the ongoing negative “geographical mix” effect but should still allow mid single digit organic revenue growth. With margin expansion across all regions we expect SABMiller to return to healthy low double digit organic EBIT growth, after the slowdown seen in FY08-FY10.

SABMiller reported fiscal Q4 (calendar Q1) organic beer volume growth of 3% with a total of 5% organic sales growth in line with JPMe. Financial performance was in line with company (and implicitly market) expectations. Our forecasts remained unchanged (FY2011E EPS 188 cents, FY2012 EPS 217.5 cents).

• Diageo. We expect organic volume growth of some 2.5% in FY11E and 3.1% in FY12E as North America returns to growth, Europe shows marginal decline, robust growth continues in the International business and Asia accelerates. A return to positive price/mix across the Group should drive 3.5% and then 4.9% revenue growth. We have organic EBIT growth of 4.7% in FY11E against guidance of at least 2% of FY10 as gross margin gains are reinvested back into A&P.

For Q311E we expect Diageo to show organic sales growth of 3%, slightly behind the 3.9% of 1H11 and the FY11E rate of 3.5%.

• Pernod Ricard. We expect 5.1% organic sales growth in FY11E and 5.8% in FY12E (to June) as Europe moves back into growth and Americas and Asia accelerate. For FY11E we think PR will come in close to guidance of “close to7%” organic EBIT growth as any positive gross margin surprise is reinvested back into A&P behind the brands and structure costs leverage is limited, but in FY12E we expect to see an acceleration to 9.1% growth.

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For Q311E we expect some 1.8% organic sales growth with company derived consensus at 2.8%. The comp period was up 15.5% in large part driven by the absence of the huge destocking seen in the prior Q109 comp.

We expect slight organic sales decline in Europe and France and a slowdown in Asia from the 16.7% H111 run rate given the timing of Chinese New Year and the very strong comp.

• Remy Cointreau. We updated our forecasts following FY11 reported sales and in line with guidance decreased our organic FY11E EBIT growth in cognac from 21.6% to 18.1% which takes our FY11E organic EBIT growth estimates to 8.5% (previously 11.5%). For FY12E and FY13E we now expect organic sales growth in cognac of 9.5% and 8.5% and organic EBIT growth of 17.3% and 14.1% respectively.

RC reported FY11 sales of €908.1m with organic growth of 6.4% (comp 12%) and currency tailwind of 6%. As expected the earlier timing of Chinese New Year resulted in a pull forward of sales from Q411 to Q311. We estimate RC’s organic sales declined by -5.8% in Q411 against a very tough overall comp of +103% and cognac comp of +206%.

• Campari. For Campari we now assume still robust organic sales growth of 7% in FY11E and 6.5% in FY12E driven by the spirits business, but with limited margin expansion. .

• C&C Group. For C&C we expect low single digit organic sales growth in FY11E (to Feb) and again in FY12E with mid single digit organic EBIT growth rising to high single digit fuelled by cost synergies in the acquired UK businesses. Whilst absolute EBIT guidance (at €101m to €106m) is clear for FY11E we think visibility into FY12E given the consumer backdrop in the UK and RoI markets is fairly limited.

• CEDC. We are 13% below CEDC’s 2011 guidance at the EBIT level (JPM $183m, CEDC guidance $211m) and 12% below at the EBITDA level (JPM $201m, CEDC guidance $229m). This is mainly due to a more cautious view on CEDC’s margin prospects, with our sales forecasts only 4% below CEDC’s guidance. We forecast 330bps of EBIT margin expansion (from 16% to 19.3%).

• Anadolou EFES. We forecast FY11E volume growth of 7.9%, sales growth of 11.4% and EBITDA growth of 9.6%. We expect consolidated EBITDA margin erosion of 40bps due to high oil prices as well as pressure from input costs in the international beer and soft drinks segment. In FY12E we expect a similar level of sales growth, though with Turkey beer returning to double digit growth and with International beer fading, but with an acceleration to 12.3% clean EBITDA growth

• Coca Cola Icecek. In FY11E we forecast volume growth of 12.1% comprising of 10% growth in Turkey and 18.4% in international markets and sales growth of 15.9% with price/mix growth of 4% in Turkey (210bps below current JPMCE inflation estimate). CCI has already increased prices in Pakistan, Jordan, Turkmenistan and Syria this year. If the global price of sugar remains at its current high levels, we believe there is a risk that the Turkish government will increase the price of sugar post general elections in June 2011. We estimate flat “clean” EBITDA margin of 10.6% in FY11 and EBITDA growth of 16.3%. For FY12E we see 11.3% volume growth and 15.6% sales growth but with an acceleration to 21.5% clean EBITDA growth.

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Figure 6: Large cap European beverages organic volume growth

-7%

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1%

3%

5%

7%

9%

11%

13%

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

ABI Carlsberg Heineken SABMiller Diageo Pernod Ricard

Source: J.P. Morgan estimates, Company data.

Figure 7: Large cap European beverages organic net sales growth

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Figure 8: Large cap European beverages organic EBIT growth

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ABI Carlsberg Heineken SABMiller Diageo Pernod Ricard Source: J.P. Morgan estimates, Company data.

Price is a more powerful margin driver than volume The brewers were able to deliver an average of 4-5% price/mix (after stripping out the impact of “geographical mix”) through calendar 2008 and 2009. This was driven by the need to recover the impact of absolute hedged input cost increases. Even with these price increases gross margins came under pressure. In 2010 this price momentum eased to an average of 2% to 3% we estimate (though geographical mix impacted the “reported organic” price/mix). For 2011E, with low single digit input cost inflation to be offset, we expect a similar level of underlying price/mix.

We think that the combination of more constrained end demand with probably lower price elasticity in mature markets, the more concentrated market shares in key profit pools post the wave of consolidation in recent years and the much higher levels of financial leverage for the key global brewers, have all conspired to drive much more rational pricing behaviour. Having tested this proposition in recent years we would not expect this “rationality” to unwind.

In contrast we think that negative mix, increased discounting in mature markets notably in the US and the absence of price increases in emerging markets was clear through calendar 2009 and 2010 for the major spirits players Diageo and Pernod Ricard to which the contribution to organic sales growth from price/mix was minimal. This followed a much more robust uplift in the “peak” years of calendar 2007 and most of 2008 when the combination of both pure price and product mix combined to exceed weighted inflation.

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Whilst we build in some improvement through calendar 2011 and 2012 we do not see an early return to the kind of price/mix growth seen at the peak for spirits. Whilst there is no doubt that price/mix momentum in some pockets of international spirits is very favourable, for example in cognac and Scotch in “growth” markets in Asia, this is offset in our view by a less favourable outlook elsewhere. In our view, in mature markets, especially in Europe, a return to more robust pricing can only come with recovery of demand in the on trade which will be “late cycle” in nature. In emerging markets, affordability and currency movements act as constraints on spirits pricing momentum in our view though mix improvement should continue here. Whilst the consensus view is that the pricing environment is improving in the US, we think it will be calendar 2012 before this translates into achieved price rises (as opposed to mix improvement) which match inflation.

These are clearly generalisations but to us it does look like the more concentrated competitive structures in key beer profit pools as well as the much shorter “purchase cycles” allow more robust pricing than spirits in an era of low inflation. With more “normalised” input cost inflation we think this is a recipe for better gross margin expansion in beer. However as we move to a more inflationary environment especially in more mature markets the tables might be turned. We believe spirits companies’ ability to push through pricing to consumers increases with higher background inflation and, for aged spirits products, the “cost” of matured inventory should rise more slowly than overall inflation.

Our analysis in the past has suggested that price/mix is c. 2.0x more “valuable” to EBIT growth and margin expansion than volume for a spirits company (that is, ceteris paribus, 100 bps of incremental price/mix improvement at the top line will drive 150 to 200 bps of incremental EBIT growth improvement compared to just 100bps for every 100 bps of volume incremental growth). Industry participants point to price/mix being as much as 3x more valuable than volume. This dynamic reflects the relatively high gross margin and low fixed costs in spirits when compared to beer.

For beer our analysis suggests that pricing is still more “valuable” than volume to margin but at a more muted level c. 1.5x than in spirits. Given the comments from brewers over the last three years or so though we think we may actually be underestimating the benefits of pricing to gross margin. As the proportionate contribution from cost savings programmes and synergy capture fades for the brewers we think this robust pricing stance, together with positive operational gearing as the volume picture improves, should underpin our expectation of long term high single digit EBIT growth.

We would be wary of assuming a rapid recovery in product mix Perhaps the most unpredictable, least visible and "latest cycle” part of the European beverages line will be mix. We would not want to overestimate the historical importance of mix as a driver of overall industry growth even in the boom years but clearly for specific companies in specific categories in specific markets the overall shift up the price ladder has driven accelerated revenue growth and margin expansion.

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To an extent we can estimate the impact on volume and “pure” pricing for key categories in our universe by assessing expectations of overall GDP growth and consumer price inflation. However the duration over which we see the “down-trading” trends seen in recession reversing back towards the “secular” trends of “premiumisation” are much more difficult to assess. Our gut feeling, though, and looking back to previous “recoveries”, is that this may lag the overall economic cycle by some time with much greater implications for the growth of the spirits companies for whom mix has proved a more important margin driver.

We note that the negative channel mix trends, with a shift from on trade to off trade channels, and to “cheaper priced” outlets within both on and off trade, continue to be a key driver of the overall negative mix trends, especially in mature markets in Europe. In the US product and channel mix is improving slowly for spirits but we think this is already discounted in consensus expectations.

Table 13: US spirits market volume and value share by category Mn cases Volume share US$ bns Value share

Value 76.2 40.0% 4.0 21.1% Premium 69.2 36.3% 6.9 36.1% High End 31.9 16.7% 5.1 26.6% Super 13.4 7.0% 3.1 16.2% Total 190.7 100.0% 19.1 100.0% Source: DISCUS

Table 14: US spirits market volume growth by price category 2002-2010 2002-2007 2008 2009 2010

Value -0.2% 0.6% 5.5% 0.3% Premium 5.3% 3.7% 0.6% 1.8% High End 5.8% -0.6% -3.5% 3.3% Super 14.7% 1.7% -5.1% 10.6% Source: DISCUS

Cost cutting and synergies have been driving organic margin expansion for the brewers A combination of rising input costs and slowing volumes put pressure on “organic” margins for brewers in calendar 2008 most notably at ABI and SABMiller. Price rises and cost cutting will have only offset some part of this in 2008. In 2009 however, with input costs turning into a tailwind, and continuing cost cutting, synergy benefits and price rises, albeit more muted, organic margins expanded despite marked volume slowdown. In 2010, stripping out the impact of Russia, volumes improved and pricing, whilst still robust, eased. With a more muted contribution from synergy capture this left cost saving as a relatively more important driver of margin expansion most notably for Heineken.

For FY11E and FY12E despite accelerating volume growth and robust price/mix we still see more muted margin expansion when compared to some prior years though this will still mean healthy c.10% average organic EBIT growth. In part this reflects the gentle tailwind input cost inflation, but more importantly, the relative “lack” of synergy capture compared to prior years and an implied assumption that cost savings programmes fade. Whilst we think the balance of risk for the brewers is that they can deliver a better margin outcome than we forecast we need to be cognisant of the risks that input cost pressures may continue to pose into 2012 and even beyond.

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Cost savings and synergy capture programmes will continue through 2011. ABI is still expecting a further $500mn of synergy capture having already delivered $1.98bn of the $2.25bn target identified for the AB transaction. There will be further savings but no formal target has been given. Carlsberg continues to drive ongoing savings in Western Europe and we estimate Heineken will deliver a further c.€160mn of TCM savings in FY11E (after €280mn in 2010) as well as an annualised €80mn of synergies at FEMSA Cerveza. SABMiller will start to reap the early benefits of the Business Capability Programmes.

In contrast we expect very modest cost savings benefits for the spirits companies, namely some £30mn at Diageo and some limited acquisition synergies for Campari.

Figure 9: European brewers’ organic sales and EBIT growth FY2008-2012E

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Restoring marketing spend is holding back margin expansion in spirits In FY08 PR, Diageo and Remy Cointreau were able to convert healthy organic sales growth into organic margin expansion ahead of the brewers. However for the spirits companies the input costs inflation impact was far less marked. In FY09 whilst organic sales growth evaporated (and in the case of Remy Cointreau sharply declined) organic EBIT margins expanded (ex Remy Cointreau), often by more than in the “peak years” primarily from cuts in marketing investment. In FY10, whilst volumes recovered against the destocking comp, the need to reinvest back into marketing behind the brands ahead of recovery held back margins.

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In FY11E and FY12E we expect a “reversion” to something like the historical growth metrics though with the top line acceleration being more volume than price/mix driven this will likely hold back the gross margin expansion as will further A&P investment ahead of sales growth. Remy Cointreau, where category and geography create a more favourable price/mix dynamic, should see more rapid margin expansion and double digit organic EBIT growth.

Figure 10: European spirits companies organic sales and EBIT growth FY2008-2012E

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Figure 11: European spirits companies marketing to sales ratios FY07-FY12E

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Figure 12: EBIT margin 2008-2011E calendarised

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Anadolu Efes

Anheuser Busch InBev

Britvic Plc C&C Group Carlsberg CEDC Coca-Cola Hellenic

Coca-Cola Icecek

Davide Campari

Diageo Heineken Pernod Ricard

Remy Cointreau

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2008 2009 2010 2011 2012


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Figure 13: Change in EBIT margin FY09-FY12E

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Remy Cointreau

SABMiller

2009 2010 2011E 2012E


An update on input cost inflation Malting barley futures rose by near 80% from mid 2010 through to year end but have fallen by some 15% year to date. Spot and futures prices are not necessarily indicative of the price that the brewers will have secured internally or externally for malt, and there will be a delay from forward contracts and other hedging. We expect the brewers to be facing significant increases in effective malt prices in the second half of 2011 and into 2012 which we think will be most marked in Europe, west and (particularly) east. However we think these increases are now firmly baked into guidance and consensus expectations and can be managed and recovered through price increases in most key profit pools.

These malt price cost pressures have been accompanied by direct and indirect energy cost impacts, though we note that packaging spot prices (whilst volatile) have not, in the round, moved significantly through 2H10 with the exception of aluminium which can be hedged.

Overall the brewers will see LSD to HSD input cost inflation in 2011 in our view, although the exact impact for each brewer will vary significantly by geography and to reflect the magnitude and duration of commodity and associated currency hedges. Generally we would expect the most input cost pressure to be felt across Europe, west and east, with proportionately less impact in the Americas, Asia and Africa. The European markets are also where we believe price rises to recover these cost pressures may be most difficult to secure.

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We also note though that, in soft drinks, sugar and juice spot prices have moved very significantly since the mid 2010 trough. Whilst this has already been incorporated into the guidance for the European soft drinks players we think that the more muted pricing power in this industry and the nature of the hedging opportunity could present further pressure in 2012.

We expect minimal COGS inflation in 2011 and 2012 for the spirits companies.

Figure 14: Oil price future USD/barrel

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Figure 16: Malting barley future EUR/MT

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Figure 17: Pulp USD/MT

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Figure 18: Natural gas spot USD/MMBTu

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Figure 19: Sugar future USD/MT

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Cashflow is available for investment or distribution We think investors may still be underestimating the strength and potential longevity of free cashflow generation most notably for the European brewers but also for the major spirits companies.

We estimate a weighted average free cashflow yield for the European beverages sector of 6.1% in CY11E and 7.2% in CY12E. This compares to 5.4% average for the large cap European food sector in CY12E.

A squeeze on capex and working capital Over the last two years the major beverages companies have pointed to well above historical trend levels of FCF generation primarily driven by squeezing working capital across the board and through much lower capex at the brewers at 5-6% of sales. We might argue that the working capital improvement at the spirits companies was partially cyclical as volumes fell, suppliers’ terms extended again and investment in maturing inventory for spirits eased back. We see this reversing as volumes pick up. We would argue that the cut in brewer capex from the peak of 2007 is not just a function of slowing volumes but also reflects a lower “price” on new capex and a secular shift down as the investment into key emerging markets like Russia and China has eased up. Finally the cash available to pay down debt has also been boosted by asset and business disposals.

It may be therefore that the combination of “positive” drivers of free cashflow is unlikely to persist going forward. However we think that our forecasts capture this dynamic and in any event any “negative” surprise across the sector in terms of cash generation is itself likely to be a function of improving top line growth prospects.

We expect continued rapid de-gearing by the brewers with Carlsberg (1.5x) and Heineken (1.9x) well below their 2.5x net debt/EBITDA leverage targets in the absence of any M&A/cash distribution by end FY11E. We expect ABI to fall below 2.0x net debt/EBITDA by the end of FY12E, even with an accelerated AmBev and ABI dividend payout. This would trigger the AB acquisition option package for management and leave ABI at its “optimal” gearing target. At 1.0x net debt/EBITDA in FY11E SABMiller looks under-geared in our view, in the absence of M&A developments.

We see Pernod Ricard meeting its 4.0x “investment grade” net debt/EBITDA leverage target by FY12E, and Diageo at 1.5x end calendar 2011 will look under-geared in our view.

On the basis of the financial leverage ratios that we monitor, net debt to EBITDA and free cashflow to net debt, we believe the most “stretched” balance sheets will be those of Pernod Ricard (and CEDC where the level of financial leverage remains a real concern). The least stretched balance sheets will be SABMiller, Anadolu EFES (0.6x net bet/EBITDA at end 2011E) and C&C Group (which will be net cash in FY12E). Post the intended disposal of the champagne business we would expect Remy Cointreau to also be close to net cash.

39



M&A opportunities In spirits we believe that investors will focus on the potential for a combination between Fortune Brands, as its non spirits businesses are spun out, and the European-listed players. We see Diageo as the most likely to be interested in parts, although not all, of the Fortune brands portfolio (Daily Mail, 8th Dec 2010).We note that Campari and Remy Cointreau (if its champagne business is disposed) would also have potential debt capacity to acquire some brands. We note that Pernod-Ricard has ruled out any M&A using debt prior to meeting its leverage targets (FT, 5th Jan 2011).

In brewing we believe a transaction between ABI and Grupo Modelo is not imminent (Bloomberg, 29th Dec 2010), that Carlsberg may look to expand its equity interests if possible in Asia, and that Heineken would be unlikely to explore any scale M&A acquisition until the equity payout to Group FEMSA is complete. We have discussed the M&A opportunities for SABMiller in our recent note “Back to the basics in beer part 2: where will the cash go?” 2nd Dec 2010.

Cash distribution opportunities In the absence of any M&A developments we see opportunities, notably at ABI, for accelerated dividend payout.

• ABI. We expect ABI will generate over $7.0bn of free cashflow in FY11E on our definition (after the dividend leak to AmBev minorities) rising to $8.7bn in FY12E as capex eases back, restructuring spend falls and the Modelo dividend payout increases. Following the rise in the dividend payout at FY10 year end to around 33% of earnings we would expect a cash distribution to ABI of some $3.3bn in FY11E rising to $3.7bn in FY12E. ABI could still comfortably pay down debt to its target of 2.0x net debt/EBITDA in 2012E. Indeed we think this target could still be met even with a further uplift in the payout to 50% of earnings, equivalent to a 4% 2012E dividend yield.

• Carlsberg. We expect Carlsberg to generate DKK 7.9bn of FCF in FY11E rising to DKK 8.9bn in FY12E as operating cashflows grow and capex is constrained at DKK3.25bn level. This could be enhanced by any cash flow from the Valby site. Carlsberg is already below its 2.5x target net debt/EBITDA ratio and in the absence of any enhanced dividend payout we see Asia as the prime M&A focus.

• Heineken. Heineken’s free cash flow may ease back a little to €1.8bn in FY11E and €1.9bn in FY12E as capex shifts up and the powerful working capital savings seen in FY09 and FY10 are not repeated. We expect the Heineken dividend and the buyback of equity to deliver to Group FEMSA to use up half of this free cashflow.

• SABMiller. For SABMiller we expect FCF of $2.4bn in FY11E rising to $3.2bn in FY12E as operating cashflows grow and with capex falling to $1.3bn and $1.2bn respectively after a peak of $2.1bn in FY09. We estimate SABMiller has the capacity to finance around $10bn of acquisition through debt assuming transaction multiples in line with prior scale acquisitions in the global brewing space.

40



• Diageo. In 1H11 Diageo generated £0.8bn of free cashflow and we expect £1.85bn in FY11E as the significant working capital inflow seen in FY09 is not repeated. We do not anticipate Diageo reviving its share buyback programme until it has fully explored the opportunities to expand its distribution platform in emerging markets through M&A. (We have examined the opportunity for Diageo to become involved in the potential Fortune Brands acquisition opportunity in our note “Diageo: Be careful what you wish for, 28th Jan 2011).

• Pernod Ricard. PR’s FCF generation in FY10 was less dramatic than in FY09 and we expect a further slowdown in FY11E as working capital investment and capex shift up and past factoring and asset disposal benefits are not repeated. We still expect c. €1bn (on our definition) in FY11E with near €1.2bn in FY12E. This should allow PR to reduce net debt/EBITDA to 4.5x at end FY11E with the 4.0x target reached at calendar end (depending on working capital movements). We think PR’s level of gearing will start to be seen by investors as more of a benefit than a risk which is gearing high single digit EBIT growth into mid double digit earnings growth in FY12E and FY13E. Refinancing of the existing debt through bond issues will lead to a higher interest cost in our view.

• Remy Cointreau. We expect RC to generate FCF of some €70mn in FY11E as the much improved profit base in reinvested back into inventory. If the working capital demand eases and with further profit growth we can see the FCF ramping up to well in excess of €100mn in FY12E and maybe nearer to €140mn by FY13E. We think RC may choose to reinvest further cash into more cognac inventory. If RC sells the champagne business for c. €400mn in line with book value this would leave RC in net cash at end FY12E. We assume that RC will look to reinvest the proceeds and potentially gear up to acquire further premium spirits brands to set alongside the current portfolio.

• Campari. For Campari we expect some €175mn of FCF in FY11E rising by c. €25mn p.a. thereafter. Campari has indicated that it has a potential €500mn to invest in further brand acquisitions.

• C&C Group. With a low tax rate and limited capex requirement in cider we see C&C generating c. €80mn of FCF in FY12E as restructuring and other costs fall back. Without any increase in dividend or further M&A C&C is set to build up a cash pile after selling the spirits business in calendar 2010 for €300mn.

• CEDC. CEDC’s prospects depend on its ability to renegotiate the covenants on (or alternatively to repay) its bank debt by 30th June 2011. The consequences of failing to do so could be serious given the cross-default provisions contained in the indentures relating to the bulk of its bond debt. CEDC also needs to manage a tight liquidity situation. Although we believe that it currently has the $80m – $100m of cash that it targets as a comfortable level for its operational requirements, we expect this to dwindle as CEDC moves through the low trading season and suffers from destocking by wholesalers during the forthcoming re-licensing process in Russia.

41



• CCHBC. The company is expecting cumulative FCF of €1.6bn between 2011 and 2013. Management has stated that its main objective is to expand the business and that they are evaluating acquisition opportunities. CCH’s target gearing (net debt to total capitalization) is between 35% and 45%. According to our estimates the company will be below that level of gearing by the second half of 2011 which along with the available cash could prompt further M&A. Over the past few years the company has completed acquisitions to seal gaps in its product portfolio primarily in the water and still beverages categories. The company expects to pay a 7x to 8x EBITDA multiple for suitable acquisitions.

• Anadolu EFES. We expect consolidated free cashflow of some TRY 430mn in FY11E rising to TRY 580mn by FY13E and despite continuing capex investment. The existing dividend payout will soak up around 60% of FCF but we still see EFES near net cash in FY13E.

• Coca Cola Icecek. We expect minimal free cashflow in FY11E as CCI doubles capex to near TRY 400mn. However with growth in operating cashflows we expect a return to strong FCF generation in FY12E and beyond even with this level of investment capex. This investment is driving distribution in Turkey as well as the growth markets which underpins our double digit volume growth expectations. We still expect CCI net debt/EBITDA ratio to fall from 1.9x in FY11E to 1.4x by end FY13E.

Figure 20: EBIDTA to free cashflow conversion ratios for European beverages calendar 2009-2012E

-20%0%

20%40%60%80%

100%120%

Anadolu Efes

ABI Britvic C&C Group

Carlsberg CEDC CHBC CCI Campari Diageo Heineken Pernod Ricard

Remy Cointreau

SABMiller

2009 2010 2011 2012

Source: J.P. Morgan estimates.

Figure 21: European beverages net debt/EBITDA ratios 2008-2012E calendarised ranked by 2011E

-1.0 -

1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0

CEDC Pernod Ricard

Britvic ABI Campari Heineken CCI Remy Cointreau

Carlsberg CHBC Diageo SABMiller Anadolu Efes

C&C Group

2008 2009 2010 2011 2012

Source: J.P. Morgan estimates, Company data

42



Figure 22: European beverages FCF/net debt ratios 2007-2011 calendarised ranked by 2011E

-20%0%

20%40%60%80%

100%120%

CCI CHBC CEDC Britvic Pernod Ricard

ABI Heineken Campari Remy Cointreau

Carlsberg Diageo SABMiller Anadolu Efes

2009 2010 2011 2012

Source: J.P. Morgan estimates, Company data

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Revenue growth expectations by region North America US beer volumes across channels fell by -1.6% in 2010 after a -2.1% fall in 2009. To end Feb shipments were down by -2.7% despite relatively easy comps (based on Beer Institute shipment data). Production data shows domestic brewers down -4.3% YTD. Imports are up double digit with no comp benefit. BLS data suggests beer CPI is running at 1.4% at home in Feb 2011 and 2.6% away from home.

AC Nielsen data through supermarket channels in the 4 weeks to Feb 19 shows volumes down -2.7% and 12 weeks as -2.6% with pricing up 2.5%.

So right now we think volume decline of c. 2.5% in the US beer industry is being just about offset by overall pricing at c. 2%. From a revenue point of view this says to us that so far there is no sign of improvement in the US beer market despite easier comps. On the other hand this pattern of robust pricing and volume decline against a still tough though hopefully improving consumer backdrop is no cause for concern. We continue to see price as a better driver of gross margin compared to volume when the major domestic players are still securing significant cost savings.

As for the argument that the domestic brewers are taking “too much pricing” and that may have to be “reversed” in order to drive volume recovery, we simply cannot see this. We see unemployment and consumer confidence as the key determinants of “mass market” beer consumption. This level of pricing in beer at 2.5% is hardly “elevated" compared to overall CPI which JPM estimates at 3% through 2011, though we accept that the strategy of pushing prices up faster at the lower price points, led by ABI, will have had a disproportionate impact on volumes in these segments.

We expect the US beer market to post slight volume decline in 2011 though this implies substantial improvement through Q2 and Q3 which may prove optimistic. Pricing in US beer at c. 2.5% should slightly lag CPI, with continued positive mix.

Figure 23: US beer state by state shipments % change yoy Jan 07- Feb11

-8%-6%-4%-2%0%2%4%6%8%

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Source: Beer Institute

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Figure 24: US beer CPI at home and away from home % change yoy Jan 07-Feb11

0%

1%

2%

3%

4%

5%

6%

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Beer CPI at Home Beer CPI away from home

Source: Beer Institute

Figure 25: US CPI April 2006-Feb 2011 %

-3

-2

-1

0

1

2

3

4

5

6

Source: Bloomberg

Figure 26: US "real" beer pricing 1999-2011E

0.3%

-0.6%

0.7% 1.1% 0.6%

-0.8%

-4.7%

-2.1%-1.1% -0.5%

4.5%

0.4%

-0.4%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E


45



Table 15: US beer sales through Nielsen channels period end Feb 19th 4 weeks ending Feb 19th 12 weeks ending Feb 19th

Volume Pricing Sales Volume Pricing Sales Anheuser Busch InBev -5.8% 2.6% -3.3% -5.3% 2.3% -3.1% MillerCoors -1.2% 2.5% 1.3% -1.6% 2.2% 0.5% Constellation Brands -1.9% 0.9% -1.0% -3.9% 0.6% -3.4% Heineken -7.0% 0.9% -6.1% -6.2% 0.6% -5.7% Total Beer -2.7% 2.7% -0.1% -2.6% 2.5% -0.1% Source: AC Nielsen

Figure 27: US beer market sales by channel 2004-2009

22.1% 21.9% 21.8% 21.6% 21.1% 20.7%

17.8% 17.7% 17.3% 17.3% 17.4% 17.8%

32.1% 32.2% 32.2% 32.1% 32.0% 31.7%

19.7% 19.5% 19.4% 19.4% 19.3% 19.1%

3.6% 3.9% 4.3% 4.5% 5.0% 5.4%4.8% 4.8% 5.1% 5.1% 5.2% 5.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009

Other Off Premise Club/MassMerch Package Liquor C Store Supermarket/Grocery On Premise

Source: Company data

In 2010 the overall US spirits industry saw 2.0% volume growth according to DISCUS with 0.3% of price/mix which we believe was all mix driven. This followed 1.4% volume growth in 2009 with no revenue growth implying price/mix decline.

In US spirits we expect volume growth to improve to c. 2.5% and a return to positive price and mix of 1.5% following the declines in 2009 and 2010, though still lagging CPI. On-trade recovery should accelerate as the unemployment rate falls. We do not see significant list price increases until calendar 2012.

We expect low single-digit revenue growth for beer and spirits in Canada.

46



Figure 28: US spirits industry volume, price and mix growth 2001-2010E

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E

Volume Price Mix

Source: Adams, DISCUS, J.P. Morgan estimates

Figure 29: US GDP growth, spirits consumption and unemployment rate % yoy change 1950-2009

-10%

-5%

0%

5%

10%

15%

1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Distilled spirits consumption growth GDP growth Unemployment

Source: Adams, Bloomberg

Latin America In LatAm beer in 2011 we see robust mid single-digit volume growth on average (LSD Colombia and Argentina, MSD Brazil and Mexico and HSD Peru) with pricing at least in line with local CPI. We expect double-digit revenue growth for international spirits, though part of this is coming from local inflation and currency recovery offsetting volume declines in Venezuelan Scotch.

47



Western Europe We expect continued tough trading conditions in 2011 as pressures on consumer incomes increase, particularly in the periphery. This will continue to be manifested in the channel shift from on to off-trade. However, easier comps should mean volume declines moderate slightly. We expect a continuing tough pricing environment with large retailers grabbing more of the cost inflation pass through and limited product mix improvement. We expect the best growth to be in UK off-trade spirits, in France and the Nordics, with the most pain still being seen in beer and spirits in Spain, Ireland and Greece. However, there will continue to be varied performance by brand and market across the region in our view.

Central and Eastern Europe We expect the Russian beer market to recover to at least mid single-digit volume growth in 2011, but with more variable performance elsewhere in the region. We expect pricing to match inflation, but for excise tax increases to be far less of an influence this year.

Following the two excise tax hikes in 2010 with the latest being at the end of October, we expect the Turkish beer market to decline by LSD in 2011. Thereafter, in the absence of any further adverse regulatory or consumer sentiment changes we forecast a return to MSD volume growth in the medium term.

Africa In South Africa we expect LSD volume growth in beer with MSD pricing. Elsewhere in beer in Africa we see MSD to HSD volume growth with pricing matching local inflation and continued mix improvement.

Asia Pacific In China and Vietnam we expect MSD beer volume growth but with pricing lagging CPI. In spirits we expect HSD revenue growth for Scotch and LDD revenue growth for cognac in China, with high teens revenue growth in India.

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Company Profiles

Com

pany

Pro

files

50



Anadolu Efes Our favourite CEEMEA play right now

Overweight Company Data Price (YTL) 23.70Date Of Price 21 Apr 11Price Target (YTL) 27.80Price Target End Date

01 Apr 12

52-week Range (TL) 23.95 -17.10

Mkt Cap (YTL bn) 10.7Shares O/S (mn) 450

Anadolu Efes Biracilik ve Malt Sanayii AS (AEFES.IS;AEFES TI) FYE Dec 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E(New)

Adj. EPS FY (YTL) 1.11 1.26 1.26 1.48 1.48EPS Reported FY 1.12 1.26 1.26 1.48 1.48Revenue FY (YTL mn) 4,169 4,646 4,646 5,198 5,198EBITDA FY (YTL mn) 1,026 1,117 1,117 1,254 1,254EBIT FY (YTL mn) 703 766 766 872 872Earning Before tax FY (YTL mn)

658 736 736 862 862

Net Income FY (YTL mn) 503 568 568 667 667Adj P/E FY 21.3 18.8 18.8 16.0 16.0DPS (Net) FY (YTL) 0.48 0.54 0.54 0.64 0.64Source: Company data, Bloomberg, J.P. Morgan estimates.

• At 16.0x CY12E PE Efes now trades at only a modest premium to

SABMiller 15.4x and ABI 14.2x, despite its faster top line growth, and a discount to comparable global brewers such as AmBev 17.6x and Modelo 20.9x. We expect earnings growth plus the dividend yield (of 2.7%) to produce annual returns of c.20% even with no multiple expansion. Our April 12E DCF and SOTP derived PT moves up to TRY 27.8 largely to reflect an assumed lower specific risk premium.

• We expect volumes in the Turkey beer business (49% of FY10 group EBITDA) to grow in MSD in the medium term driven by a young and growing population, rising disposable incomes and changing consumer preferences.

• We expect Efes’s International beer business (30% of FY10 group EBITDA) to benefit from a recovery in the Russian beer market, further market share gain in this market and growth in its other markets albeit from a low base. We expect the resultant positive operational gearing to lead to steady EBITDA margin expansion towards Efes’s target for EBI of 25% (from 20% in 2009) in the next five years.

• Efes’s 50.3% share in CCI (21% of FY10 group EBITDA) provides long term volume growth potential that is unparalleled in our beverages universe. We believe investors will continue to look to secure exposure to this growth opportunity, particularly given the lack of consumer alternatives in Turkey and Central Eurasia.

• We forecast FY11E volume growth of 7.9%, sales growth of 11.4% and EBITDA growth of 9.6%. We expect consolidated EBITDA margin erosion of 40bps due to high oil prices as well as pressure from input costs in the international beer (barley price in Russia) and soft drinks (sugar price) segments.

• Efes’s Turkey beer segment faces the near term risk of a further increase in excise duty rates following the two significant increases of 2010. Additionally, given the rise in sugar prices in Q111 we believe there is a risk that the Turkish government will increase the price of sugar post general elections in June 2011 which will adversely impact CCI’s margins.

51



Anheuser Busch InBev A core holding

Overweight Company Data Price (€) 42.81Date Of Price 21 Apr 11Price Target (€) 50.00Price Target End Date

01 Apr 12

52-week Range (€) 46.33 -35.06

Mkt Cap (€ bn) 68.7Shares O/S (mn) 1,604

Anheuser Busch InBev (ABI.BR;ABI BB) FYE Dec 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY ($) 3.17 3.79 3.79 4.39 4.39Revenue FY ($ mn) 36,297 38,397 38,397 40,479 40,479EBITDA FY ($ mn) 13,869 15,101 15,101 16,254 16,254Pretax Profit Adjusted FY ($ mn)

8,354 9,912 9,912 11,324 11,324

Adj P/E FY 19.7 16.4 16.4 14.2 14.2EBIT FY ($ mn) 11,165 12,270 12,270 13,252 13,252EBITDA margin FY 38.2% 39.3% 39.3% 40.2% 40.2%EBIT margin FY 30.8% 32.0% 32.0% 32.7% 32.7%Source: Company data, Bloomberg, J.P. Morgan estimates.

• We still see further capacity for ABI to show positive earnings and

shareholder value surprise over the medium and long term from multiple catalysts. These include a recovery in US beer volumes, gross margin expansion from sustained US price increases, marketing investment to drive US market share gains, the resumption of margin expansion in Brazil following recent substantial revenue and capital investment, continuing rapid profit growth from the enhanced platform in China, a recovery in demand in Eastern Europe, the unfolding of the “global Budweiser” story, ongoing fixed cost reduction across the Group and finally, and most importantly, from the deployment of the massive cashflow post de-leverage in the form of a rising dividend and/or further M&A.

• We think there is potential for consensus forecasts to rise gently in FY11E primarily to reflect better pricing and margin expansion in the AmBev businesses, Real strength and cost savings in the US. We do not think our forecasts of 9.5% organic EBITDA growth in FY11E followed by 8.0% in FY12E are ambitious in this context and given the average 10% that this combination of assets has generated over the last decade. We expect c. 3% organic volume growth in FY11E and FY12E as the US beer market “normalises” and with an average of mid single digit growth across the EM platforms. ABI has already guided to revenue per hl growth ahead of inflation in FY11E which we think underpins our 3% assumption fading to 2.5% in FY12E.

• For Q111E due on 4th May we expect ABI to show barely any organic volume growth with N. America still down low single digits and LatAm North only slightly up given the tough comp (14%), the impact of the price uplift in Q410 and unfavourable weather. However robust pricing and mix should drive mid single digit organic revenue growth and, with ongoing synergy capture and cost cutting, limited input cost impact and an “easy” comp on sales and marketing spend in LatAm and Europe we expect high single digit organic EBITDA growth.

• ABI trades on a PE of 14.2x in line with the sector despite faster earnings growth of 16% against the sector 13%. Given the certainty of earnings we continue to believe ABI warrants a premium rating to the sector. Our April 12E DCF derived price target is €50 (was €51) as we mark to market currency, minority and associate valuations.

52



Britvic Cheap, but still vulnerable to input cost pressure

Overweight Company Data Price (p) 390Date Of Price 20 Apr 11Price Target (p) 440Price Target End Date 01 Apr 1252-week Range (p) 518 - 355Mkt Cap (£ bn) 0.93Shares O/S (mn) 239

Britvic Plc (BVIC.L;BVIC LN) FYE Sep 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (p) 39.79 38.30 38.30 43.33 43.33Adj P/E FY 9.8 10.2 10.2 9.0 9.0Revenue FY (£ mn) 1,139 1,326 1,326 1,386 1,386EBIT FY (£ mn) 135 140 140 156 156EBITDA FY (£ mn) 177 194 194 213 213Net Income FY (£ mn) 80 91 91 104 104FCF Yield FY 8.6% 3.7% 4.2% 3.3% 3.7%EV/EBITDA FY 8.1 8.2 7.4 7.5 6.8Source: Company data, Bloomberg, J.P. Morgan estimates.

• We see Britvic as a very cheap stock, both in absolute terms and relative to

the sector. Moreover, we do not think that there has been any fundamental change to a business model that has produced a clean EPS CAGR of over 20% during the last four years. This model is based on driving market share gains through product and packaging innovation, supplemented by expansion into new markets. We retain our Overweight recommendation.

• However, recent events have exposed Britvic’s Achilles’ Heel, namely its vulnerability to input cost increases. This vulnerability stems from Britvic’s relatively small number of suppliers, its reluctance to hedge its commodity exposure due to the expense entailed, its relatively low margins by industry standards (with a given move in commodity prices therefore having a relatively large percentage impact on absolute profits) and restricted pricing power versus the European supermarkets, particularly in competitive carbonates markets.

• Rising commodity costs forced Britvic to issue a profit warning on 24th February, with its previous guidance of a 5-6% increase in input costs in FY2011 in GB & Ireland rising to 9-11%. The c.3% price increases negotiated with Britvic’s (on and off-trade) customers, whilst sufficient to pass on the initial cost pressure, is insufficient to pass on this new level of cost inflation.

• Britvic has guided to a mid single digit increase in input costs in FY2012 across the business as a whole. Britvic believes that a further 3% price increase would allow it to maintain its cash gross margin and deliver a 50bps expansion in its EBIT margin in combination with cost saving measures. However, this would leave Britvic vulnerable to further input cost inflation, as we believe that it would be very difficult to achieve a price increase of over 3%. The latest outlook for input costs will thus be a key issue on 27th May when Britvic reports FY2011 results.

• Britvic trades on 8.7x CY2012E PE, broadly in line with the long-term “normal” forward PE range of 8x-11x. These multiples represent a c.38% discount to the European beverages sector. Our April 12E DCF-derived price target mechanically falls from 450p to 440p as we update balance sheet liabilities. The (well-covered) dividend yield offers some additional support for the shares at 4.6% in CY2011 and 5.3% in CY2012.

53



C&C Group Limited visibility into FY12E

Neutral Company Data Price (€) 3.33Date Of Price 21 Apr 11Price Target (€) 3.50Price Target End Date 01 Apr 1252-week Range (€) 3.83 - 3.00Mkt Cap (€ bn) 1.1Shares O/S (mn) 324

C&C Group (GCC.I;GCC ID) FYE Feb 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (€) 0.23 0.24 0.26 0.27 0.29Adj P/E FY 14.7 13.9 12.9 12.4 11.5Revenue FY (€ mn) 569 854 845 851 842EBIT FY (€ mn) 90 101 104 107 112EBITDA FY (€ mn) 106 131 134 136 140Net Income FY (€ mn) 73 80 87 90 98FCF Yield FY 10.3% 2.9% 2.9% 8.8% 8.8%EV/EBITDA FY 13.2 10.5 10.5 10.2 10.0Source: Company data, Bloomberg, J.P. Morgan estimates.

• We expect the cider business in GB to move back into mid single digit

volume growth for FY11E, driven by strong off trade growth, offset in part by continuing decline in volumes in Ireland, though with an improving price/mix outlook as the comps ease in 2H11E. Channel mix will still be a negative impact on pricing in both geographies however. With a slight uplift in underlying cider margins and the FY contribution from the Tennants and Gaymers businesses in line with expectations this should leave C&C on track to deliver EBIT in line with the €104m we now forecast for FY11E.

• Thereafter we think C&C should be able to drive an improvement in revenue growth in GB in a still buoyant cider market (though with increased competition in the form of the ABI Stella Artois “cidre” brand) and to deliver on the synergy targets across the now much broader brand and distribution platform. On the other hand the risk in Ireland in our view is of another lurch down in demand making it ever more difficult for management to hold the profit base stable despite the further headcount rationalisation. We can see opportunities for growth in cider outside the core markets, and investors may see the near ungeared balance sheet post the disposal of spirits as an opportunity, but we see better earnings growth with less risk elsewhere in the sector.

• We have updated our estimates and now forecast EBIT of €104.1mn for FY11E (C&C reports on 18th May) with €111.7mn in FY12E. This is slightly below Bloomberg consensus of €106mn for FY11E but in line with the guidance given at Q3 trading of a range €102mn to €106mn. For FY12E we expect mid single digit revenue growth in the combined cider businesses with lower growth in Tennants and further margin expansion driven by synergy capture and cost savings. This should underpin high single digit organic EBIT growth whilst still allowing reinvestment back into the brand portfolio.

• C&C now trades on 11.9x CY12E PE a discount to the sector at 13.9x which we think fairly reflects its lower growth prospects and still very substantial exposure to Ireland (over 40% of forecast EBIT). If the prospectively ungeared balance sheet were used to fund further earnings enhancing M&A or a return to share buyback then this multiple might look more attractive but there is no clear visibility on balance sheet strategy in our view. Our April 12E DCF derived PT is unchanged at €3.5.

54



Campari Limited margin expansion in FY11E

Underweight Company Data Price (€) 4.77Date Of Price 21 Apr 11Price Target (€) 4.65Price Target End Date 01 Apr 1252-week Range (€) 5.05 - 3.55Mkt Cap (€ bn) 2.8Shares O/S (mn) 580

Campari (CPRI.MI;CPR IM) FYE Dec 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (€) 0.28 0.31 0.31 0.33 0.33Revenue FY (€ mn) 1,163 1,244 1,244 1,326 1,326EBITDA FY (€ mn) 299 327 327 348 348EBIT FY (€ mn) 273 296 296 316 316Pretax Profit Adjusted FY (€ mn)

236 257 257 274 274

FCF Yield FY 4.9% 6.7% 6.7% 8.0% 8.0%EV/EBITDA FY 11.1 9.7 10.2 9.1 9.6Adj P/E FY 17.3 15.6 15.6 14.6 14.6Source: Company data, Bloomberg, J.P. Morgan estimates.

• Campari continues to deliver robust sales growth, ahead of larger spirits

peers, underpinned by continuing growth in aperitifs in Italy, its spirits platform in the US and the benefits of its enhanced brand and distribution platform following recent acquisitions. Moreover it still has at least €500mn of debt capacity to make further brand acquisitions. Management is still looking to drive MSD organic sales growth and EBIT growth in the medium term.

• Management is cautiously optimistic for 2011 and the medium term and expects market conditions in 2011 to be in line with those prevalent in H210. Guidance is for increased marketing spend to 18% of sales and strengthening route-to-market. In FY11 we expect an organic sales increase of 6.9%, gross margin to expand with continued mix improvement and organic CAAP growth of 8.6%. However, these will be offset by increased A&P spend to 18% of sales to leave organic EBIT growing at some 7% and only limited margin expansion.

• The US vodka and bourbon markets remain very competitive with pricing pressure still prevalent. Skol and Smirnoff appear to be the top two vodka brands tracked by Nielsen data that were increasing prices in Q4 2010. However, they have since lost momentum into 2011. Campari’s Wild Turkey bourbon also appears to be recovering from its lows in Q3 2010. However, Nielsen data should be analysed with a degree of caution as it does not track couponing and therefore does not fully reveal the extent of discounting in the market, as well as not covering other key channels.

• Campari is currently trading on a CY 2012E PE of 14.6x, a premium to the European beverages sector at 13.9x and its large cap spirits peers Diageo at 13.5x and Pernod Ricard at 12.9x. We do not believe this premium is warranted given Campari’s similar growth prospects relative to its peers and retain our Underweight recommendation. Our April 12E DCF derived PT moves to €4.65 from €4.30 to reflect our updated capital structure assumptions with a WACC of 8.9% vs 9.2% previously.

55



Carlsberg Q1 margin constrained but full year on track

Overweight Company Data Price (Dkr) 593.00Date Of Price 20 Apr 11Price Target (Dkr) 670.00Price Target End Date

01 Apr 12

52-week Range (Dkr)

616.50 -412.60

Mkt Cap (Dkr bn) 90.5Shares O/S (mn) 153Free Float 70.0%

Carlsberg A/S (CARLb.CO;CARLB DC) FYE Dec 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (Dkr) 35.90 42.57 42.57 49.63 49.63Revenue FY (Dkr mn) 60,055 63,982 63,982 66,606 66,606EBITDA FY (Dkr mn) 14,236 15,646 15,646 16,947 16,947EBIT FY (Dkr mn) 10,249 11,500 11,500 12,634 12,634Pretax Profit Adjusted FY (Dkr mn)

8,094 9,655 9,655 11,224 11,224

Net Income FY (Dkr mn) 5,476 6,497 6,497 7,585 7,585Adj P/E FY 16.5 13.9 13.9 11.9 11.9DPS (Net) FY (Dkr) 5.00 6.00 6.00 7.00 7.00Source: Company data, Bloomberg, J.P. Morgan estimates.

• Although we are cautious on Carlsberg ahead of its Q1 results (due on 11th

May), it remains one of our top picks on a medium and long term view. We remain above consensus for FY2011, with our EBIT forecast of DKK11,500m being 3% ahead of current Bloomberg consensus of DKK11,155m. We expect the Russian beer market to grow by at least 5% (ahead of Carlsberg’s guidance of 2-4%) as the Russian economy benefits from the high oil price, with the consequent positive operational gearing holding Carlsberg’s regional margin flat (versus company guidance of a modest decline). Looking forward to 2012, we expect falling input costs in Russia to lead to significant upgrades to consensus, assuming a normal Russian barley harvest in 2011. Our FY2012 EBIT forecast of DKK12,634m is already 4% above consensus of DKK12,201m, and we believe that our assumption of only a 50bps improvement in the Eastern Europe margin in 2012 is very conservative.

• More fundamentally, we see scope for further margin expansion in Western Europe over the medium term (of c.100bps p.a.) as Carlsberg continues its efficiency programmes. Moreover, we expect sales growth in this region to continue its recent improvement as Carlsberg extends its value management initiatives. In Russia we believe that beer consumption will at least recover the 15% of cumulative volume lost in 2009 and 2010 over time, and that Carlsberg’s market share will resume its long-term growth from 2011 onwards.

• Carlsberg is scheduled to report Q1 results on 11th May. We expect a mixed quarter, with very strong growth in both volumes and pricing in Russia (against easy comps in both cases) offset by muted margin expansion as Carlsberg faces higher input costs and increases investment in the Carlsberg brand and its Russian business.

• Carlsberg trades on only 11.9x CY2012E PE, a 14%discount to the sector on 13.9x. We acknowledge that Carlsberg has a riskier profile than the peer group given its heavy exposure to a single market with relatively high political and economic risk. We nonetheless think that this multiple undervalues Carlsberg’s earnings growth prospects: we forecast 19% clean EPS growth in 2011 and 17% growth in 2012. Our April 12E DCF derived price target rises from DKK625 to DKK670 to reflect the roll forward of net debt assumptions.

56



CEDC Guidance remains aggressive and risks remain

Underweight Company Data Price ($) 10.52Date Of Price 20 Apr 11Price Target ($) 10.00Price Target End Date

01 Apr 12

52-week Range ($) 38.35 -10.00

Mkt Cap ($ bn) 0.8Shares O/S (mn) 72

Central European Distribution Corp. (CEDC;CEDC US) FYE Dec 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY ($) 0.55 0.84 0.84 1.15 1.15Adj P/E FY 19.2 12.6 12.6 9.1 9.1Revenue FY ($ mn) 712 945 945 979 979EBITDA FY ($ mn) 145 201 201 224 224EBITDA margin FY 20.4% 21.2% 21.2% 22.9% 22.9%EV/EBITDA FY 13.3 15.0 9.7 13.0 8.3FCF Yield FY 1.9% 3.9% 9.3% 4.3% 10.4%Net Income FY ($ mn) 39 60 60 82 82Source: Company data, Reuters, J.P. Morgan estimates.

• Although we back CEDC to navigate its way through its current issues, we

believe that the share price still does not fully reflect the risks involved, and assumes too rapid a recovery. We rate the stock Underweight, and still see 6% downside from the current share price to our price target of $10 despite the stock’s ongoing underperformance. We expect this underperformance to continue until the de-stocking expected in Russia in H1 is behind us.

• We believe that the operational assumptions underlying CEDC’s 2011 guidance are too aggressive. Our more conservative assumptions produce a 2011 EPS forecast of $0.84, 27% below the mid point of CEDC’s $1.05 - $1.25 guidance range. We are 13% below CEDC’s 2011 guidance at the EBIT level (JPM $183m, CEDC guidance $211m) and 12% below at the EBITDA level (JPM $201m, CEDC guidance $229m). This is mainly due to a more cautious view on CEDC’s margin prospects, with our sales forecasts only 4% below CEDC’s guidance. We forecast 330bps of EBIT margin expansion (from 16% to 19.3%) in 2011 versus CEDC’s guidance of 550bps of expansion to 21.5%.

• CEDC has not yet set a date for its Q1 results. We believe that the company’s operational performance will be severely hampered in H1 by the re-licensing of the Russian spirits industry, and that this will start to show through in the Q1 figures. We value CEDC on a PE and EV/EBITDA basis against the sector peers, using both 2011 and 2012 forecasts. We consider a 25% discount appropriate given CEDC’s recent operational record and current liquidity pressures. The implied range of share prices is $8.76 to $12.52. Our DCF analysis suggests a $10.00 valuation. Both approaches therefore point to a valuation of around our April 12E target price of $10.

57



Coca-Cola Hellenic Input cost pressure on near term margin

Neutral Company Data Price (€) 18.98Date Of Price 21 Apr 11Price Target (€) 20.00Price Target End Date

01 Apr 12

52-week Range (€) 22.28 -16.75

Mkt Cap (€ bn) 6.8Shares O/S (mn) 359

Coca-Cola Hellenic Bottling Company S.A. (HLBr.AT;EEEK GA) FYE Dec 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (€) 1.16 1.35 1.31 1.54 1.49Revenue FY (€ mn) 6,794 7,062 7,102 7,483 7,558EBITDA FY (€ mn) 1,040 1,089 1,065 1,163 1,136EBIT FY (€ mn) 645 724 700 798 772Earning Before tax FY (€ mn)

572 636 612 715 689

Net Income FY (€ mn) 435 496 481 557 541Adj P/E FY 16.3 14.0 14.5 12.3 12.7EBIT margin FY 9.5% 10.3% 9.9% 10.7% 10.2%Source: Company data, Bloomberg, J.P. Morgan estimates.

• We believe top-line headroom remains in CCH’s emerging market segment (including countries such as Nigeria and Russia) which currently has low per capita sparkling beverage consumption. We expect rising disposable income, positive demographics and increased product availability to drive mid single digit volume growth as demonstrated by the company’s track record, with an 8% CAGR between 2004 and 2009.

• However, established markets still account for a majority of the company’s profitability. Growth in CCH’s established and developing markets, such as Greece, Ireland and the Czech Republic, is expected to be hindered by austerity measures, low consumer confidence and overall slow economic recovery. Additionally, we expect rising sugar, juice and oil prices to put pressure on the company’s margins in the latter half of 2011 and going into 2012.

• We expect CCH’s margins to expand in the short to medium term as a result of its restructuring programme which commenced in 2008 with an aim to reduce costs and improve operational efficiency, particularly in its established markets. Restructuring is expected to boost 2011 EBIT by €43-48m and 2012 onwards by €55-65m.

• For FY11E the company expects economic improvement in some key emerging and developing countries but remains cautious on prospects for some of the established markets. The company is expecting a mid to high single digit increase in commodity costs in 2011 primarily from higher sugar and resin costs with a significant rise already seen in Q410. Pricing is expected to run slightly below inflation in FY11E. Capex will rise to €1.5bn for FY11-13E. FCF target for the next three years is now €1.6bn and the company intends to give further details of a “recapitalisation transaction” to return capital to shareholders. We have updated our FY11E and FY12E EPS estimates to reflect this guidance.

• CCH is currently trading at a 2012E P/E of 12.7x and EV/EBITDA of 7.6x versus the European beverages sector at 13.9x and 9.3x respectively. We believe these are fair multiples given the company’s growth prospects are offset by input cost pressure and risks associated with operating in emerging markets. Our April 2012E DCF derived PT is €20 as we update our earnings estimates.

58



Coca-Cola Icecek The fastest volume growth in the sector

Neutral Company Data Price (YTL) 21.25Date Of Price 21 Apr 11Price Target (YTL) 21.00Price Target End Date

01 Apr 12

52-week Range (TL) 23.50 -12.70

Mkt Cap (YTL bn) 5.4Shares O/S (mn) 254

Coca-Cola Icecek AS (CCOLA.IS;CCOLA TI) FYE Dec 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E(New)

Adj. EPS FY (YTL) 0.81 0.93 0.93 1.15 1.15EPS Reported FY 0.78 0.93 0.93 1.15 1.15Revenue FY (YTL mn) 2,753 3,192 3,192 3,691 3,691EBITDA FY (YTL mn) 429 499 499 606 606EBIT FY (YTL mn) 281 320 320 381 381Earning Before tax FY (YTL mn)

255 303 303 371 371

Net Income FY (YTL mn) 198 238 238 294 294Adj P/E FY 26.3 22.7 22.7 18.4 18.4DPS (Net) FY (YTL) 0.28 0.28 0.28 0.35 0.35Source: Company data, Bloomberg, J.P. Morgan estimates.

• With the prospect of sustainable double-digit volume growth, we believe CCI

is the most attractive long term growth opportunity in our beverages universe. We also believe that CCI’s business model is defensive, having demonstrated its ability to maintain volume growth throughout the recession, and with many of its raw materials sourced locally (in some cases under controlled prices). We also see some scope for margin expansion, particularly in the international business as newly-acquired operations are integrated into the CCI network and as they benefit from economies of scale.

• We would acknowledge that CCI’s valuation (17.0x CY12E PE) is high by the standards of our universe and indeed by the company's own history. However, as long as investor enthusiasm for the emerging markets remains intact, we see no reason for this multiple to contract, particularly in light of the tight shareholder register (the free-float is only 24.6%).

• In FY11E we forecast volume growth of 12.1% comprising of 10% growth in Turkey and 18.4% in international markets and sales growth of 15.9% with price/mix growth of 4% in Turkey (210bps below current JPMCE inflation estimate). CCI has already increased prices in Pakistan, Jordan, Turkmenistan and Syria this year. If the global price of sugar remains at its current high levels, we believe there is a risk that the Turkish government will increase the price of sugar post general elections in June 2011. We estimate flat “clean” EBITDA margin of 10.6% in FY11 and EBITDA growth of 16.3%.

• Our April 12E DCF derived price target moves up from TRY 18.6 to TRY 21 to reflect a lower assumed specific risk premium. On our estimates CCI is currently trading on 2012E PE of 18.4x against the European beverages sector at 13.9x. Given the short term headwinds, we believe CCI is currently trading at an appropriate level.

59



Diageo Suffering by comparison

Underweight Company Data Price (p) 1,207Date Of Price 20 Apr 11Price Target (p) 1,120Price Target End Date

01 Apr 12

52-week Range (p) 1,266 -1,024

Mkt Cap (£ bn) 30.28Shares O/S (mn) 2,509

Diageo (DGE.L;DGE LN) FYE Jun 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (p) 73.53 77.56 77.56 84.94 84.94Adj P/E FY 16.4 15.6 15.6 14.2 14.2Revenue FY (£ mn) 9,780 10,150 10,150 10,586 10,586EBIT FY (£ mn) 2,751 2,923 2,923 3,093 3,093EBITDA FY (£ mn) 3,123 3,303 3,303 3,492 3,492Net Income FY (£ mn) 1,840 1,959 1,959 2,156 2,156FCF Yield FY 6.9% 6.1% 6.1% 6.3% 6.3%EV/EBITDA FY 12.4 11.6 11.7 11.0 11.1Source: Company data, Bloomberg, J.P. Morgan estimates.

• Five years of c. 28% EBIT margins at Diageo reflects industrial and

geographical reality and not a failure by management to tap potential cost savings. Diageo is still compromised by its distribution platform in key growth markets like China and India. Even so, 8% CAGR EPS growth over the last decade outpaced the 5% for the European equity market and the shares have outperformed (whilst lagging the sector) with very low volatility and with significant dividend income.

• We continue to see Diageo’s growth rate lagging its peers, as it has over the last decade. We currently see calendarised EPS growth of 8% in CY11E followed by 10% in CY12E compared to 16% and 13% for the sector, respectively. This would accelerate in the event of a sustained recovery in demand for spirits in the US, but we would caution against investors overestimating the operational gearing that the Diageo portfolio can generate based on its own history. Through FY03 to FY08, the “boom” years for premium spirits, Diageo delivered an average 6-7% organic sales growth but only managed to “add” another c.100 bps of growth at the organic EBIT level. We believe that the scope for cost savings is inherently limited by the nature of the spirits cost base.

• We think Diageo is somewhat disadvantaged in the emerging markets particularly in terms of its distribution platform in the key growth markets in Asia, notably China and India. The main drivers of profit growth in EM are the beer businesses in Nigeria and east Africa and Scotch in Latin America, where inflation in Venezuela has boosted the reported revenue growth rate.

• In contrast to its peers Diageo has largely pursued an “organic” growth strategy over the last decade with limited M&A to drive “inorganic growth”. We think investors are now expecting further activity, particularly with the pending spin-off of Fortune Brands’ non-spirits businesses and the intended disposal of the Stock spirits business in Poland.

• Diageo is scheduled to report Q3 sales figures on 5th May. We forecast 3% organic sales growth.

• Our April 12E DCF derived PT is unchanged at 1,120p. Diageo trades on 13.5x CY12E PE, a small discount to the sector on 13.9x and a small premium to the closest peer Pernod-Ricard on 12.9x.

60



Heineken Cost savings to fund marketing investment in 2011


01 Apr 12

52-week Range (€) 40.70 -32.81


Heineken (HEIN.AS;HEIA NA) FYE Dec 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (€) 2.56 2.95 2.95 3.16 3.16Revenue FY (€ mn) 16,133 17,059 17,059 17,422 17,422EBIT FY (€ mn) 2,608 2,921 2,921 3,088 3,088Pretax Profit Adjusted FY (€ mn)

2,099 2,468 2,468 2,652 2,652

DPS (Net) FY (€) 0.76 0.84 0.84 0.92 0.92Adj P/E FY 15.8 13.7 13.7 12.8 12.8FCF Yield FY 8.8% 8.1% 8.0% 8.6% 8.2%EBIT margin FY 16.2% 17.1% 17.1% 17.7% 17.7%Source: Company data, Bloomberg, J.P. Morgan estimates.

• In our view Heineken is currently still too reliant on cost savings to drive

profit growth given its heavy exposure to Western European mature markets (40% of EBIT) where price rises to recover input cost pressures are more difficult to secure. We expect Heineken to deliver mid single-digit organic EBIT growth in the next 3 years vs. high single-digit for the brewing peers. Its free cash-flow through FY11E and FY12E is already “committed” to buying equity to deliver to Group FEMSA.

• Heineken reported stronger Q111 organic volume (5.5% vs JPMCE 3.9% and Bloomberg consensus 2.1%) and EBIT (beia) growth (20%+ vs JPMCE “double digits”) than we expected. However, Heineken reiterated that this level of growth should not be extrapolated through the rest of the year. Volume comps will not be as easy in subsequent quarters and muted pricing/mix will only recover the expected low single digit per hl input cost inflation. This will leave the remaining €160mn of TCM gross cost savings that we estimate in FY11E to fund the planned uplift in marketing spend (we estimate 50bps relative to sales). This we see as a recipe for c. 7% organic EBIT growth (excluding the FEMSA assets) and low double digit organic net profit growth.

• We could be too conservative in our organic growth expectations here and we would read positively any sign that the uplift in marketing was boosting sales growth. On the other hand Heineken still has significant exposure to markets where consumer demand could take another lurch down (we estimate periphery Europe and UK is over 25% of Group EBIT). Heineken management was reluctant to point to any improvement in the consumer backdrop across Europe and in the US.

• In our view this lower level of organic profit growth compared to the high single digit or double digit organic growth we expect from the other brewers warrants a lower valuation multiple. Heineken trades on a CY12E PE multiple of 12.8x for 7% EPS growth compared to ABI on 14.2x for 16% growth and Carlsberg on 11.9x for 17% growth. Our April 2012E DCF derived PT is unchanged at €41.

61



Pernod-Ricard SA Asia is still the key


01 Apr 12

52-week Range (€) 72.78 -58.32


Pernod Ricard SA (PERP.PA;RI FP) FYE Jun 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (€) 3.78 4.09 4.09 4.79 4.74Revenue FY (€ mn) 7,081 7,482 7,544 8,033 8,099EBITDA FY (€ mn) 1,954 2,079 2,079 2,287 2,286EBIT FY (€ mn) 1,795 1,916 1,916 2,118 2,117DPS (Net) FY (€) 1.34 1.24 1.24 1.44 1.42Adj P/E FY 17.5 16.1 16.1 13.8 13.9FCF Yield FY 6.0% 5.7% 5.7% 7.0% 6.8%EV/EBITDA FY 15.0 13.9 14.1 12.7 12.8Source: Company data, Bloomberg, J.P. Morgan estimates.

• We continue to prefer PR to Diageo based on its consistently superior organic

growth record, which we see as sustainable based on its more attractive geographical exposure, specifically to Chinese Asia and India. We nonetheless retain our Neutral recommendation on PR, with our preference for brewing versus spirits unchanged. This is largely based on the brewers’ greater exposure to the emerging markets, their greater pricing power, and their greater scope to reduce costs.

• We expect 5.1% organic sales growth in FY11E and +5.8% in FY12E (to June) as Europe moves back into growth and Americas and Asia accelerate. For FY11E we think PR will come in around guidance of “close to 7%” organic EBIT growth as any positive gross margin surprise is reinvested back into A&P behind the brands and structure costs leverage is limited but in FY12E we expect to see an acceleration to 9.1%.

• For Q311E we expect 1.8% organic sales growth. The comp period was up 15.5% in large part driven by the absence of the huge destocking seen in the prior Q109 comp. We expect slight organic sales decline in Europe and France and a slowdown in Asia from the 16.7% H111 run rate given the timing of Chinese New Year.

• PR’s FCF generation in FY10 was less dramatic than in FY09 and we expect a further slowdown in FY11E as working capital investment and capex shift up and past factoring and asset disposal benefits are not repeated. We still expect c. €1bn (on our definition) in FY11E with near €1.2bn in FY12E. This should allow PR to reduce net debt/EBITDA to 4.5x at end FY11E with the 4.0x target reached at calendar end (depending on working capital movements). We think PR’s level of gearing will start to be seen by investors as more of a benefit than a risk which is gearing high single digit EBIT growth into mid double digit earnings growth in FY12E and FY13E. Refinancing of the existing debt through bond issues will lead to a higher interest cost in our view which we have reflected in our EPS estimates leading to a 1% downgrade in FY12E and FY13E.

• PR trades on a CY12E PE multiple of 12.9x for 16% EPS growth compared to Diageo on 13.5x but with 10% growth. Our April 2012E DCF derived PT moves up from €62 to €66 to reflect the roll forward of our estimates and net debt assumptions.

62



Remy Cointreau SA Price and mix to drive cognac margin


01 Apr 12

52-week Range (€) 56.15 -38.01


Remy Cointreau SA (RCOP.PA;RCO FP) FYE Mar 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (€) 1.88 2.17 2.17 2.78 2.78Revenue FY (€ mn) 808 908 908 981 981EBITDA FY (€ mn) 162 191 191 225 225EBIT FY (€ mn) 140 166 166 197 197Pretax Profit Adjusted FY (€ mn)

118 141 141 179 179

DPS (Net) FY (€) 1.30 1.43 1.43 1.57 1.57FCF Yield FY 2.3% 3.0% 3.0% 4.8% 4.8%Adj P/E FY 29.0 25.2 25.2 19.7 19.7Source: Company data, Bloomberg, J.P. Morgan estimates.

• Cognac is still an industry where the mix continues to rapidly improve both in

terms of product and geography and pricing is running ahead of inflation. We estimate China is now around 30% of RC’s profit with sales growth running at around 30%. We also see RC as the best way to play recovery in on trade demand for spirits in the US. We still think price and mix in cognac can fuel gross margin expansion ahead of spirits peers and allow reinvestment back into sales capability and marketing ahead of sales growth.

• On 28 Feb the company announced that it was in exclusive negotiations with EPI, a family group that owns a variety of retail brands, to sell its Champagne division which includes the Piper-Heidsieck and Charles Heidsieck brands. We expect RC is looking to sell this barely profitable division for something around the historical book value of c. €430m. However, uncertainty around when this happens and what the company will then do with the proceeds remains. We think there is a clear intention to look to acquire premium brands to set alongside the existing portfolio and leverage the distribution platform.

• Remy Cointreau reported FY11 sales of €908.1m with organic growth of 6.4% (comp 12%) and currency tailwind of 6%. As expected the earlier timing of Chinese New Year resulted in a pull forward of sales from Q411 to Q311. We estimate RC’s organic sales declined by -5.8% in Q411 against a very tough overall comp of +103% and cognac comp of +206%. We have updated our forecasts with FY11 reported sales and in line with guidance have decreased our organic FY11E EBIT growth in cognac from 21.6% to 18.1% which takes our FY11E organic EBIT growth estimates to 8.5% (previously 11.5%). For FY12E and FY13E we now expect organic sales growth in cognac of 9.5% and 8.5% and organic EBIT growth of 17.3% and 14.1% respectively. These and small changes to the other segments results in EPS estimates decrease of 3% in FY11E (€2.17 vs €2.23) and 2% in both FY12E and FY13E.

• Our April 12E DCF derived PT is unchanged at €52. Remy Cointreau trades at CY12E PE of 17.5x and EBITDA of 11.9x against the European beverages sector at 13.9x and 9.3x respectively. The company also trades on a slight premium to LVMH at 17.1x (Bloomberg consensus). With good pricing power and sales momentum in Asia, RC remains our favoured play in spirits.

63



SABMiller Premium fully warranted

Overweight Company Data Price (p) 2,201Date Of Price 20 Apr 11Price Target (p) 2,400Price Target End Date

01 Apr 12

52-week Range (p) 2,328 -1,810


SABMiller plc (SAB.L;SAB LN) FYE Mar 2010A 2011E

(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY ($) 1.61 1.88 1.88 2.17 2.17Adj P/E FY 22.6 19.3 19.3 16.7 16.7Revenue FY ($ mn) 21,783 23,177 23,177 24,816 24,816Adj EBITDA FY ($ mn) 5,262 5,916 5,916 6,515 6,515EBIT FY ($ mn) 4,381 4,993 4,993 5,567 5,567Pretax Profit Adjusted FY ($ mn)

3,803 4,400 4,400 5,067 5,067

Net Income FY ($ mn) 2,507 2,971 2,971 3,447 3,447EBIT margin FY 20.1% 21.5% 21.5% 22.4% 22.4%Source: Company data, Bloomberg, J.P. Morgan estimates.

• In our view SABMiller’s superior long-term growth prospects fully support

the stock’s premium rating. 85% of group EBIT arises in the emerging markets, suggesting faster volume growth than the peers over time. We believe that this is now beginning to show through again, with 3% volume growth in each of the last two quarters. This follows a long period during which volume growth was constrained by both the recession and by aggressive price increases that were implemented to protect margins while SABM’s input costs were rising sharply.

• We also see scope for further margin expansion at SABM due to (i) the pricing power provided by the company’s often dominant market shares and (ii) the change from a national to a regional/global operational approach, facilitated by the Business Capability Programme which currently targets $300m of annual savings by FY2014.

• In our view SABM’s premium valuation is also supported by the nature of the shareholder register, with substantial holdings by Altria (27%) and the Santo Domingo family (14%), plus a loyal South African investor base (20%), squeezing the effective free float. This leaves the UK structurally underweight what has been one of the best-performing FTSE100 stocks over the last decade.

• SABM is scheduled to report FY2011 results on 19th May. It has already issued a full year trading statement which disclosed organic volume growth of 2% and organic sales growth of 5%. Financial performance was said to be in line with company (and implicitly market) expectations. This factors in an ongoing (although moderating) gains from productivity and efficiency initiatives in H2, and raw material costs which (while now starting to rise) remain subdued. Our EPS forecast of 188 cents is in line with Bloomberg consensus.

• SABM trades on 15.4x CY2012E, an 11% premium to the sector on 13.9x. As noted above, we believe that this premium is fully justified by SABM’s superior long-term growth prospects and supported by the nature of the shareholder register. Our April 12E DCF derived price target rises from 2290p to 2400p to reflect updated currency, minority valuations and debt assumptions.

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Valuation Methodology and Risks Anadolu Efes (Overweight; Price Target YTL27.80) Valuation Methodology We use a sum of the parts valuation methodology to arrive at Anadolu Efes’ total value. While we use our DCF driven valuations for Turkey beer operations, CCI and EBI, we use market equity value for Anadolu Efes' 7.5% stake in Alternatifbank. We arrive at a value of TRY27.80 for Anadolu Efes shares. Risks to Our View The main risk to our view is that investors re-assess the multiples they are willing to pay for emerging-market assets, implicitly downgrading the value assigned to future growth and increasing the risk premium applied. There is also a risk that the macro-economic or political environment in one of Efes’ key markets deteriorates. Clearly Turkey is the key market, but Efes is also heavily exposed to Russia. The main company-specific risk in our view is a further increase in excise duty rates on beer in Turkey, following the two significant increases of 2010. We expect these increases (one in January, one in October) to lead to two years of low single digit volume decline given the price increases required to pass them on to the consumer. We believe that the risk of further increases in the excise duty on beer in Russia is more muted given that the rates for 2011 and 2012 have already been agreed. There is also the risk that Efes sees a hardening of attitudes towards alcohol by the Turkish population, leading to a reversal of the long-term trend towards higher alcohol consumption in the country.

Anheuser Busch InBev (Overweight; Price Target €50.00) Valuation Methodology Our target price of €50 for April 2012 is derived from our DCF analysis. We assume a perpetuity growth rate of 1.50%. We fade sales growth down from 3.8% in FY13E to this level. We assume stable EBIT margins at 34.0% from FY14E. We assume a WACC of 8.5%. This is based on a group pretax cost of debt of 6.2% and a cost of equity of 9.9%, which is common across our large cap universe. Risks to Our View The key risks, in our view, that could keep our rating and target price from being achieved include the following: 1. A failure to realize the expected US$2.25bn of cost synergies. 2.· Any significant volume decline in key markets, notably the US and Brazil. 3.· A significant adverse shift in key currencies, notably a weakening Real.

Britvic (Overweight; Price Target 440p) Valuation Methodology Our April 12E DCF derived price target is 440p. We use a WACC of 8.8% and perpetuity growth rate of 1.0%. Risks to Our View The following risks could prevent the stock from achieving our price target and rating: Downside risks - Failure to deliver expected synergies in Fruite acquisition - Another lurch down in the soft drinks market in GB or Ireland - Failure to deliver the existing and future innovation pipeline

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- Aggressive competitor pricing from Coke system in GB and Ireland - Further increases in input costs

C&C Group (Neutral; Price Target €3.50) Valuation Methodology Our April 12E DCF derived target price is €3.5. We use a WACC of 9.0% and perpetuity growth rate of 1.25%. Risks to Our View The following risks could prevent the stock from achieving our price target and rating: Upside risks An acceleration in market share gain in UK cider Positive surprise on timing and magnitude of synergies from Tennents and Gaymers transaction Recovery in on trade volumes in GB and RoI An acquisition in GB long drinks market Downside risks Continuing market share loss or a significant contraction in achieved pricing for Magners in GB Accelerating on trade decline in GB and Ireland Integration of newly acquired businesses Failure to recycle spirits disposal proceeds

Campari (Underweight; Price Target €4.65) Valuation Methodology Our apr-12 DCF-derived PT is €4.65 based on a WACC of 8.9% and a perpetuity growth rate 1.5%. Risks to Our View The following risks could prevent the stock from achieving our price target and rating: Upside risks - Participation in any further consolidation in global spirits. - An acceleration in the growth rates of the recently acquired brands, notably Wild Turkey and the ex C&C brands. - Any improvement in pricing in US spirits

Carlsberg (Overweight; Price Target Dkr 670.00) Valuation Methodology Our April 2012E DCF-derived PT is DKK 670 based on a WACC of 8.8% and a perpetuity growth rate of 1.5%. Risks to Our View 1. If the Russian Rouble falls sharply against the Euro we would see earnings downgrades at both the EBIT level and in the financials line. 2. The Russian beer market could prove less resilient than we expect to regulatory/demographic pressures. 3. Carlsberg could be unable to sell the Valby site at an acceptable price in 2011, thus slowing the process of debt reduction.

CEDC (Underweight; Price Target $10.00) Valuation Methodology We look at CEDC on a PE and EV/EBITDA basis against the sector peers, using both 2011 and 2012 forecasts, and also on a DCF basis. The range of implied share prices is

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$8.33 to $12.15. We adopt $10 as our new price target based on a blend of these outcomes. We discount CEDC's cash flows using a WACC of 11%. Risks to Our View Upside risks (i) We might be too cautious in our assumptions on CEDC's prospects for share gains in the Russian vodka market. The company management, which has an outstanding record of share gains in the (similar) Polish vodka market, has more aggressive targets than we have factored in. (ii) Investor attitudes towards Russia might improve further. This could increase both the level of CEDC's dollar profits via the level of the Russian rouble, and the multiple of these profits that investors are willing to pay for the shares. (iii) Investor attitudes towards highly-geared companies might improve further.

Coca-Cola Hellenic (Neutral; Price Target €20.00) Valuation Methodology In line with the methodology we use to value the European beverages sector, we use DCF as our primary valuation methodology for CCH. Additionally, as a secondary valuation approach, we have analysed the multiples of the five biggest Coca-Cola bottlers and the European beverages sector. Our DCF valuation indicates a value of €20.00 per CCH share for a 12-month target period, broadly in line with the current trading price of the shares. Our main assumptions for the DCF valuation include a WACC of 8.4% and long-term growth rate of 1.5%. Risks to Our View CCH faces the risk that growth in CCH’s established (50% of EBIT) and developing markets will be hampered by austerity measures, in countries such as Greece, Ireland and the Czech Republic, and overall slow economic recovery. We believe continued rise in sugar, juice and oil prices could potentially be a meaningful risk for CCH in the latter half of 2011 and going into 2012. CCH faces the risk of its growth prospects being hindered if it cannot continue to grow market share in growth categories, such as still beverages and water. These categories are more competitive than the sparkling beverages category for CCH due to more limited brand equity. With 44% of CCH’s volumes generated in emerging markets such as Russia, Nigeria and much of Eastern Europe, CCH faces the risk of investors re-assessing the multiples they are willing to pay for emerging market assets, implicitly downgrading the value assigned to future growth and increasing the risk premium. Additionally, unstable macro-economic and/or political environment in these markets could have a contagion effect and be a key concern to investors.

Coca-Cola Icecek (Neutral; Price Target YTL21.00) Valuation Methodology In line with the methodology we use to value the European beverages sector, we use DCF as our primary valuation methodology for CCI. Additionally, as a secondary valuation approach, we have analysed the multiples of the five biggest Coca-Cola bottlers and the European beverages sector. Our DCF valuation indicates a value of TRY 21 per CCI share for a 12-month target period. Our main assumptions for the DCF valuation include a WACC of 10.3% and long-term growth rate of 4.5%.

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Risks to Our View The main risk to our view is that investors re-assess the multiples they are willing to pay for emerging-market assets, implicitly downgrading the value assigned to future growth and increasing the risk premium applied. There is also a risk that the macro-economic or political environment in one of CCI’s key markets deteriorates. Clearly Turkey is the key market, but CCI is also exposed to Pakistan. The markets in which CCI operates have a short track record of political stability, and in the case of Iraq arguably no track record at all. In these countries the macro-economic and political risk is clearly very high. The main operational risk in our view is that populations in the Middle East turn against American brands, which would clearly be negative for the Coca-Cola brand in particular. There are two main upside risks in our view. Firstly, the company may not face significant input cost pressure in 2011 if the Turkish government does not increase the price of sugar post general elections in June 2011 and if the oil price declines from current high levels. Secondly, better than expected weather could drive greater demand for CCI's products thereby accelerating top line growth.

Diageo (Underweight; Price Target 1,120p) Valuation Methodology Our target price of 1120p for Apr 12E is derived from our discounted cash flow valuation analysis. We assume a WACC of 8.4% and perpetuity growth rate of 1.5% to arrive at our price target. Risks to Our View The key risks that, in our view, could keep our target price and rating from being achieved include the following: Upside risks: – Any substantial reduction in the level of marketing investment. – Any significant change to capital structure through large scale M&A activity – Acceleration of volume growth in key markets in Asia and the Americas - A significant uplift in inflation in key markets

Heineken (Neutral; Price Target €41.00) Valuation Methodology Our target price €41 for Apr 2012 is derived from our discounted cash flow analysis for which we assume a perpetuity growth rate of 1.25% and an overall WACC of 8.4%. Risks to Our View The key risks that in our view could keep our rating and target price from being achieved include the following: Upside risks 1. Faster volume recovery in mature markets. 2. Significant positive surprise on the TCM cost-savings capture. 3. A significant revenue synergy capture at FEMSA Cerveza. Downside risks 1. Weaker volume recovery in mature markets 2. A failure to secure expected TCM cost savings 3. Negative currency impacts, notably EUR strengthening vs USD and MXN

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Pernod-Ricard SA (Neutral; Price Target €66.00) Valuation Methodology Our April 12E DCF derived PT is €66. We use a WACC of 8.1% and a long-term growth rate of 1.5%. Risks to Our View We believe the key upside downside/risks that could keep our rating and target price from being achieved include the following: Upside risks Accelerating demand in the US and key emerging markets, improved pricing and any acceleration in background inflation, further favourable refinancing of debt facilities Downside risks Deterioration in demand in the US, slowdown in emerging market growth, any further pressure on debt costs

Remy Cointreau SA (Neutral; Price Target €52.00) Valuation Methodology Our April 12E DCF-derived price target is €52. We assume a WACC of 8.4% and perpetuity growth rate of 2.5%. Risks to Our View We believe the key risks that could keep our rating and target price from being achieved include the following: Upside · Faster acceleration in demand in its key markets: the US, China, Duty Free and Russia. · Any improvement in working capital in the medium term above our assumptions. · Participation in industry consolidation. - A successful disposal of the champagne business Downside - a slowdown in end cognac consumption notably in China - a significant uplift in investment in maturing inventory - escalating price competition in cognac

SABMiller (Overweight; Price Target 2,400p) Valuation Methodology Our April 12E DCF derived PT is 2,400p based on a WACC of 8.7% and perpetuity growth rate of 1.75%. Risks to Our View 1 - Sentiment could shift against emerging market stocks (SABMiller generates over 80% of group EBIT in these markets) which could lead to a de-rating of the company. 2 - SABMiller's major trading currencies (notably the South African Rand and the Colombian Peso) could fall against the $US, leading to earnings downgrades via both the translation and transaction effects. 3 - Heineken could introduce a mainstream brand in South Africa, resulting in further market share loss for SABMiller in its largest single market. 4 - The recent rise in input costs could ultimately put downward pressure on SABMiller's gross margins as current contracts and hedging arrangements roll over.

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Anadolu Efes: Summary of Financials Profit and Loss Statement Cash flow statement TL in millions, year end Dec FY09 FY10 FY11E FY12E FY13E TL in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Revenues 3,811 4,169 4,646 5,198 5,815 EBIT 653 703 766 872 1,004

% change Y/Y 3.9% 9.4% 11.4% 11.9% 11.9% Depreciation & amortization 261 323 352 383 416 Change in working capital 109 (134) (81) (97) (109)EBITDA 914 1,026 1,117 1,254 1,420 Taxes (123) (131) (147) (172) (201)

% change Y/Y 7.3% 12.2% 8.9% 12.3% 13.2% Other operating cash flows - - - - -EBITDA Margin (%) 24.0% 24.6% 24.0% 24.1% 24.4% Cash Flow from Operations 1,024 892 1,037 1,157 1,311

EBIT 653 703 766 872 1,004 % change Y/Y 11.0% 7.6% 8.9% 13.9% 15.2% Capex (318) (331) (441) (483) (529)EBIT Margin (%) 17.1% 16.9% 16.5% 16.8% 17.3% Net Interest (31) (6) (20) (10) 0

Net Interest (25) (6) (20) (10) 0 Free Cash Flow 602 487 428 491 582Earnings before tax 544 658 736 862 1,004 Disposal/(purchase) (113) (315) 0 0 0

% change Y/Y 53.2% 21.1% 11.7% 17.2% 16.5% Tax (127) (128) (147) (172) (201) Equity raised/ (repaid) 0 27 0 0 0

as % of EBT 23.4% 19.4% 20.0% 20.0% 20.0% Debt raised/ (repaid) 35 -150 -185 -209 -253Net Income (Analyst) 423 503 568 667 779 Other - - - - -

% change Y/Y 36.5% 19.1% 12.9% 17.4% 16.8% Dividends Paid (133) (169) (243) (282) (329)Shares Outstanding - - - - - EPS (Analyst) 0.94 1.12 1.26 1.48 1.73 DPS 0.32 0.48 0.54 0.64 0.74

% change Y/Y 36.5% 19.1% 12.9% 17.4% 16.8% Balance sheet Ratio Analysis TL in millions, year end Dec FY09 FY10 FY11E FY12E FY13E TL in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 1,053 939 936 936 936 EBITDA Margin (%) 24.0% 24.6% 24.0% 24.1% 24.4%Others 6 8 8 8 8 EBIT Margin (%) 17.1% 16.9% 16.5% 16.8% 17.3%Current Assets 2,057 2,141 2,263 2,395 2,543 Net Profit Margin (%) 11.1% 12.1% 12.2% 12.8% 13.4% Intangible assets 357 362 362 362 362 Dividend payout 34.1% 42.9% 42.9% 42.9% 42.9%Net Fixed Assets 1,982 2,044 2,137 2,241 2,357 Total Assets 4,481 4,605 4,820 5,057 5,321 Capex/sales (8.3%) (7.9%) (9.5%) (9.3%) (9.1%) Capex/Depreciation -1.2 -1.0 -1.3 -1.3 -1.3Liabilities Net Working Capital/Sales 16% 18% 18% 18% 18%ST Loans 949 996 996 996 996 Others 273 484 484 484 484 Total Current Liabilities 1,489 1,757 1,812 1,850 1,891 Interest Coverage (x) 26.3 119.8 38.3 87.2 - Net Debt/EBITDA 0.9 0.8 0.6 0.3 0.1Long Term Debt 908 768 583 375 122 Net Debt to Equity 29.4% 29.3% 20.4% 12.2% 4.5%Other Liabilities 265 205 205 205 205 Total Liabilities 2,696 2,774 2,644 2,472 2,261 Sales/Total Assets 0.9 0.9 1.0 1.0 1.1Shareholders' Equity 2,427 2,767 3,092 3,478 3,929 ROCE 21.1% 20.5% 21.4% 23.4% 25.8% Source: Company reports and J.P. Morgan estimates.

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Anheuser Busch InBev: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY10 FY11E FY12E FY13E $ in millions, year end Dec FY10 FY11E FY12E FY13E Revenues 36,297 38,397 40,479 - EBIT 11,165 12,270 13,252 -

% change Y/Y -1.3% 5.8% 5.4% - Depreciation & amortization 2,704 2,832 3,001 - Change in working capital 226 192 202 -EBITDA 13,869 15,101 16,254 - Taxes (1,920) (2,528) (2,888) -

% change Y/Y 6.4% 8.9% 7.6% - Other operating cash flows - - - -EBITDA Margin (%) 38.2% 39.3% 40.2% - Cash Flow from Operations 14,095 15,293 16,456 -

EBIT 11,165 12,270 13,252 - % change Y/Y 8.9% 9.9% 8.0% - Capex (2,344) (2,035) (2,105) -EBIT Margin (%) 30.8% 32.0% 32.7% - Net Interest (2,811) (2,308) (1,928) -

Net Interest (2,811) (2,308) (1,928) - Free Cash Flow 7,782 8,374 9,925 -Earnings before tax 7,161 9,912 11,324 - Disposal/(purchase) 84 0 0 -

% change Y/Y 0.2% 38.4% 14.2% - Tax (1,920) (2,528) (2,888) - Equity raised/ (repaid) 215 0 0 -

as % of EBT 26.0% 25.5% 25.5% - Debt raised/ (repaid) 5,730 5,110 6,271 -Net Income (Analyst) 5,040 6,090 7,038 - Other - - - -

% change Y/Y 28.3% 20.8% 15.6% - Dividends Paid (1,924) (3,264) (3,654) -Shares Outstanding 1,590 1,605 1,605 - EPS (Analyst) - - - - DPS (€) 0.8 1.0 1.2 -

% change Y/Y - - - - Balance sheet Ratio Analysis $ in millions, year end Dec FY10 FY11E FY12E FY13E $ in millions, year end Dec FY10 FY11E FY12E FY13E Cash and cash equivalent 4,511 4,511 4,511 - EBITDA Margin (%) 38.2% 39.3% 40.2% -Others 1,039 1,039 1,039 - EBIT Margin (%) 30.8% 32.0% 32.7% -Current Assets 12,597 12,469 12,334 - Net Profit Margin (%) 13.9% 15.9% 17.4% - LT investments & Intangibles 85,852 85,852 85,852 - Dividend payout - - - -Net Fixed Assets 15,893 15,097 14,200 - Total Assets 114,342 113,418 112,386 - Capex/sales 6.5% 5.3% 5.2% - Capex/Depreciation 0.9 0.7 0.7 -Liabilities Net Working Capital/Sales 1% 0% 0% -ST Loans 2,933 2,933 2,933 - Others 12,787 12,851 12,918 - Total Current Liabilities 15,720 15,784 15,851 - Interest Coverage (x) 4.0 5.3 6.9 - Net Debt/EBITDA 2.9 2.3 1.8 -Long Term Debt 41,961 36,851 30,580 - Net Debt to Equity 95.4% 73.0% 52.2% -Other Liabilities 17,862 17,862 17,862 - Total Liabilities 75,543 70,497 64,293 - Sales/Total Assets 0.3 0.3 0.4 -Shareholders' Equity 38,799 42,921 48,093 - ROCE - - - - Source: Company reports and J.P. Morgan estimates.

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Britvic: Summary of Financials Profit and Loss Statement Cash flow statement £ in millions, year end Sep FY09 FY10 FY11E FY12E FY13E £ in millions, year end Sep FY09 FY10 FY11E FY12E FY13E Revenues 978 1,139 1,326 1,386 - EBIT 110 135 140 156 -

% change Y/Y 5.6% 16.4% 16.4% 4.6% - Depreciation & amortization 43 42 54 56 - Change in working capital 22 (5) 5 (6) -EBITDA 153 177 194 213 - Taxes (22) (29) (31) (36) -

% change Y/Y 9.8% 15.7% 9.4% 9.8% - Other operating cash flows 9 9 8 8 -EBITDA Margin (%) 15.6% 15.5% 14.6% 15.3% - Cash Flow from Operations 184 181 207 215 -

EBIT 110 135 140 156 - % change Y/Y 13.9% 22.3% 3.8% 11.9% - Capex (38) (40) (70) (72) -EBIT Margin (%) 11.3% 11.8% 10.5% 11.3% - Net Interest (25) (25) (29) (28) -

Net Interest (24) (26) (29) (28) - Free Cash Flow 77 75 39 34 -Earnings before tax 66 109 111 128 - Disposal/(purchase) (2) (157) 0 0 -

% change Y/Y 27.8% 64.8% 1.7% 15.6% - Tax (22) (29) (31) (36) - Equity raised/ (repaid) (3) 92 - - -

as % of EBT (25.8%) (26.7%) (28.0%) (28.0%) - Debt raised/ (repaid) 0 55 0 0 -Net Income (Analyst) 64 80 91 104 - Other - - - - -

% change Y/Y 21.1% 24.6% 14.3% 13.6% - Dividends Paid (28) (35) (42) (47) -Shares Outstanding 215 225 239 240 - EPS (Analyst) 29.87 39.79 38.30 43.33 - DPS 15 17 18 20 -

% change Y/Y 20.6% 33.2% (3.7%) 13.1% - Balance sheet Ratio Analysis £ in millions, year end Sep FY09 FY10 FY11E FY12E FY13E £ in millions, year end Sep FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 42 55 53 40 - EBITDA Margin (%) 15.6% 15.5% 14.6% 15.3% -Others 42 55 53 40 - EBIT Margin (%) 11.3% 11.8% 10.5% 11.3% -Current Assets 83 110 105 81 - Net Profit Margin (%) 6.6% 7.0% 6.9% 7.5% - Intangible assets - - - - - Dividend payout 50.2% 42.0% 45.7% 45.0% -Net Fixed Assets 226 249 276 304 - Total Assets 607 709 720 711 - Capex/sales 3.9% 3.5% 5.3% 5.2% - Capex/Depreciation 1.3 1.2 1.7 1.6 -Liabilities Net Working Capital/Sales -6% -3% -3% -3% -ST Loans 0 0 0 0 - Others 303 366 368 366 - Total Current Liabilities 303 366 368 366 - Interest Coverage (x) 4.7 5.3 4.9 5.6 - Net Debt/EBITDA 2.7 2.9 2.7 2.5 -Long Term Debt 451 570 570 570 - Net Debt to Equity -16368.2% -1677.2% 2727.9% 696.0% -Other Liabilities - - - - - Total Liabilities 1,159 1,443 1,431 1,411 - Sales/Total Assets 1.6 1.6 1.8 1.9 -Shareholders' Equity (2) (31) 19 76 - ROCE 20.1% 21.9% - - - Source: Company reports and J.P. Morgan estimates.

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C&C Group: Summary of Financials Profit and Loss Statement Cash flow statement € in millions, year end Feb FY09 FY10 FY11E FY12E FY13E € in millions, year end Feb FY09 FY10 FY11E FY12E FY13E Revenues 514 569 845 842 - EBIT 100 90 104 112 -

% change Y/Y -24.2% 10.6% 48.5% -0.3% - Depreciation & amortization 19 17 29 28 - Change in working capital 27 38 (4) (13) -EBITDA 120 106 134 140 - Taxes (11) (5) (11) (14) -

% change Y/Y -17.7% -11.3% 25.7% 4.9% - Other operating cash flows -61 -17 -32 -13 -EBITDA Margin (%) 23.3% 18.7% 15.8% 16.6% - Cash Flow from Operations 86 127 98 115 -

EBIT 100 90 104 112 - % change Y/Y -19.8% -10.9% 16.3% 7.3% - Capex (18) (5) (12) (6) -EBIT Margin (%) 19.5% 15.7% 12.3% 13.3% - Net Interest (5) (7) (7) (1) -

Net Interest (10) (9) (7) (1) - Free Cash Flow 85 110 55 81 -Earnings before tax -66 79 71 103 - Disposal/(purchase) 13 0 300 0 -

% change Y/Y -127.4% -219.8% -9.7% 44.4% - Tax 4 (8) (11) (14) - Equity raised/ (repaid) 2 2 0 0 -

as % of EBT 12.8% 10.8% 11.5% 12.5% - Debt raised/ (repaid) 40 -140 302 48 -Net Income (Analyst) 70 73 87 98 - Other - - - - -

% change Y/Y -28.6% 5.5% 18.3% 12.9% - Dividends Paid (60) (15) (26) (32) -Shares Outstanding 314 324 336 338 - EPS (Analyst) 0.00 0.00 0.00 0.00 - DPS 0.09 0.06 0.08 0.10 -

% change Y/Y - - - - - Balance sheet Ratio Analysis € in millions, year end Feb FY09 FY10 FY11E FY12E FY13E € in millions, year end Feb FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 83 114 114 114 - EBITDA Margin (%) 23.3% 18.7% 15.8% 16.6% -Others 83 114 114 114 - EBIT Margin (%) 19.5% 15.7% 12.3% 13.3% -Current Assets 166 227 227 227 - Net Profit Margin (%) 13.5% 12.9% 10.3% 11.6% - Intangible assets - - - - - Dividend payout - - - - -Net Fixed Assets 96 187 182 172 - Total Assets 671 954 981 979 - Capex/sales 3.6% 0.9% 1.5% 0.8% - Capex/Depreciation 1.0 0.3 0.4 0.2 -Liabilities Net Working Capital/Sales 7% 3% 2% 4% -ST Loans 0 17 17 17 - Others 65 164 163 159 - Total Current Liabilities 65 181 179 175 - Interest Coverage (x) 9.7 9.7 13.9 82.5 - Net Debt/EBITDA 2.1 3.4 0.5 0.1 -Long Term Debt 309 462 160 111 - Net Debt to Equity 90.6% 109.3% 9.4% 2.0% -Other Liabilities - - - - - Total Liabilities 396 655 352 299 - Sales/Total Assets 0.8 0.6 0.9 0.9 -Shareholders' Equity 250 334 667 726 - ROCE 0.0% 11.6% 8.0% 10.4% - Source: Company reports and J.P. Morgan estimates.

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Campari: Summary of Financials Profit and Loss Statement Cash flow statement € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Revenues 1,008 1,163 1,244 1,326 1,405 EBIT 240 273 296 316 341

% change Y/Y 7.0% 15.3% 7.0% 6.6% 6.0% Depreciation & amortization 25 26 31 32 33 Change in working capital 43 (48) (6) (7) (11)EBITDA 265 299 327 348 374 Taxes (43) (50) (61) (60) (66)

% change Y/Y 20.7% 12.6% 9.4% 6.4% 7.4% Other operating cash flows -7 37 20 21 22EBITDA Margin (%) 26.3% 25.7% 26.3% 26.2% 26.6% Cash Flow from Operations 301 287 340 362 385

EBIT 240 273 296 316 341 % change Y/Y 19.7% 13.8% 8.6% 6.8% 7.7% Capex (55) (41) (33) (28) (31)EBIT Margin (%) 23.8% 23.5% 23.8% 23.9% 24.3% Net Interest (37) (36) (39) (42) (42)

Net Interest (37) (36) (39) (42) (42) Free Cash Flow 167 136 176 200 213Earnings before tax 198 233 257 274 299 Disposal/(purchase) (441) (223) (128) 0 0

% change Y/Y 14.1% 17.5% 10.3% 6.8% 8.9% Tax (61) (76) (79) (84) (92) Equity raised/ (repaid) - - - - -

as % of EBT (30.7%) (32.7%) (30.7%) (30.7%) (30.7%) Debt raised/ (repaid) 0 0 0 0 0Net Income (Analyst) 141 160 178 190 207 Other - - - - -

% change Y/Y 7.4% 13.0% 11.3% 6.8% 8.9% Dividends Paid (32) (35) (38) (42) (46)Shares Outstanding 580 580 580 580 580 EPS (Analyst) - - - - - DPS 0.12 0.06 0.07 0.07 0.08

% change Y/Y - - - - - Balance sheet Ratio Analysis € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 136 261 261 261 261 EBITDA Margin (%) 26.3% 25.7% 26.3% 26.2% 26.6%Others 532 591 611 634 655 EBIT Margin (%) 23.8% 23.5% 23.8% 23.9% 24.3%Current Assets 668 852 872 895 916 Net Profit Margin (%) 14.0% 13.7% 14.3% 14.3% 14.7% Intangible assets - - - - - Dividend payout - - - - -Net Fixed Assets 303 344 347 346 313 Total Assets 2,378 2,651 2,673 2,696 2,684 Capex/sales 5.4% 3.5% 2.7% 2.1% 2.2% Capex/Depreciation 2.2 1.6 1.1 0.9 0.9Liabilities Net Working Capital/Sales 33% 32% 31% 30% 29%ST Loans 42 61 61 61 61 Others 298 313 326 339 352 Total Current Liabilities 340 374 387 400 413 Interest Coverage (x) 6.6 7.7 7.6 7.6 8.2 Net Debt/EBITDA 2.4 1.8 2.1 2.0 1.8Long Term Debt 884 881 881 881 881 Net Debt to Equity 60.0% 42.3% 54.0% 53.6% 54.6%Other Liabilities 108 143 144 144 145 Total Liabilities 1,630 1,711 1,738 1,764 1,790 Sales/Total Assets 0.4 0.4 0.5 0.5 0.5Shareholders' Equity 1,046 1,253 1,261 1,271 1,246 ROCE 10.7% 9.7% 10.3% 11.0% 11.8% Source: Company reports and J.P. Morgan estimates.

74



Carlsberg: Summary of Financials Profit and Loss Statement Cash flow statement Dkr in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Dkr in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Revenues 59,382 60,055 63,982 66,606 - EBIT 9,390 10,249 11,500 12,634 -

% change Y/Y -0.9% 1.1% 6.5% 4.1% - Depreciation & amortization 3,779 3,987 4,147 4,313 - Change in working capital 2,000 150 0 (300) -EBITDA 13,169 14,236 15,646 16,947 - Taxes (1,374) (1,890) (2,452) (2,860) -

% change Y/Y 13.4% 8.1% 9.9% 8.3% - Other operating cash flows - - - - -EBITDA Margin (%) 22.2% 23.7% 24.5% 25.4% - Cash Flow from Operations 15,169 14,386 15,646 16,647 -

EBIT 9,390 10,249 11,500 12,634 - % change Y/Y 17.7% 9.1% 12.2% 9.9% - Capex (2,923) (3,575) (3,626) (3,676) -EBIT Margin (%) 15.8% 17.1% 18.0% 19.0% - Net Interest (1,597) (2,089) (1,595) (1,160) -

Net Interest (2,990) (2,155) (1,845) (1,410) - Free Cash Flow 11,820 9,110 8,914 9,800 -Earnings before tax 6,400 8,094 9,655 11,224 - Disposal/(purchase) - - - - -

% change Y/Y 41.5% 26.5% 19.3% 16.3% - Tax (1,666) (2,009) (2,452) (2,860) - Equity raised/ (repaid) - - - - -

as % of EBT 29.2% 24.8% 26.0% 26.0% - Debt raised/ (repaid) - - - - -Net Income (Analyst) 4,170 5,476 6,497 7,585 - Other (507) (446) (400) (300) -

% change Y/Y 45.0% 31.3% 18.7% 16.7% - Dividends Paid (534) (581) (828) (916) -Shares Outstanding 153 153 153 153 - EPS (Analyst) 27.33 35.90 42.57 49.63 - DPS 3.50 5.00 6.00 7.00 -

% change Y/Y 12.9% 31.3% 18.6% 16.6% - Balance sheet Ratio Analysis Dkr in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Dkr in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 2,734 2,735 2,735 2,735 - EBITDA Margin (%) 22.2% 23.7% 24.5% 25.4% -Others 12,107 12,007 12,007 12,207 - EBIT Margin (%) 15.8% 17.1% 18.0% 19.0% -Current Assets 14,841 14,742 14,742 14,942 - Net Profit Margin (%) 7.0% 9.1% 10.2% 11.4% - Intangible assets 81,611 87,813 87,813 87,813 - Dividend payout 12.8% 13.9% 14.1% 14.1% -Net Fixed Assets 31,825 32,420 29,399 28,763 - Total Assets 134,515 143,451 140,382 139,893 - Capex/sales 4.9% 6.0% 5.7% 5.5% - Capex/Depreciation 0.8 0.9 0.9 0.9 -Liabilities Net Working Capital/Sales - - - - -ST Loans 3,322 3,959 3,959 3,959 - Others 21,638 23,012 23,012 23,112 - Total Current Liabilities 24,960 26,971 26,971 27,071 - Interest Coverage (x) 3.1 4.8 6.2 9.0 - Net Debt/EBITDA 2.7 2.3 1.5 1.0 -Long Term Debt 36,075 32,587 24,071 16,843 - Net Debt to Equity 60.0% 50.9% 34.4% 22.0% -Other Liabilities 35,629 37,130 37,130 37,230 - Total Liabilities 75,026 73,676 65,160 58,032 - Sales/Total Assets - - - - -Shareholders' Equity 59,489 64,345 70,362 77,276 - ROCE 9.5% 10.2% - - - Source: Company reports and J.P. Morgan estimates.

75



CEDC: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E $ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Revenues 1,507 712 945 979 1,014 EBIT 203 128 183 206 221

% change Y/Y -8.5% -52.8% 32.8% 3.6% 3.6% Depreciation & amortization 15 17 18 18 18 Change in working capital 12 (20) (15) (15) (15)EBITDA 269 145 201 224 239 Taxes (29) (21) (10) (17) (21)

% change Y/Y 32.0% -46.2% 38.5% 11.8% 6.5% Other operating cash flows 79 - - - -EBITDA Margin (%) 17.9% 20.4% 21.2% 22.9% 23.5% Cash Flow from Operations 360 124 186 209 224

EBIT 203 128 183 206 221 % change Y/Y 7.0% -37.0% 42.8% 12.9% 7.1% Capex (19) (15) (12) (12) (12)EBIT Margin (%) 13.5% 18.0% 19.3% 21.1% 21.8% Net Interest (68) (84) (107) (102) (97)

Net Interest (68) (101) (107) (102) (97) Free Cash Flow 74 14 70 78 94Earnings before tax 155 28 76 104 124 Disposal/(purchase) (1,051) (12) (74) 0 0

% change Y/Y 881.3% -82.2% 173.7% 37.8% 18.8% Tax (29) (5) (16) (22) (26) Equity raised/ (repaid) 455 - - - -

as % of EBT 19.0% 17.5% 21.0% 21.0% 21.0% Debt raised/ (repaid) -494 111 -17 78 94Net Income (Analyst) 128 39 60 82 98 Other - - - - -

% change Y/Y -871.0% -69.7% 54.2% 37.8% 18.8% Dividends Paid - - - - -Shares Outstanding 58 71 72 72 72 EPS (Analyst) - 0.55 0.84 1.15 1.37 DPS - - - - -

% change Y/Y - - 52.3% 37.8% 18.8% Balance sheet Ratio Analysis $ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E $ in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 126 122 122 122 122 EBITDA Margin (%) 17.9% 20.4% 21.2% 22.9% 23.5%Others 1,449 691 573 604 639 EBIT Margin (%) 13.5% 18.0% 19.3% 21.1% 21.8%Current Assets 1,575 813 696 726 762 Net Profit Margin (%) 8.5% 5.4% 6.3% 8.4% 9.6% Intangible assets 773 627 699 698 697 Dividend payout - - - - -Net Fixed Assets 2,091 1,956 2,001 2,049 2,100 Total Assets 4,439 3,396 3,396 3,473 3,558 Capex/sales 1.2% 2.1% 1.3% 1.2% 1.2% Capex/Depreciation 1.4 0.9 0.7 0.7 0.7Liabilities Net Working Capital/Sales -1% 3% 2% 2% 1%ST Loans 82 45 45 45 45 Others 204 171 171 171 171 Total Current Liabilities 1,218 408 390 395 403 Interest Coverage (x) 3.0 1.3 1.7 2.0 2.3 Net Debt/EBITDA 3.7 4.9 4.5 3.8 3.3Long Term Debt 1,332 1,251 1,268 1,190 1,096 Net Debt to Equity 76.4% 75.0% 76.0% 64.8% 54.0%Other Liabilities 204 171 171 171 171 Total Liabilities 1,491 1,345 1,362 1,283 1,190 Sales/Total Assets 0.3 0.2 0.3 0.3 0.3Shareholders' Equity 1,685 1,565 1,566 1,717 1,888 ROCE - - - - - Source: Company reports and JPMorgan estimates.

76



Coca-Cola Hellenic: Summary of Financials Profit and Loss Statement Cash flow statement € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Revenues 6,544 6,794 7,102 7,558 - EBIT 639 645 700 772 -

% change Y/Y -6.3% 3.8% 4.5% 6.4% - Depreciation & amortization 368 395 365 365 - Change in working capital (123) (79) 94 15 -EBITDA 1,006 1,040 1,065 1,136 - Taxes (89) (141) 0 0 -

% change Y/Y 17.5% 3.3% 2.4% 6.7% - Other operating cash flows - - - - -EBITDA Margin (%) 15.4% 15.3% 15.0% 15.0% - Cash Flow from Operations 884 961 1,159 1,151 -

EBIT 639 645 700 772 - % change Y/Y 31.4% 1.0% 8.5% 10.2% - Capex (452) (422) (533) (567) -EBIT Margin (%) 9.8% 9.5% 9.9% 10.2% - Net Interest (75) (72) 0 0 -

Net Interest (73) (76) (90) (85) - Free Cash Flow 302 439 501 443 -Earnings before tax 564 572 612 689 - Disposal/(purchase) (366) (380) (421) (421) -

% change Y/Y 49.3% 1.4% 7.0% 12.5% - Tax (142) (137) (131) (147) - Equity raised/ (repaid) - - - - -

as % of EBT 25.3% 23.9% 21.4% 21.4% - Debt raised/ (repaid) -308 -264 0 0 -Net Income (Analyst) 422 435 481 541 - Other - - - - -

% change Y/Y 55.3% 3.2% 10.6% 12.5% - Dividends Paid (108) (109) (113) (125) -Shares Outstanding - - - - - EPS (Analyst) - - - - - DPS - - - - -

% change Y/Y - - - - - Balance sheet Ratio Analysis € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 232 326 326 326 - EBITDA Margin (%) 15.4% 15.3% 15.0% 15.0% -Others 1,748 1,930 1,972 2,085 - EBIT Margin (%) 9.8% 9.5% 9.9% 10.2% -Current Assets 3,497 3,859 3,944 4,162 - Net Profit Margin (%) 6.4% 6.4% 6.8% 7.2% - Intangible assets 1,874 1,967 1,967 1,967 - Dividend payout - - - - -Net Fixed Assets 2,961 3,123 3,291 3,493 - Total Assets 8,545 9,161 9,414 9,834 - Capex/sales (6.9%) (6.2%) (7.5%) (7.5%) - Capex/Depreciation -1.3 -1.1 -1.5 -1.6 -Liabilities Net Working Capital/Sales 3% 2% 3% 3% -ST Loans 307 535 259 259 - Others 1,336 1,501 1,450 1,540 - Total Current Liabilities 1,643 2,036 1,709 1,799 - Interest Coverage (x) 8.8 8.5 7.8 9.1 - Net Debt/EBITDA 2.1 1.8 1.7 1.4 -Long Term Debt 2,101 1,656 1,656 1,656 - Net Debt to Equity 80.6% 58.2% 44.6% 40.0% -Other Liabilities 458 443 443 443 - Total Liabilities 4,201 4,136 3,808 3,898 - Sales/Total Assets 0.8 0.7 0.8 0.8 -Shareholders' Equity 2,596 3,096 3,453 3,859 - ROCE - - - - - Source: Company reports and J.P. Morgan estimates.

77



Coca-Cola Icecek: Summary of Financials Profit and Loss Statement Cash flow statement TL in millions, year end Dec FY09 FY10 FY11E FY12E FY13E TL in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Revenues 2,408 2,753 3,192 3,691 4,247 EBIT 208 281 320 381 444

% change Y/Y 6.6% 14.4% 15.9% 15.6% 15.1% Depreciation & amortization 132 147 179 225 279 Change in working capital (26) (1) (62) (52) (56)EBITDA 340 429 499 606 724 Taxes (23) (60) (64) (77) (88)

% change Y/Y -5.8% 26.3% 16.3% 21.5% 19.4% Other operating cash flows - - - - -EBITDA Margin (%) 14.1% 15.6% 15.6% 16.4% 17.0% Cash Flow from Operations 314 428 437 554 668

EBIT 208 281 320 381 444 % change Y/Y -18.2% 35.5% 13.6% 19.3% 16.6% Capex (131) (160) (383) (406) (425)EBIT Margin (%) 8.6% 10.2% 10.0% 10.3% 10.5% Net Interest (35) (48) (22) (15) (10)

Net Interest (11) (9) (22) (15) (10) Free Cash Flow 103 78 (32) 56 144Earnings before tax 215 255 303 371 439 Disposal/(purchase) (80) (68) (68) (68) (68)

% change Y/Y 110.6% 18.5% 18.6% 22.7% 18.4% Tax (39) (56) (64) (77) (88) Equity raised/ (repaid) 0 0 0 0 0

as % of EBT 18.1% 22.1% 21.1% 20.6% 20.1% Debt raised/ (repaid) 259 -49 0 0 0Net Income (Analyst) 170 198 238 294 350 Other - - - - -

% change Y/Y 108.4% 16.5% 20.3% 23.5% 19.2% Dividends Paid (16) (50) (70) (71) (88)Shares Outstanding 254 254 254 254 254 EPS (Analyst) 0.67 0.78 0.93 1.15 1.38 DPS 0.20 0.28 0.28 0.35 0.41

% change Y/Y 108.4% 16.5% 20.3% 23.5% 19.2% Balance sheet Ratio Analysis TL in millions, year end Dec FY09 FY10 FY11E FY12E FY13E TL in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 585 599 322 240 228 EBITDA Margin (%) 14.1% 15.6% 15.6% 16.4% 17.0%Others 185 260 301 348 401 EBIT Margin (%) 8.6% 10.2% 10.0% 10.3% 10.5%Current Assets 1,186 1,294 1,136 1,171 1,288 Net Profit Margin (%) 7.0% 7.2% 7.4% 8.0% 8.2% Intangible assets 450 459 468 478 490 Dividend payout 29.5% 35.4% 30.0% 30.0% 30.0%Net Fixed Assets 1,190 1,203 1,412 1,598 1,749 Total Assets 2,864 3,014 3,076 3,308 3,588 Capex/sales (5.4%) (5.8%) (12.0%) (11.0%) (10.0%) Capex/Depreciation -1.0 -1.1 -2.2 -1.8 -1.6Liabilities Net Working Capital/Sales 14% 12% 12% 12% 12%ST Loans 904 628 628 628 628 Others 152 154 179 207 238 Total Current Liabilities 1,138 881 922 968 1,019 Interest Coverage (x) 19.4 32.3 14.5 25.4 44.4 Net Debt/EBITDA 2.1 1.5 1.9 1.7 1.4Long Term Debt 385 618 618 618 618 Net Debt to Equity 54.0% 44.0% 61.0% 59.1% 52.6%Other Liabilities 32 39 39 39 39 Total Liabilities 1,594 1,579 1,599 1,645 1,696 Sales/Total Assets 0.8 0.9 1.0 1.1 1.2Shareholders' Equity 1,286 1,453 1,496 1,682 1,913 ROCE 11.0% 14.1% 13.4% 14.8% 15.9% Source: Company reports and J.P. Morgan estimates.

78



Diageo: Summary of Financials Profit and Loss Statement Cash flow statement £ in millions, year end Jun FY09 FY10 FY11E FY12E FY13E £ in millions, year end Jun FY09 FY10 FY11E FY12E FY13E Revenues 9,311 9,780 10,150 10,586 11,132 EBIT 2,591 2,751 2,923 3,093 3,320

% change Y/Y 15.1% 5.0% 3.8% 4.3% 5.2% Depreciation & amortization 300 372 379 398 414 Change in working capital (253) 334 100 (125) (140)EBITDA 2,891 3,123 3,303 3,492 3,735 Taxes (522) (474) (589) (648) (715)

% change Y/Y 14.0% 8.0% 5.8% 5.7% 7.0% Other operating cash flows 91 -203 -144 -40 15EBITDA Margin (%) 31.0% 31.9% 32.5% 33.0% 33.5% Cash Flow from Operations 2,729 3,254 3,259 3,327 3,610

EBIT 2,591 2,751 2,923 3,093 3,320 % change Y/Y 12.5% 6.2% 6.3% 5.8% 7.3% Capex (355) (374) (404) (428) (441)EBIT Margin (%) 27.8% 28.1% 28.8% 29.2% 29.8% Net Interest (415) (305) (409) (331) (278)

Net Interest (592) (462) (409) (331) (278) Free Cash Flow 1,278 2,067 1,856 1,919 2,176Earnings before tax 1,993 2,239 2,633 2,947 3,249 Disposal/(purchase) (111) (105) 0 0 0

% change Y/Y -4.8% 12.3% 17.6% 11.9% 10.2% Tax (292) (477) (589) (648) (715) Equity raised/ (repaid) (392) 85 0 0 0

as % of EBT (14.4%) (21.3%) (22.0%) (22.0%) (22.0%) Debt raised/ (repaid) -43 974 793 780 941Net Income (Analyst) 1,767 1,840 1,959 2,156 2,378 Other - - - - -

% change Y/Y 13.0% 4.1% 6.4% 10.1% 10.3% Dividends Paid (870) (914) (1,013) (1,090) (1,185)Shares Outstanding 2,485 2,486 2,509 2,521 2,526 EPS (Analyst) 70.64 73.53 77.56 84.94 93.53 DPS 36 38 40 43 47

% change Y/Y 16.6% 4.1% 5.5% 9.5% 10.1% Balance sheet Ratio Analysis £ in millions, year end Jun FY09 FY10 FY11E FY12E FY13E £ in millions, year end Jun FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 1,012 1,012 1,012 1,012 1,012 EBITDA Margin (%) 31.0% 31.9% 32.5% 33.0% 33.5%Others 5,193 4,584 4,402 4,630 4,885 EBIT Margin (%) 27.8% 28.1% 28.8% 29.2% 29.8%Current Assets 6,205 5,596 5,414 5,642 5,897 Net Profit Margin (%) 19.0% 18.8% 19.3% 20.4% 21.4% Intangible assets 6,215 6,215 6,215 6,215 6,215 Dividend payout 51.1% 51.8% 52.1% 50.9% 50.1%Net Fixed Assets 2,305 2,413 2,437 2,467 2,494 Total Assets 17,475 17,004 16,882 17,180 17,507 Capex/sales 3.8% 3.8% 4.0% 4.0% 4.0% Capex/Depreciation 1.2 1.0 1.1 1.1 1.1Liabilities Net Working Capital/Sales 31% 26% - - -ST Loans 890 890 890 890 890 Others 2,345 2,070 1,988 2,091 2,206 Total Current Liabilities 3,235 2,960 2,878 2,981 3,096 Interest Coverage (x) 4.4 6.0 7.1 9.3 11.9 Net Debt/EBITDA 2.6 2.1 1.8 1.4 1.1Long Term Debt 7,685 4,687 3,894 3,114 2,173 Net Debt to Equity 192.1% 139.8% 105.0% 76.7% 52.6%Other Liabilities 2,619 2,619 2,569 2,519 2,469 Total Liabilities 13,539 10,266 9,340 8,614 7,738 Sales/Total Assets 0.5 0.6 0.6 0.6 0.6Shareholders' Equity 3,222 4,000 4,803 5,827 7,029 ROCE 18.5% 18.5% 21.7% - - Source: Company reports and J.P. Morgan estimates.

79



Heineken: Summary of Financials Profit and Loss Statement Cash flow statement € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Revenues 14,701 16,133 17,059 17,422 17,963 EBIT 2,095 2,608 2,921 3,088 3,277

% change Y/Y 2.7% 9.7% 5.7% 2.1% 3.1% Depreciation & amortization 1,083 1,118 1,158 1,198 1,234 Change in working capital 220 454 (40) (30) (50)EBITDA 3,178 3,726 4,079 4,286 4,511 Taxes (245) (443) (632) (687) (760)

% change Y/Y 1.3% 17.2% 9.5% 5.1% 5.2% Other operating cash flows 163 -102 128 205 281EBITDA Margin (%) 21.6% 23.1% 23.9% 24.6% 25.1% Cash Flow from Operations 3,561 4,078 4,167 4,461 4,742

EBIT 2,095 2,608 2,921 3,088 3,277 % change Y/Y 8.4% 24.5% 12.0% 5.7% 6.1% Capex (777) (704) (850) (1,045) (1,221)EBIT Margin (%) 14.3% 16.2% 17.1% 17.7% 18.2% Net Interest (467) (539) (453) (436) (371)

Net Interest (329) (509) (453) (436) (371) Free Cash Flow 1,741 1,993 1,832 1,885 1,966Earnings before tax 1,428 1,967 2,296 2,500 2,764 Disposal/(purchase) 31 370 0 0 0

% change Y/Y 140.0% 37.7% 16.7% 8.9% 10.6% Tax (373) (517) (640) (690) (760) Equity raised/ (repaid) (13) (381) (355) (320) 0

as % of EBT 25.0% 27.3% 27.5% 27.5% 27.5% Debt raised/ (repaid) -1,119 -1,321 -1,000 -1,040 -1,384Net Income (Analyst) 1,055 1,445 1,685 1,806 1,983 Other (68) (65) 0 0 0

% change Y/Y 4.1% 37.0% 16.6% 7.2% 9.8% Dividends Paid (392) (483) (477) (526) (583)Shares Outstanding 489 563 571 572 576 EPS (Analyst) 2.16 2.56 2.95 3.16 3.44 DPS 0.62 0.76 0.84 0.92 -

% change Y/Y 4.2% 18.8% 15.0% 7.1% 8.9% Balance sheet Ratio Analysis € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E € in millions, year end Dec FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 379 495 495 495 495 EBITDA Margin (%) 21.6% 23.1% 23.9% 24.6% 25.1%Others 3,509 3,685 3,712 3,732 3,765 EBIT Margin (%) 14.3% 16.2% 17.1% 17.7% 18.2%Current Assets 3,888 4,180 4,207 4,227 4,260 Net Profit Margin (%) 7.2% 9.0% 9.9% 10.4% 11.0% Intangible assets - - - - - Dividend payout 28.7% 29.6% 28.3% 29.1% -Net Fixed Assets 6,017 7,687 7,379 7,227 7,214 Total Assets 20,024 26,417 26,136 26,003 26,024 Capex/sales 5.3% 4.4% 5.0% 6.0% 6.8% Capex/Depreciation 0.8 0.7 0.8 1.0 1.1Liabilities Net Working Capital/Sales -1% -4% -3% -3% -3%ST Loans 1,145 862 862 862 862 Others 3,696 4,265 4,252 4,242 4,225 Total Current Liabilities 4,841 5,127 5,114 5,104 5,087 Interest Coverage (x) 6.4 5.1 6.5 7.1 8.8 Net Debt/EBITDA 2.6 2.3 1.8 1.5 1.1Long Term Debt 7,401 8,078 7,078 6,038 4,654 Net Debt to Equity 137.4% 78.2% 63.7% 50.2% 35.0%Other Liabilities 2,431 2,984 3,128 3,283 3,446 Total Liabilities 14,673 16,189 15,319 14,425 13,188 Sales/Total Assets 0.7 0.6 0.7 0.7 0.7Shareholders' Equity 5,647 10,517 11,250 12,167 13,588 ROCE 10.7% 13.5% 11.9% 12.7% 13.2% Source: Company reports and J.P. Morgan estimates.

80



Pernod-Ricard SA: Summary of Financials Profit and Loss Statement Cash flow statement € in millions, year end Jun FY09 FY10 FY11E FY12E FY13E € in millions, year end Jun FY09 FY10 FY11E FY12E FY13E Revenues 7,203 7,081 7,544 8,099 8,625 EBIT 1,846 1,795 1,916 2,117 2,308

% change Y/Y 9.3% -1.7% 6.5% 7.4% 6.5% Depreciation & amortization 157 159 163 169 176 Change in working capital 246 (48) (150) (110) (86)EBITDA 2,003 1,954 2,079 2,286 2,484 Taxes (108) (223) (331) (383) (435)

% change Y/Y 18.7% -2.5% 6.4% 10.0% 8.7% Other operating cash flows -300 0 0 0 0EBITDA Margin (%) 27.8% 27.6% 27.6% 28.2% 28.8% Cash Flow from Operations 1,949 1,906 1,929 2,176 2,398

EBIT 1,846 1,795 1,916 2,117 2,308 % change Y/Y 21.3% -2.8% 6.7% 10.5% 9.0% Capex 239 (163) (193) (193) (199)EBIT Margin (%) 25.6% 25.3% 25.4% 26.1% 26.8% Net Interest (619) (446) (446) (442) (416)

Net Interest (619) (446) (446) (442) (416) Free Cash Flow 1,341 1,026 959 1,158 1,348Earnings before tax 1,067 1,200 1,440 1,665 1,892 Disposal/(purchase) (5,351) 103 0 0 0

% change Y/Y -2.3% 12.5% 20.0% 15.7% 13.6% Tax (204) (271) (331) (383) (435) Equity raised/ (repaid) 1,007 - - - -

as % of EBT 16.6% 20.9% 23.0% 23.0% 23.0% Debt raised/ (repaid) -3,323 220 1,293 795 935Net Income (Analyst) 1,010 1,001 1,083 1,255 1,429 Other - - - - -

% change Y/Y 12.6% -0.9% 8.2% 15.9% 13.8% Dividends Paid (301) (123) (316) (363) (413)Shares Outstanding 226 255 255 255 255 EPS (Analyst) 4.27 3.78 4.09 4.74 5.39 DPS 0.50 1.34 1.24 1.42 1.62

% change Y/Y 3.4% (11.5%) 8.2% 15.9% 13.8% Balance sheet Ratio Analysis € in millions, year end Jun FY09 FY10 FY11E FY12E FY13E € in millions, year end Jun FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 520 520 520 520 520 EBITDA Margin (%) 27.8% 27.6% 27.6% 28.2% 28.8%Others 6,104 6,001 6,001 6,001 6,001 EBIT Margin (%) 25.6% 25.3% 25.4% 26.1% 26.8%Current Assets 1,040 1,040 1,040 1,040 1,040 Net Profit Margin (%) 14.0% 14.1% 14.4% 15.5% 16.6% Intangible assets - - - - - Dividend payout 11.7% 35.5% 30.2% 30.0% 30.0%Net Fixed Assets 1,757 1,761 1,791 1,815 1,838 Total Assets 20,289 20,190 20,220 20,244 20,267 Capex/sales (3.3%) 2.3% 2.6% 2.4% 2.3% Capex/Depreciation -1.5 1.0 1.2 1.1 1.1Liabilities Net Working Capital/Sales 41% 43% 42% 41% 39%ST Loans 366 366 366 366 366 Others 1,540 1,514 1,489 1,462 1,434 Total Current Liabilities 1,906 1,880 1,855 1,828 1,800 Interest Coverage (x) 3.0 4.0 4.3 4.8 5.6 Net Debt/EBITDA 5.3 5.4 4.5 3.7 3.0Long Term Debt 10,855 10,738 9,445 8,650 7,715 Net Debt to Equity 140.5% 137.8% 101.5% 84.3% 68.0%Other Liabilities - - - - - Total Liabilities 15,163 15,046 13,753 12,958 12,023 Sales/Total Assets 0.4 0.4 0.4 0.4 0.4Shareholders' Equity 7,431 7,469 8,917 9,819 10,835 ROCE 10.2% 7.8% 8.5% 9.3% 10.0% Source: Company reports and J.P. Morgan estimates.

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Remy Cointreau SA: Summary of Financials Profit and Loss Statement Cash flow statement € in millions, year end Mar FY09 FY10 FY11E FY12E FY13E € in millions, year end Mar FY09 FY10 FY11E FY12E FY13E Revenues 714 808 908 981 1,050 EBIT 137 140 166 197 225

% change Y/Y -12.7% 13.2% 12.4% 8.0% 7.1% Depreciation & amortization 15 16 25 27 29 Change in working capital 3 12 (30) (15) (17)EBITDA 157 162 191 225 255 Taxes 28 (54) (39) (49) (58)

% change Y/Y -15.0% 3.0% 18.1% 17.9% 13.3% Other operating cash flows -214 -4 0 0 0EBITDA Margin (%) 22.0% 20.0% 21.0% 22.9% 24.3% Cash Flow from Operations (54) 170 161 210 238

EBIT 137 140 166 197 225 % change Y/Y -13.8% 2.2% 18.4% 19.2% 14.2% Capex (37) (36) (23) (23) (23)EBIT Margin (%) 19.2% 17.3% 18.2% 20.1% 21.5% Net Interest (31) (22) (25) (18) (15)

Net Interest (31) (22) (25) (18) (15) Free Cash Flow (34) 57 74 119 142Earnings before tax 106 118 141 179 210 Disposal/(purchase) 66 4 0 0 0

% change Y/Y -6.6% 11.3% 19.7% 27.1% 17.3% Tax (38) (29) (39) (49) (58) Equity raised/ (repaid) (1) 3 1 1 1

as % of EBT (31.1%) (26.4%) (28.0%) (27.5%) (27.5%) Debt raised/ (repaid) 82 -25 -35 -76 -94Net Income (Analyst) 86 91 105 135 158 Other - - - - -

% change Y/Y -8.2% 5.4% 16.0% 27.8% 17.3% Dividends Paid (39) (38) (41) (45) (50)Shares Outstanding 47 48 48 48 48 EPS (Analyst) 0.00 0.00 0.00 0.00 0.00 DPS 1.30 1.30 1.43 1.57 1.73

% change Y/Y - - - - - Balance sheet Ratio Analysis € in millions, year end Mar FY09 FY10 FY11E FY12E FY13E € in millions, year end Mar FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 89 86 121 197 291 EBITDA Margin (%) 22.0% 20.0% 21.0% 22.9% 24.3%Others 1,257 1,229 1,256 1,271 1,288 EBIT Margin (%) 19.2% 17.3% 18.2% 20.1% 21.5%Current Assets 1,347 1,316 1,377 1,468 1,579 Net Profit Margin (%) 12.1% 11.2% 11.6% 13.7% 15.0% Intangible assets - - - - - Dividend payout - - - - -Net Fixed Assets 197 209 206 201 195 Total Assets 2,319 2,317 2,383 2,476 2,587 Capex/sales 5.2% 4.4% 2.5% 2.3% 2.2% Capex/Depreciation 1.9 1.6 0.9 0.8 0.8Liabilities Net Working Capital/Sales 110% 96% 89% 84% 80%ST Loans 29 50 (71) 0 0 Others 470 432 553 482 482 Total Current Liabilities 499 482 482 482 482 Interest Coverage (x) 4.4 6.3 6.7 10.7 14.6 Net Debt/EBITDA 3.4 3.1 2.4 1.7 1.2Long Term Debt 592 538 538 391 297 Net Debt to Equity 54.9% 49.2% 38.7% 28.4% 18.8%Other Liabilities - - - - - Total Liabilities 1,322 1,248 1,248 1,101 1,008 Sales/Total Assets 0.3 0.3 0.4 0.4 0.4Shareholders' Equity 971 1,018 1,207 1,378 1,585 ROCE 8.8% 7.5% 5.2% 9.1% 8.7% Source: Company reports and J.P. Morgan estimates.

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SABMiller: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Mar FY09 FY10 FY11E FY12E FY13E $ in millions, year end Mar FY09 FY10 FY11E FY12E FY13E Revenues 20,919 21,783 23,177 24,816 26,382 EBIT 4,129 4,381 4,993 5,567 6,029

% change Y/Y 7.4% 4.1% 6.4% 7.1% 6.3% Depreciation & amortization 626 655 694 715 737 Change in working capital (497) 542 150 100 50EBITDA 4,958 5,262 5,916 6,515 7,003 Taxes (766) (620) (1,054) (1,269) (1,476)

% change Y/Y -0.6% 6.1% 12.4% 10.1% 7.5% Other operating cash flows - - - - -EBITDA Margin (%) 23.7% 24.2% 25.5% 26.3% 26.5% Cash Flow from Operations 4,461 5,804 6,066 6,615 7,053

EBIT 4,129 4,381 4,993 5,567 6,029 % change Y/Y -0.3% 6.1% 14.0% 11.5% 8.3% Capex (2,073) (1,436) (1,300) (1,200) (1,200)EBIT Margin (%) 19.7% 20.1% 21.5% 22.4% 22.9% Net Interest (722) (640) (593) (500) (400)

Net Interest (724) (578) (593) (500) (400) Free Cash Flow 502 2,499 2,377 3,135 3,546Earnings before tax 3,405 3,803 4,400 5,067 5,629 Disposal/(purchase) (152) (78) (15) 0 0

% change Y/Y -6.4% 11.7% 15.7% 15.2% 11.1% Tax (1,028) (1,084) (1,254) (1,419) (1,576) Equity raised/ (repaid) 23 114 50 25 25

as % of EBT 30.2% 28.5% 28.5% 28.0% 28.0% Debt raised/ (repaid) - - - - -Net Income (Analyst) 2,065 2,507 2,971 3,447 3,829 Other - - - - -

% change Y/Y -3.8% 21.4% 18.5% 16.0% 11.1% Dividends Paid (1,094) (1,084) (1,227) (1,404) (1,612)Shares Outstanding 1,502 1,558 1,580 1,585 1,590 EPS (Analyst) 1.37 1.61 1.88 2.17 2.41 DPS 1 1 1 1 1

% change Y/Y (4.0%) 17.0% 16.9% 15.7% 10.7% Balance sheet Ratio Analysis $ in millions, year end Mar FY09 FY10 FY11E FY12E FY13E $ in millions, year end Mar FY09 FY10 FY11E FY12E FY13E Cash and cash equivalent 409 409 409 409 - EBITDA Margin (%) 23.7% 24.2% 25.5% 26.3% 26.5%Others - - - - - EBIT Margin (%) 19.7% 20.1% 21.5% 22.4% 22.9%Current Assets 3,227 2,685 2,535 2,435 - Net Profit Margin (%) 9.9% 11.5% 12.8% 13.9% 14.5% Intangible assets 12,463 12,352 12,119 11,880 - Dividend payout 42.2% 42.3% 41.5% 41.4% 41.1%Net Fixed Assets 7,404 7,837 8,149 8,336 - Total Assets 31,619 31,744 31,728 31,642 - Capex/sales - - - - - Capex/Depreciation 3.3 2.2 1.9 1.7 -Liabilities Net Working Capital/Sales - - - - -ST Loans 2,148 2,148 2,148 2,148 - Others 965 944 944 944 - Total Current Liabilities 6,300 6,279 6,279 6,279 - Interest Coverage (x) 5.7 7.6 8.4 11.1 15.1 Net Debt/EBITDA - - - - -Long Term Debt 7,597 7,286 6,528 4,697 - Net Debt to Equity 60.7% 57.1% 49.6% 34.7% -Other Liabilities - - - - - Total Liabilities 15,506 15,174 14,416 12,585 - Sales/Total Assets - - - - -Shareholders' Equity 15,375 15,820 16,664 18,526 - ROCE - - - - - Source: Company reports and J.P. Morgan estimates.

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Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

• Market Maker: JPMS makes a market in the stock of CEDC. • Market Maker/ Liquidity Provider: J.P. Morgan Securities Ltd. is a market maker and/or liquidity provider in Anadolu Efes,

Anheuser Busch InBev, Britvic, C&C Group, Campari, Carlsberg, CEDC, Coca-Cola Hellenic, Coca-Cola Icecek, Diageo, Heineken, Pernod-Ricard SA, Remy Cointreau SA, SABMiller.

• Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Anheuser Busch InBev, C&C Group, Diageo, Heineken, Pernod-Ricard SA within the past 12 months.

• Beneficial Ownership (1% or more): J.P. Morgan beneficially owns 1% or more of a class of common equity securities of Britvic. • Client of the Firm: Anadolu Efes is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the

company investment banking services and non-investment banking securities-related service. Anheuser Busch InBev is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. C&C Group is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services. Campari is or was in the past 12 months a client of JPM. Carlsberg is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service and non-securities-related services. CEDC is or was in the past 12 months a client of JPM. Coca-Cola Hellenic is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service and non-securities-related services. Coca-Cola Icecek is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service. Diageo is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Heineken is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Pernod-Ricard SA is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Remy Cointreau SA is or was in the past 12 months a client of JPM. SABMiller is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services.

• Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services from Anadolu Efes, Anheuser Busch InBev, C&C Group, Diageo, Heineken, Pernod-Ricard SA, SABMiller.

• Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Anadolu Efes, Anheuser Busch InBev, C&C Group, Campari, CEDC, Diageo, Heineken, Pernod-Ricard SA, SABMiller.

• Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other than investment banking from Anadolu Efes, Anheuser Busch InBev, Carlsberg, Coca-Cola Hellenic, Coca-Cola Icecek, Diageo, Heineken, Pernod-Ricard SA, SABMiller. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from Anheuser Busch InBev, Carlsberg, Coca-Cola Hellenic, Diageo, Heineken, Pernod-Ricard SA, SABMiller.

• Broker: J.P. Morgan Securities Ltd. acts as Corporate Broker to SABMiller.

Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan’s website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406)

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s

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coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Mike J Gibbs: Anheuser Busch InBev (ABI.BR), Anheuser-Busch InBev (ADR) (BUD), C&C Group (GCC.I), Campari (CPRI.MI), Coca-Cola Hellenic (HLBr.AT), Heineken (HEIN.AS), Pernod-Ricard SA (PERP.PA), Remy Cointreau SA (RCOP.PA)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2011

Overweight (buy)

Neutral (hold)

Underweight (sell)

J.P. Morgan Global Equity Research Coverage 47% 42% 11% IB clients* 50% 45% 33% JPMS Equity Research Coverage 43% 49% 8% IB clients* 70% 62% 56%

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.

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solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

“Other Disclosures” last revised January 8, 2011.

Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.#$J&098$#*P

Europe Equity Research 03 December 2010

European Beverages

Back to the basics in beer part 2: where will the cash go

Beverages

Mike J GibbsAC

(44-20) 7325-1205 [email protected]




For Specialist Sales Advice, please contact: Natasha Cobden (44-20) 7325 3092 [email protected]

Equity Ratings and Price Targets Mkt Cap Price RatingCompany Symbol ($ mn) Currency Price Cur Anheuser Busch InBev ABI.BR 90,189.4 EUR 42.80 OW Carlsberg A/S CARLb.CO 14,749.6 DKK 547.00 OW Heineken HEIN.AS 27,225.9 EUR 35.98 N SABMiller plc SAB.L 51,481.1 GBp 2,083 OW Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 01 Dec 10.

See page 80 for analyst certification and important disclosures, including non-US aJ.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, inveshave a conflict of interest that could affect the objectivity of this report. Investors should consider this report asinvestment decision.

• The major European brewers look poised to generate free cashflow of US$ 13.4bn in CY11E up from just US$ 1.35bn in CY01. Debt paydown is still the overriding priority but “optimal” levels of gearing are now on the horizon (below 2.5x ND/EBITDA for Heineken and Carlsberg at end FY10E and below 2x for ABI in mid FY12E). We think capex to sales ratios have fallen to a sustainable 5-6% of sales in the medium term.

• We think prospective M&A for these brewers can be financed out of cashflows. We think the change of Board membership at Modelo makes a full combination with ABI less likely in the near term, despite the strategic and financial attractions (high single digit medium term earnings accretion on our scenario analysis). We believe ABI could acquire a scale “asset” for US$ 60bn in FY12E at a multiple of 12.5x EBITDA pre synergies and still leave net debt/EBITDA at around 4.2x. We believe a full combination with Castel/BGI in Africa for SABMiller, which we estimate would cost US$11bn , would be very attractive strategically. Carlsberg may invest further in Asia but we do not see Heineken extending its equity stakes in its major partnerships in emerging markets even though these drive its top line growth.

• For ABI to deliver a 3% dividend yield in CY11E would only add a negligible 0.1x “turn” to net debt/EBITDA. We do not envisage any change to the level of SABMiller’s dividend payout. Given Carlsberg’s FCF yield (9.7% in FY11E) any change in policy could herald a very meaningful payout for investors. Heineken’s share buyback to deliver the ADSI shares to Group FEMSA will soak up free cashflow through to mid FY12E, and from mid FY13E Group FEMSA can start selling.

• Our 2011DCF derived price targets are ABI €51, Carlsberg DKK 650, Heineken €38 and SABMiller 2290p. This equates to 19% upside for ABI and Carlsberg, 6% upside for Heineken and 10% upside for SABMiller. In contrast for the large cap spirits stocks we have downside of 8% for Diageo and just 1% upside for Pernod Ricard. Although we see limited near term earnings momentum for the brewers we would still resist the temptation to shift into large cap spirits stocks until the pricing outlook in spirits is much clearer. We still see superior earnings growth overall for brewers in CY11E, 19% for ABI, 16% for SABMiller, 14% for Carlsberg and 13% for Heineken.

Table 1: Top 20 global brewers 2009PFmn hls

2009 Anheuser Busch InBev 347.5 SABMiller 243.8 Heineken 202.1 Carlsberg 120.3 Tsingtao Group 59.1 Molson Coors 55.0 Modelo 51.7 Beijing Yanjing 46.7 Kirin 33.2 Asahi 29.8 Diageo (Guinness) 22.7 Anadolu Group (EFES) 22.2 Castel/BGI 21.7 San Miguel 20.9 Henan Gold Star (Jingxing) 19.0 Polar 17.0 Chongqing 16.7 Schincariol 15.0 Radeberger Group 14.7 CVC StarBev 14.5 Source: Plato Logic

Price Target Prev Cur Prev

n/c 51.00 50.00n/c 650.00 n/cn/c 38.00 n/cn/c 2,290 n/c

nalyst disclosures. tors should be aware that the firm may only a single factor in making their

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Table of Contents Executive Summary .................................................................3 The cash is coming … quickly ................................................9 Capex can be contained at a lower level ..............................13 The potential consolidation opportunities ...........................16 The potential for distribution of cashflows ..........................39 Brewers still offer robust organic profit growth at low risk45 Valuation: Brewing still preferred to spirits stocks.............51 Anheuser Busch InBev ..........................................................56 Carlsberg.................................................................................59 Heineken .................................................................................62 SABMiller ................................................................................65 Valuation Methodology and Risks ........................................74

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Executive Summary The cash is coming … quickly • The major European brewers now look poised to generate significant free

cashflow – we estimate US$ 13.4bn in CY11 up from just US$ 1.35bn in CY01.

• Debt paydown is still the priority but “optimal” levels of gearing are now on the horizon. Carlsberg and Heineken will likely both be below their 2.5x net debt/EBITDA target at the end of this calendar year. For ABI we expect the 2.0x net debt/EBITDA “target” will be met in mid 2012. In the absence of cash distribution or any M&A activity we see SABMiller at some 1.0x net debt/EBITDA at end calendar 2011.

• Bank debt has been substantially refinanced with average maturity pushed out and cost of debt now locked in. We assume a medium term cost of debt of 5.7% for Carlsberg, 6.0% for Heineken, 6.2% for ABI and 7.2% for SABMiller.

Table 2: European brewers leverage comparisons (calendarise0 Net debt/EBITDA FCF/net debt

2009 2010E 2011E 2009 2010E 2011E ABI 3.5x 3.0x 2.4x 29% 14% 20% Carlsberg 2.7x 2.2x 1.4x 30% 19% 36% Heineken 2.6x 2.4x 2.0x 21% 21% 21% SABMiller 1.6x 1.4x 1.0x 24% 31% 38% Source: J.P. Morgan estimates

Capex can be contained at a lower level • The first call on brewers' cashflows has historically been capex to build new, or

expand existing, brewing, packaging and route to market capacity in markets where volumes have been growing. With a more disciplined approach, spare capacity and more muted volume growth the rate of investment has fallen by 30% to 5-6% of sales. This may reverse but only partially in our view and only if the returns are attractive for shareholders.

Figure 1: European brewers' capex to sales ratios

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%

ABI Carlsberg Heineken SABMiller

2007 2008 2009 2010 2011 Source: J.P. Morgan estimates.

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The potential consolidation opportunities • There are still further M&A opportunities in which the European brewers might

participate, in our view. However, we do think the scale of consolidation activity, relative to the free cashflows and invested capital base of these brewers, will be more muted going forward, in the absence of transformational deals between the world’s largest brewers.

ABI • We have updated our scenario analysis of a debt financed acquisition by ABI to

take full equity control of Grupo Modelo. We estimate a transaction would be 3% earnings enhancing in FY11E the first full year, rising to 7% by FY15E. If we assume a 15% premium to the current Modelo share price, this would equate to an adjusted 2010E EBITDA multiple of 15.5x for the whole of Modelo. This would represent a full multiple compared to previous comparable transactions.

• We note the recent changes to the Modelo Board including the joining of the ABI CEO and CFO. In our view this indicates that ABI is keen to work with the Modelo Board and management to fully explore opportunities which benefit both ABI and Modelo and makes a full combination of Modelo and ABI in the near term less likely. ABI has made no public comment on taking full equity control of Modelo and the Modelo CEO recently indicated that the family control group has no desire to sell (Bloomberg Oct 4th)

• We continue to see limited financial or strategic logic in ABI acquiring Fosters beer assets at a premium to the multiple implied by Foster’s current share price. The management of Fosters Group has indicated that it intends to de-merge the wine and beer assets in 2011and press reports have indicated that other brewers such as ABI, SABMiller and Asahi might be interested in acquiring the beer assets (Bloomberg 23rd August) We see limited need for “in-fill” acquisitions by ABI and note that it has options to buy back the Central European Korean businesses it sold to private equity to de-gear post the AB acquisition.

• In our view ABI may look to take on another large scale transaction in the medium term. By way of illustration we estimate ABI could acquire a hypothetical “asset” for US$ 60bn in FY12E at a multiple of 12.5x EBITDA and still leave net debt/EBITDA at around 4.2x. This ignores any potential synergy capture. Given ABI management’s record in securing synergies, as well as generating value through applying “appropriate” capital structures to acquired assets, we think it reasonable to assume that ABI could “capitalise” value to “fund” an even larger scale transaction. We note that, in European beverages at least, this would not preclude potential combinations with companies as large as Diageo or SABMiller, although ABI has made no public comment on such any such transaction.

• We continue to see limited financial logic in SABMiller acquiring Fosters beer assets at the multiple implied by Foster’s current share price.

• We believe a full combination with Castel/BGI, SABMiller’s joint venture partner in Africa (ex South Africa), would offer very significant strategic attractions. There would be a positive impact on SABMiller's volume growth and significant scope for both cost and revenue synergies. However we note that Castel has indicated that there are currently no talks between themselves and SABMiller over the BGI African assets (Bloomberg Oct 7th).

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• We estimate total FY10E Castel/BGI EBITDA of US$ 1.17bn. If we assume a multiple of some 11x EBITDA, based on quoted Africa beer stocks, this would put a value of US$ 12.9bn on the total Castel/BGI business in Africa and some US$ 10.3bn on the 80% not owned by SABMiller. We estimate the value of Castel/BGI’s 38% stake in SABMiller Africa ex minorities at some US$ 800mn.

• Based on comparable multiples for quoted Chinese brewing stocks at 25x forward PE we estimate the value of CR Snow, SABMiller’s joint venture with China Resources Enterprises, at US$ 2.7bn. We believe that SABMiller is currently satisfied with the current ownership structure of CR Snow.

• In CY10 we expect the MillerCoors JV will deliver EBITDA of some US$ 1.5bn. At a 10x multiple this would mean that SABMiller's equity share would be valued at some US$ 8.7bn and Molson Coors’ share at US$ 6.3bn. As with the other partnerships however we do not envisage any near term change to the structure of the MillerCoors JV.

• We believe SABMiller would be keen to extend its footprint further in South America beyond Colombia, Peru, Ecuador and now Argentina based on recent public comments (Bloomberg 24th November).

Carlsberg • We think Carlsberg might look to extend the equity stakes across its China

platform as well as in Vietnam but have limited insight into the timing or value of any such transactions. Chongqing Brewery in China, where Carlsberg now has a 29.71% stake, has a total market capitalisation of some US$ 5.4bn and trades on a Bloomberg consensus CY10E PE of 169x.

Heineken • Following the Femsa Cerveza acquisition we estimate 55% of pro forma FY10E

profit for Heineken comes from emerging markets. However, a significant proportion of this exposure is not fully controlled, and we do not think this will change in the medium term.

• We estimate the value of Heineken Africa minorities in the region of US$ 3bn. Heineken’s equity interest in CCU in LatAm is worth around US$ 1.2bn. In India Heineken has a 37.5% interest in United Breweries Limited (UBL) with a total market capitalisation of some US$ 2.3bn. Heineken has a effective 41.9% equity interest in Asia Pacific Breweries whose current market capitalisation is US$ 3.7bn.

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Table 3: Major global brewers 2009 pro forma Mn hls

1994 2005 2006 2007 2008 2009 CAGR 1994-2008 Anheuser Busch InBev 14.9 203.9 215.0 226.9 364.6 347.5 23.4% SABMiller 33.1 188.5 209.7 231.3 237.2 243.8 14.2% Heineken 60.4 121.1 130.3 163.2 167.9 202.1 8.4% Carlsberg 30.2 73.8 77.7 121.5 125.5 120.3 9.7% Tsingtao Group 3.1 40.8 45.4 50.5 53.8 59.1 21.7% Molson Coors 48.4 49.5 58.0 57.0 55.0 Modelo 25.2 45.5 49.3 50.9 51.5 51.7 4.9% Beijing Yanjing 2.5 31.3 35.7 40.7 42.2 46.7 21.6% Kirin 34.6 33.8 34.9 35.0 33.7 33.2 (0.3%) Asahi 20.7 30.9 30.7 30.9 30.1 29.8 2.5% Diageo (Guinness) 25.6 20.4 21.1 22.2 23.0 22.7 (0.8%) Anadolu Group (EFES) 4.4 18.0 17.9 20.4 22.3 22.2 11.4% Castel/BGI 5.5 13.7 15.4 17.5 19.5 21.7 9.6% San Miguel 16.8 20.4 19.5 20.6 21.2 20.9 1.5% Henan Gold Star (Jingxing) 15.8 16.6 17.6 18.5 19.0 Polar 15.0 15.3 16.5 18.1 17.8 17.0 0.8% Chongqing 1.6 11.2 14.8 16.5 16.3 16.7 16.9% Schincariol 1.5 13.2 12.9 14.2 15.5 15.0 16.6% Radeberger Group 9.5 17.2 17.3 15.8 15.6 14.7 3.0% CVC StarBev 14.5 Suntory 5.0 12.4 13.3 13.6 14.4 14.2 7.2% Mahou San Miguel 4.4 11.5 11.9 13.2 12.8 13.0 7.5% Zhujiang 2.1 12.1 13.1 13.7 11.9 11.3 11.9% Hite 5.8 10.1 10.3 10.8 11.2 10.9 4.3% Boon Rawd 6.6 8.8 9.8 11.5 10.6 Petropolis 2.1 4.8 6.6 8.2 10.6 Obolon 7.7 9.4 10.9 11.3 9.7 Fosters 32.0 10.3 10.2 10.1 9.7 9.7 (7.6%) Saigon Brewery 4.6 5.3 6.4 7.7 9.1 Pabst/S&P 10.9 9.1 8.7 8.5 8.7 8.7 (1.5%) Sapporo 13.2 10.2 9.4 9.2 8.6 8.5 (2.9%) Oettinger Group 6.5 7.4 7.9 8.1 8.5 GBC Kingway 5.3 6.4 7.4 6.4 8.3 Grupo Damm 4.1 6.9 7.3 7.6 7.7 8.2 4.7% KKR 7.9 7.9 United Breweries Ltd 4.3 5.3 6.0 6.5 7.6 Bitburger Group 4.3 8.1 8.2 7.7 7.5 7.4 3.7% Beer Thai 0.6 9.2 10.0 10.4 8.4 6.2 16.8% Cerveceria Regional 5.5 6.1 6.5 6.2 5.7 Warsteiner 6.5 5.8 5.9 6.2 6.0 5.7 (0.9%) Krombacher 3.8 5.6 5.9 5.9 5.7 5.6 2.6% Bavaria NV 5.2 5.9 6.3 6.3 5.5 Total Market 1,202.1 1,548.3 1,684.9 1,780.8 1,814.8 1,819.8 2.8% Source: Plato Logic

The potential for distribution of cashflows • In our view it could be possible for ABI to escalate the dividend payout

whilst continuing to rapidly de-gear. To offer a 3% dividend yield in CY11E would require a doubling of the dividend we currently forecast but in cash terms this would only add a negligible 0.1x “turn” to the net debt/EBITDA ratio. On our estimates, if ABI were to increase the dividend payout to 80% in FY12E this would still leave the net debt to EBITDA at the 2x target level but deliver a yield of 4.0%.

• SABMiller already offers the most attractive dividend yield of the European brewers at 2.7% CY11E with the 1H10 dividend growing at an attractive 15%. We do not currently anticipate any change to this level of dividend payout for SABMiller given the potential M&A opportunities which may arise. We would remind investors that there are still substantial “block” shareholders in

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SABMiller, notably Altria Group (27.14% per Bloomberg) and Bevco Ltd (14.20% and who are now “unlocked”).

• We expect guidance from Carlsberg on potential cash distribution at the FY10 results. Carlsberg has already indicated that it would reassess its distribution policy following the successful de-gearing below the 2.5x net debt/EBITDA target. Carlsberg currently pays out a relatively low dividend, which equates to a dividend yield of 0.9% CY10E. Given Carlsberg’s FCF yield (9.7% in FY11E) any change in policy could herald a very meaningful change for investors.

• For Heineken there is a continuing call on free cashflow which stems from the buyback of NV shares to deliver to Group FEMSA as part of the consideration for the FEMSA Cerveza transaction. Based on the pace of buyback to date this would leave Heineken satisfying its obligation to deliver 29mn shares in 2H12E. We would assume that Heineken would make no change to its dividend policy as the buyback continues. We note that Group FEMSA, under the standstill arrangements, is free to start selling shares in both Heineken NV and Heineken Holdings from year 3 up to a maximum of 1% of the total equity in any quarter.

Brewers still offer robust organic profit growth at low risk • Prior to 2008 robust double digit EBIT growth was the rule not the

exception for the European brewers. This reflected a healthy volume environment particularly in emerging markets, a “positive” inflation differential, with output pricing generally ahead of input cost inflation, and the benefits of synergy capture from multiple transactions.

• In 2H07, and especially through 2008, growth slowed abruptly, first through an increase in input cost inflation and latterly from sharply falling volumes. This led to a sharp deceleration in organic EBIT growth despite on average 5% pricing per hl.

• In 2009 margins once again expanded despite falling volumes. The combination of synergy capture, cost savings, improving input costs, lower depreciation and robust pricing underpinned double digit organic EBIT growth (with the exception of SABMiller).

• In 2010 to date we have seen a slowdown to mid to high single digit organic EBIT growth as the input cost tailwinds and synergy benefits eased and with slightly softer pricing. Volumes were still falling for Heineken and Carlsberg but were flat for SABMiller and returned to growth for ABI.

• We expect ABI organic EBIT growth to accelerate in Q410 to high teens in line with guidance. We also expect SABMiller to maintain its rate of organic EBIT growth at 10% through 2H11E. For Heineken we expect a similar level of EBIT growth in 2H10E at 6%. Carlsberg should also maintain a similar level of low to mid single digit organic EBIT growth in H210.

Table 4: European brewers’ organic EBITA growth FY00-FY12E 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E

ABI 9.7% 12.0% 11.5% 12.8% 11.5% 20.4% 20.1% 20.4% 2.1% 20.3% 11.1% 9.7% 7.0% Carlsberg - - - - - 12.0% 16.6% 27.0% 7.0% 25.8% 3.2% 11.4% 9.7% Heineken 10.0% 10.0% 9.0% 6.9% 5.0% 2.9% 10.7% 20.0% 8.7% 14.0% 5.0% 6.5% 5.5% SABMiller 15.0% 15.0% 18.0% 22.0% 18.0% 8.8% 12.5% 8.8% 4.7% 6.3% 10.3% 9.9% 9.0% Source: J.P. Morgan estimates, Company data.

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Valuation: Brewing still preferred to spirits stocks • Our end-2011 DCF derived price targets are ABI €51, Carlsberg DKK 650,

Heineken €38 and SABMiller 2290p. This equates to 19% upside for ABI, and Carlsberg, 6% upside for Heineken and 10% upside for SABMiller. In contrast for the large cap spirits stocks we have downside of 8% for Diageo and just 1% upside for Pernod Ricard.

• Given the relative outperformance by the brewers over the last year and five years and that the highest rated brewers, ABI (14.7x CY11E PE) and SABMiller (15.5x), are now trading at slight premiums to Diageo (14.2x) and Pernod Ricard (13.9x), we think the temptation for investors to shift from brewers to spirits may gather momentum.

• We would resist this temptation. Whilst in the very near term we see limited scope for earnings upgrades for the brewers we do think that the combination of robust double digit earnings growth into CY11E and beyond as well as accelerating cash generation firmly underpins current relative valuation multiples for the brewers. Improving volume and pricing outlook could drive further upgrades, albeit muted, through next year.

• In contrast we do not yet see sufficient evidence of improving price/mix in key mature markets for the major spirits players. This is likely to continue to constrain gross margin. Spirits companies lack the “scale” cost savings programmes and synergy capture opportunities that drive expanding margins in brewing, in our view.

• We still see superior earnings growth overall for brewers in CY11E, 19% for ABI, 16% for SABMiller, 14% for Carlsberg and 13% for Heineken. To be fair, on our estimates Pernod Ricard will deliver comparable 14% earnings growth in CY11E, with a similar level of organic EBIT growth. However PR still carries a higher level of financial gearing with less visibility around cashflow generation in our view. Diageo’s earnings growth at just 7% on our estimates in CY11E continues to lag the brewing peers.

• Into CY12E we might expect the top line growth rates to be similar between the sub-sectors but we still see more margin opportunity with brewers and more "optionality" around redeploying free cashflows.

Table 5: European beverages calendarised valuation comparison

Rating Price Price Mkt. Cap. Upside/ P/E EV/EBITDA Dividend Yield FCF Yield EPS Growth Target US$ mn Downside 2011E 2012E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E

AnheuserBusch InBev EUR OW 42.80 51.00 90,925 19% 14.7x 12.9x 12.0x 10.7x 0.9% 1.2% 6.2% 7.8% 29.8% 18.7%Britvic Plc £/p OW 490.60 530.00 1,738 8% 12.1x 10.6x 9.1x 8.4x 3.8% 4.2% 3.2% 6.4% 17.5% 9.5%C&C Group EUR N 3.18 3.50 1,412 10% 12.1x 11.4x 9.8x 8.6x 2.2% 2.7% 4.2% 6.7% 4.7% 10.7%Carlsberg DKr OW 547.00 650.00 15,013 19% 12.7x 10.8x 8.7x 7.4x 0.9% 1.1% 7.1% 9.7% 38.7% 13.6%CEDC USD OW 24.47 25.50 1,730 4% 12.7x 10.4x 11.5x 10.1x 0.0% 0.0% 10.8% 5.9% -34.8% 24.8%Davide Campari EUR UW 4.64 4.30 3,558 -7% 14.9x 13.7x 11.1x 10.4x 1.4% 1.6% 3.2% 6.8% 127.6% 12.6%Diageo £/p N 1146.00 1050.00 44,802 -8% 14.2x 13.0x 11.4x 10.5x 3.4% 3.6% 6.9% 6.7% 4.8% 7.1%Heineken EUR N 35.98 38.00 27,219 6% 13.0x 12.0x 9.7x 8.6x 2.0% 2.2% 9.1% 7.9% 13.3% 13.0%Pernod Ricard EUR N 63.60 64.00 22,369 1% 13.9x 12.1x 14.1x 12.5x 2.1% 2.2% 6.0% 6.5% -0.7% 14.2%Remy Cointreau EUR N 52.15 47.00 3,337 -10% 19.0x 16.3x 16.0x 13.2x 2.7% 2.9% 3.6% 4.5% 20.2% 22.4%SABMiller £/p OW 2083.00 2290.00 52,068 10% 15.5x 13.8x 10.7x 9.4x 2.3% 2.7% 4.7% 4.6% 16.9% 15.9%Weighted average 14.4x 12.8x 11.4x 10.2x 1.9% 2.1% 6.3% 6.9% 19.8% 14.8%

Source: J.P. Morgan estimates, Bloomberg priced COB 1st Dec 2010

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The cash is coming … quickly • The major European brewers now look poised to generate significant free

cashflow – we estimate US$ 13.4bn in CY11 up from just US$ 1.35bn in CY01.

• Debt paydown is still the priority but “optimal” levels of gearing are now on the horizon. Carlsberg (2.2x) and Heineken (2.3x) will both be below their 2.5x net debt/EBITDA target at the end of this calendar year, For ABI we expect the 2.0x net debt/EBITDA “target” will be met in mid 2012. In the absence of cash distribution or any M&A activity we see SABMiller at some 1.0x net debt/EBITDA at end calendar 2011.

• Bank debt has been substantially refinanced with average maturity pushed out and cost of debt now locked in. We assume a medium term cost of debt of 5.7% for Carlsberg, 6.0% for Heineken, 6.2% for ABI and 7.2% for SABMiller.

The major European brewers will generate estimated $13.4bn of free cashflow in 2011 A decade of consolidation in global brewing, together with underlying growth, the returns from past capex investment and cost reduction, have left the four major European brewers poised to deliver US$ 13.4bn of free cashflow in calendar 2011 (at current exchange rates) , on our estimates

This has ramped up significantly from the US$ 3.7bn in 2005 and increased over ten fold from the US$ 1.35bn generated in 2001 – the “first full year” following the European listings of Interbrew and SAB.

In 2001 the four European brewers were capitalised at just short of US$ 40bn and offered a 3.5% FCF yield. Now these four stocks are capitalised at US$ 184bn with a weighted FCF yield in 2011 of 7%. Yet the European equity market has fallen by c. 15% since end 2001. We would contend that the past decade in brewing has been very much one focused on "investment" by these players in terms of both capex and M&A. We think the cash generating capacity of these brewers now is far greater than a decade ago even adjusted for their greater scale.

ABI is set to deliver free cashflow US$ 7.0bn (post AmBev dividend payout) in CY11E, SABMiller US$ 3.0bn, Heineken US$ 2.1bn and Carlsberg US$ 1.3bn.

On our forecasts the European brewers are set to turn near 50% of EBITDA into free cashflow in the medium term approaching the conversion levels of the major spirits companies and well above the 30% to 35% levels seen through to 2007.

Figure 2: European brewers EBITDA to FCF conversion 100%

80%

56%39%41% 41%

50% 46%46% 52%41% 49%

0%20%40%60%80%

100%120%


2009A 2010E 2011E Source: JP Morgan estimates

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The “excess” leverage is now a distant memory In 2008, ABI, Carlsberg and Heineken all geared up to historically high levels to acquire assets. We now estimate cash flow generation is on track to pay down debt well ahead of original plans, despite the much slower volume out-turn, as these companies have delivered on synergies, raised prices, reined back on capital investment and aggressively squeezed working capital.

In 4Q08 at the trough of the market the “risk premium” demanded by investors as a consequence of this level of gearing was very significant. This was when the Carlsberg share price troughed at DKK 150 with, in retrospect, a 1 year forward PE multiple near 6x. Heineken’s share price fell below €20 with a forward PE of 9x. The rump of ABI's shares issued to finance the AB transaction was placed at €10 which, albeit again with the benefit of hindsight, implied a 2009 PE multiple of just 5.7x.

As equity markets sharply recovered, and the strength of the brewers’ cashflows became more visible, this risk premium has unwound and we think the previous “weakness” of the financial leverage for the European brewers has now become perceived more as a “strength” and driven the relative re-rating both to market and the rest of consumer staples.

“Optimal” capital structures are now in prospect We see all these companies moving back down to “optimal” levels of financial leverage well ahead of “targets” set at the time of the transactions. We think Carlsberg and Heineken will both be below their 2.5x net debt/EBITDA target at the end of this calendar year. For ABI we expect the 2.0x net debt/EBITDA “target” will be met in mid-2012. In the absence of cash distribution or any M&A activity we see SABMiller at some 1.0x net debt/EBITDA at end 2011E.

Brewing cashflows tend to be robust and fairly predictable. We continue to see near term tailwinds in terms of volume recovery, pricing discipline, synergy capture and cost savings to drive operational cashflows. In our view it would take a further very significant lurch downward in volumes, or another very large input cost spike, to imperil the debt paydown trajectories implied by our forecasts.

Bank debt has been substantially refinanced ABI, Heineken and Carlsberg have all made very substantial progress in refinancing the debt taken on to finance the acquisitions made in 2008.

Carlsberg • Carlsberg took on some DKK 31.5bn to finance its share of the S&N assets in

2008, in addition to existing debt of c. DKK 10bn. This was financed through a total EUR 7.3bn bank facility (with a covenant of 4x net debt/EBITDA).

• In May 2009 Carlsberg issued EUR 1bn of 5 year bonds at 6% and GBP 300mn of 7 1/2 year bonds at 7.25%. In October 2010 Carlsberg secured a new 5 year multi currency revolving facility for EUR 1.75bn from 21 banks which has “extended debt maturity with favourable pricing and terms”. In addition Carlsberg issued a further EUR 1 bn of 7 year bonds at 3.375% to refinance the S&N debt due in 2012.

• We see Carlsberg’s net debt/EBITDA ratio falling to 2.2x at end 2010 and 1.4x by end 2011 though this does assume some DKK 2.5bn in proceeds from real

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estate disposals. Carlsberg is committed to maintaining investment grade and is currently rated at Baa3 (Moody’s). We estimate the cost of debt remains at around 5.7% post the recent refinancings, with some 95% of debt denominated in EUR post swaps.

Heineken • Heineken took on a new debt facility to finance its EUR 6.1bn share of the S&N

assets in 2008. These facilities have an incurrence covenant of 3.5x, which prevent any further debt acquisition, in part the reason for the equity funding of the subsequent FEMSA Cerveza acquisition.

• In February 2009 Heineken issued 6 year GBP 400mn bonds at 7.25% swapped into EUR at below 7% and in March 2009 issued a further EUR 1bn of bonds at 7.125%. It also secured a further EUR 375mn new revolving credit line and bought in the acquired debt of the Globe PubCo. In October 2009 a further 7 year EUR 400mn Bonds at 4.625% were issued, followed in May 2010 by a USD 725mn 8 year private placement at 4.6% swapped into EUR at 3.9%.

• This leaves Heineken with no immediate refinancing need until 2013 and with headroom on its bank facilities of EUR 2bn. We see Heineken net debt/EBITDA falling below 2.5x net debt/EBITDA at end 2010 and below 2.0x at end 2011 which would leave Heineken in investment grade territory (though its debt is currently not rated). We estimate a cost of debt around 6.0% with 90% of debt EUR denominated.

ABI • Post the AB deal and pre the equity issue in November 2008 ABI’s pro forma net

debt/EBITDA was 5.5x with US$ 55bn of debt taken on to finance the transaction together with US$ 12bn of existing InBev, and acquired AB, debt. In total some US$ 47bn of this debt mountain was due to be repaid by end 2011.

• With the US$ 9.8bn equity issue, US$ 7bn of asset disposals, US$ 24bn of bond issues since January 2009, the new US$ 17.2bn bank facilities (a US$ 8bn 5 year revolver, a US$ 5bn 3 year term facility and US$ 4.2bn in long term bilateral facilities), together with cashflow of USD$6bn, all of this debt has been paid down or refinanced. We estimate that ABI will have reduced net debt by c. US$ 29bn in the four years from end FY08 (US$ 57.1bn) to end FY12E (US$ 28.7bn).

• Net debt/EBITDA at end FY09 was 3.7x pro forma for disposals. We forecast net debt/EBITDA to fall below the 2.0x target in Q312E with 3.0x at FY10E and 2.4x at FY11E.The average maturity on the debt had been pushed out from 4.3 to 7.3 years. ABI is guiding to a cash cost of debt in FY10E of between 6.0% and 6.5%. ABI has over US$ 11bn in revolving credit lines which we think gives sufficient capacity to explore any realistic acquisition opportunity without recourse to further fixed-term debt. We understand there are no M&A covenants attached to the new fixed-term bank debt.

• ABI is rated BBB+ by S&P (with a positive outlook) and Baa2 Moody’s and its 5 year CDS at 111 bps is slightly ahead of Carlsberg at 102bps and Heineken at 87bps (COB 1st Dec),.

SABMiller • We note SABMiller’s robust cashflow and relatively low level of financial

gearing and we see no medium term refinancing issues here. SABMiller closed FY10 with US$ 8.4bn of net debt with US$ 2.8bn due in the next 2 years.

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• In FY10 SABMiller issued EUR 1 bn of 5 1/2 year bonds at 4.5% and completed a PEN 150mn Peruvian bond issue. It repaid floating rate US$ 300mn of floating rate debt and cancelled part of its existing US$ 1 bn 1 year revolving facility. The average maturity on fixed debt was 3.7 years, with a gross debt coupon of 5.7% and it had US$ 3.6bn of undrawn facilities to cover all refinancing in FY11E and FY12E.

• We estimate that SABMiller's net debt/EBITDA will fall to 1.4x by calendar end 2010 and to just 1.0x by calendar end 2011. SABMiller's credit rating is Baa 1 (Moody’s) and BBB+ (S&P). .

Table 6: European brewers leverage comparisons (calendarised) Net debt/EBITDA FCF/net debt

2009 2010E 2011E 2009 2010E 2011E ABI 3.5x 3.0x 2.4x 29% 14% 20% Carlsberg 2.7x 2.2x 1.4x 30% 19% 36% Heineken 2.6x 2.4x 2.0x 21% 21% 21% SABMiller 1.6x 1.4x 1.0x 24% 31% 38% Source: J.P. Morgan estimates

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Capex can be contained at a lower level The first call on brewers' cashflows has historically been capex to build new, or expand existing, brewing, packaging and route to market capacity in markets where volumes have been growing. With a more disciplined approach, spare capacity and more muted volume growth the rate of investment has fallen by 30% to 5-6% of sales. This may reverse but only partially in our view and only if the returns are attractive for shareholders.

A 30% cut to capex budgets… Carlsberg, Heineken, ABI and SABMiller all made significant cuts to their capex budgets in 2009. Carlsberg fell from a peak DKK 5.2bn in FY08 to DKK 2.9bn in FY09 with DKK 3.3bn expected in FY10E. Heineken fell from a peak of €1.26bn to under €800mn in FY09 with a similar level expected in FY10E (though this will rise with the full year effect of the acquisition of FEMSA Cerveza in FY11E). ABI reduced capex to just $1.7bn in FY09 though this will rise with investment in Brazil and China in FY10E to $2.2bn. For SABMiller capex in FY10 fell to $1.4bn from the $2bn level in FY08 and FY09. For FY11E we expect a further fall to $1.3bn.

This level of capex represents around 5-6% of sales, which we would historically have seen as a reasonable level of “maintenance” capex. For ABI, Carlsberg and Heineken capex is now running well below depreciation, though the reverse is still true for SABMiller, which reflects the maturity of the fixed asset base. Capex in recent years has been focused on growth markets – in many mature markets capex is much lower and a significant part of the fixed asset base is already fully depreciated.

With no volume growth, and in Europe sharp volume declines, across most beer markets globally (with the exception of Africa and parts of Asia and LatAm), and with the companies having come off a period of significant ramp-up in investment in the last few years, this cutback is not surprising.

We think not only have the companies cut back on now unnecessary capacity expansion in brewing and packaging, but they will also have applied much higher hurdle rates to what we might term “discretionary” upgrading of assets. Finally we think the “price” of new and “second-hand” capital in brewing may also have fallen by 10-20% from the 2007 peak.

…but this can be sustained in the medium term At some point the tap will need to be turned back on but we suspect this will not really be an issue until calendar 2012 at the earliest. We think that even with volume recovery, central and eastern Europe will not require the same level of investment that was seen through to 2007, and we are not aware of any of the brewers needing a major brewery investment in the medium term beyond what has already been disclosed, for example SABMiller in Africa and AmBev/ABI in Brazil.

In Russia following a fall in volume of near 20% over the last couple of years we think it will be a few years before meaningful new capacity is required. Levels of capacity utilisation are still relatively low in China and we would not expect to see any meaningful "acceleration" in the rate of capacity expansion beyond what is baked into our capex forecasts for the European brewers.

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Figure 3: Top 15 beer markets by incremental volume growth, 2009-2020E mn hls

0 50 100 150 200 250

Venezuela

Spain

South Africa

Philippines

Colombia

Ukraine

Nigeria

Thailand

India

Russia

Mex ico

US

Vietnam

Brazil

China

Source: Plato Logic

New breweries are only part of the picture We estimate a new brewery still costs around US$100 per hl so a 5mn hl project is a substantial US$500mn investment. This shows how lumpy discretionary capex can be and with many of these brewers having made this scale of investment over the last decade the 8-10% capex to sales ratios seen over the last few years were perhaps the exception not the norm.

We also note that not all capex is focused on new brewing capacity. In 2010, for example, around one third of ABI's capex budget will be spent on “capacity and cost” projects but 20% will be at the consumer and commercial level, with coolers at point of sale as the most obvious example, and 20% focused on returnable packs (kegs, returnable bottles).

We also note that for many brewers, notably Carlsberg and Heineken in Western Europe, there are meaningful potential cash inflows to come following real estate disposals as breweries are closed.

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Figure 4: European brewers' capex to sales ratios

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%


2007 2008 2009 2010 2011


Figure 5: European brewers' capex to EBITDA ratios

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%


2008 2009 2010 2011


Figure 6: European brewers' number of plants 2008E PF

20 8

53

1333

17

19

50 6

23

29

2618

23 59

38

29

18

75

0

50

100

150

200

250


North America Latin America Western Europe C&E Europe Africa/ME Asia Pacific

Source: Company data, J.P. Morgan estimates

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The potential consolidation opportunities Summary • We believe there are still further M&A opportunities in which the European

brewers might participate. However we do think the scale of consolidation activity, relative to the free cashflows and invested capital base of these brewers, will be more muted going forward, in the absence of transformational deals between the world’s largest brewers.

ABI • We have updated our scenario analysis of a debt financed acquisition by ABI to

take full equity control of Grupo Modelo. We estimate such a transaction would be 3% earnings enhancing in FY11E the first full year, rising to 7% by FY15E. . If we assume a 15% premium to the current Modelo share price, this would equate to an adjusted 2010E EBITDA multiple of 15.5x for the whole of Modelo. This would represent a full multiple compared to previous comparable transactions.

• We note the recent changes to the Modelo Board including the joining of the ABI CEO and CFO. In our view this indicates that ABI is keen to work with the Modelo Board and management to fully explore opportunities which benefit both ABI and Modelo, and makes a full combination of Modelo and ABI in the near term less likely. ABI has made no public comment on taking full equity control of Modelo and the Modelo CEO recently indicated that the family control group has no desire to sell (Bloomberg Oct 4th)

• We continue to see limited financial or strategic logic in ABI acquiring Fosters beer assets at anything like the multiple implied by Foster’s current share price. The management of Fosters Group has indicated that it intends to de-merge the wine and beer assets in 2011and press reports have indicated that other brewers such as ABI, SABMiller and Asahi might be interested in acquiring the beer assets (Bloomberg 23rd August). We see limited need for “in-fill” acquisitions by ABI and note that it has options to buy back the Central European Korean businesses it sold to private equity to de-gear post the AB acquisition.

• In our view ABI may look to take on another large scale transaction in the medium term. By way of illustration we estimate ABI could acquire an “asset” for US$ 60bn in FY12E at a multiple of 12.5x EBITDA and still leave net debt/EBITDA at around 4.2x. This ignores any potential synergy capture. Given ABI management’s record in securing synergies, as well as generating value through applying “appropriate” capital structures to acquired assets, we think it reasonable to assume that ABI could “capitalise” value to “fund” an even larger scale transaction. We note that, in European beverages at least, this would not preclude combinations with companies as large as Diageo or SABMiller. although ABI has made no public comment on such any such transaction.

SABMiller • We continue to see limited strategic logic in SABMiller acquiring Fosters beer

assets and limited financial appeal at the multiple implied in any premium to Foster’s current share price. The management of Fosters Group has indicated that it intends to de-merge the wine and beer assets in 2011and press reports have indicated that other brewers such as ABI, SABMiller and Asahi might be interested in acquiring the beer assets (Bloomberg 23rd August). SABMiller has

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made no public comment on any interest it may have in acquiring the Fosters beer assets.

• We believe a full combination with Castel/BGI, SABMiller’s joint venture partner in Africa (ex South Africa), would offer very significant strategic attractions. There would be a positive impact on SABMiller's volume growth and significant scope for both cost and revenue synergies. However we note that Castel has recently indicated that there are currently no talks between themselves and SABMiller over the BGI African assets (Bloomberg Oct 7th) SABMiller has made no public comment on any potential transaction with Castel in Africa.

• We estimate total FY10E Castel/BGI EBITDA of US$ 1.17bn. If we assume a multiple of some 11x EBITDA, based on quoted Africa beer stocks, this would put a value of US$ 12.9bn on the total Castel/BGI business in Africa and some US$ 10.3bn on the 80% not owned by SABMiller. We estimate the value of Castel/BGI’s 38% stake in SABMiller Africa ex minorities at some US$ 800mn.

• Based on comparable multiples for quoted Chinese brewing stocks at a 25x forward PE we estimate the value of CR Snow, SABMiller’s joint venture with China Resources Enterprises, at US$ 2.7bn. We believe that SABMiller is currently satisfied with the current ownership structure of CR Snow based on our recent conversations with the company.

• In CY10 we expect the MillerCoors JV will deliver EBITDA of some US$ 1.5bn. At a 10x multiple (based on prior transactions including the acquisition of Miller by SAB) this would mean that SABMiller's equity share would be valued at some US$ 8.7bn and Molson Coors’ share at US$ 6.3bn. We note that “old” SAB, when it acquired Miller in 2002, paid a pro forma EBITDA multiple of 9x. The combination of Molson and Coors was valued at the time of the transaction in 2004 at a pro forma EBITDA multiple of 10x. The 2007 EV/EBITDA trailing multiple paid by ABI for Anheuser Busch was 11x. As with the other partnerships however we do not envisage any near term change to the structure of the MillerCoors JV.

• We believe SABMiller would be keen to extend its footprint further in South America beyond Colombia, Peru, Ecuador and now Argentina based on recent public comments (Bloomberg 24th November)..

Carlsberg • We believe it would make sense strategically for Carlsberg might look to

extend the equity stakes across its China platform as well as in Vietnam but have limited insight into the timing or value of any such transactions. Chongqing Brewery in China, where Carlsberg now has a 29.71% stake, has a total market capitalisation of some US$ 5.4bn and trades on a Bloomberg consensus CY10E PE of 169x.

Heineken • Following the Femsa Cerveza acquisition we estimate 55% of pro forma FY10E

profit for Heineken comes from emerging markets. However, a significant proportion of this exposure is not fully controlled, and we do not think this will change in the medium term.

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• We estimate the value of Heineken Africa minorities in the region of US$ 3bn. Heineken’s equity interest in CCU in LatAm is worth around US$ 1.2bn. In India Heineken has a 37.5% interest in United Breweries Limited (UBL) with a total market capitalisation of some US$ 2.3bn. Heineken has a effective 41.9% equity interest in Asia Pacific Breweries whose current market capitalisation is US$ 3.7bn.

M&A won’t go away … but it might be “smaller” If capex can be contained at the lower level as we expect, and with all the brewers on track to meet their leverage targets, we think it is reasonable for investors to contemplate what might happen to the wall of free cashflow that will be generated in the medium term.

In the past we believe it was fairly safe for investors to assume that European brewers’ cashflow, and latterly debt and equity capacity, would be recycled into further M&A to drive consolidation and therefore industry scale and ideally returns.

We still see further M&A opportunities in which the European brewers might participate. We have examined these opportunities in detail for each of the major European listed brewers. However, we do think the scale of consolidation activity, relative to the free cashflows and invested capital base of these brewers, will be more muted going forward, in the absence of transformational deals between the world’s largest brewers.

• We think consolidation will continue although at a much slower pace as there are now far fewer willing sellers. Most major profit pools are already fairly concentrated with significant capital already invested by the major European and Japanese beer players. With some limited exceptions we believe the opportunities to realise synergies through in-market roll-ups have waned.

• There are a number of second-tier brewers where the major brewers already have substantial equity stakes or “relationships”. There are some remaining independent players in key profit pools but the controlling shareholders appear well aware of the value of their assets.

• The remaining likely consolidation opportunities could be financed out of the existing free cashflows of the European brewers and we think investors will become increasingly focused on the prospect of significant cash distribution.

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Table 7: Key major brewing transactions over US$ 0.5bn over the last decade involving European listed brewers Transaction Date EV/EBITDA multiple Price US$ bn Heineken/FEMSA Jan-10 11 7.4 Kirin/Lion Nathan Nov-09 13 3.3 SABMiller/Poland minority May-09 8 1.1 Asahi/Tsingtao minority Apr-09 14 0.7 InBev/Anheuser Busch Oct-08 11 52.2 Carlsberg and Heineken/S&N Jan-08 14 15.0 SABMiller/Grolsch Nov-07 15 1.1 InBev/Quilmes minority Apr-06 10 1.2 S&N/Fosters brand Apr-06 12 0.5 InBev/Fujian Sedrin Jan-06 13 0.7 Heineken/Ivan Taranov Aug-05 11 0.6 SAB/Bavaria Jul-05 14 4.8 InBev/Korea minority Jan-05 14 0.9 Interbrew/Sun rump Aug-04 12 0.5 Molson/Coors Jul-04 10 6.0 Interbrew/Ambev Mar-04 11 11.0 Carlsberg/Orkla stake Mar-04 9 3.5 Carlsberg/Holsten Jan-04 9 0.5 Interbrew/Korea Dec-03 11 0.8 Interbrew/Spaten Sep-03 9 0.6 SABMiller/Peroni May-03 13 0.6 Heineken/BBAG May-03 10 2.1 Interbrew/Gilde Nov-02 11 0.6 SAB/Miller May-02 9 5.6 Molson/Kaiser Mar-02 12 0.8 S & N/Hartwall Jan-02 10 1.2 Coors/Carling Dec-01 8 1.7 SAB/BevCo Nov-01 9 0.5 Interbrew/Becks Aug-01 13 1.8 Carlsberg/Feldschlossen Nov-00 10 0.5 Interbrew/Bass Jun-00 9 3.5 Carlsberg/Orkla May-00 10 1.3 S&N/Kronenbourg Mar-00 11 2.7 SAB/Pilsner Urquell Oct-99 13 0.6 Heineken/Cruzcampo Jun-99 12 0.8 Source: J.P. Morgan estimates, Company data.

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Table 8: Major global brewers 2009 pro forma volumes Mn hls


ABI has a record of value creating acquisition We might reasonably expect that ABI’s Board and management would look to reinvest potential balance sheet capacity into further M&A opportunities given what we judge as the success of the other major transactions by the Group. We estimate the AmBev/Interbrew merger to create InBev in 2004 generated an ROIC in excess of 20% in year 5 and that the AB transaction is set to deliver in excess of 9% on a similar timeframe, well above the transaction cost of capital in our view.

We understand that the most recent refinancing removed all M&A covenants attached to ABI’s bank debt and left ABI with USD 11bn of revolving facilities, which we think gives ABI sufficient capacity to immediately finance any realistic near term opportunity.

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ABI owns a 50.2% economic interest in Grupo Modelo We have examined ABI’s potential M&A opportunities (and indeed the possibility for an accelerating dividend) in detail in our note “Brass in pocket” dated 6th July 2010. In that note we examined in detail the potential value that might accrue to ABI from an acquisition of the remaining 49.8% economic interest in Grupo Modelo.

On the basis of the detailed assumptions set out in that note we concluded that a debt financed transaction would be 3% earnings enhancing in FY11E the first full year, 5% in FY12E and rising to 8% by FY15E. We estimated ROIC of 8.9% in FY11E rising to 11.1% in FY15E against a Group WACC for ABI which we estimated at 8.5% in our DCF analysis.

We estimated net debt/EBITDA at end FY11E of 2.7x post such a transaction against 2.2x on our then forecasts.

Given the relative size of the transaction with, we also noted that the level of earnings enhancement in our scenario model is relatively insensitive to the assumptions we make on synergies, cost of debt and the tax rate.

This scenario was predicated on a 30% premium to the then Modelo share price adjusting for share of cash, dividends and assuming a "penalty" impact in the US, and adjusting EBITDA for the ABI stake in Diblo. This backed out an implied FY10E EBITDA multiple on Grupo Modelo of 14.4x.This compared to an adjusted trailing EV/EBITDA multiple of 10.5x 2009 paid by Heineken to acquire the number two player in Mexico FEMSA Cerveza.

We think it might be reasonable for investors to expect that any Grupo Modelo transaction should command a higher multiple given its greater share of the Mexican beer volume and profit pool, the absence of a loss making business in Brazil, and its much bigger US and international export footprint. On the other hand we would argue there is only really one potential buyer here in ABI. We cannot see why the family control group would want to sell to a party other than ABI and how another party could in fact justify paying more than ABI could presumably pay given that ABI already controls 50.2% of the economic interest in Grupo Modelo.

This 14.4x EBITDA multiple that we assumed in our scenario analysis described above would clearly be at the higher end of previous transaction multiples paid in the sector but we think this would fairly reflect the value of the asset to ABI.

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Figure 7: Modelo – Organization Structure

50% E

Diblo

Grupo Modelo 3,232 mm shares

Domestic Operations (Mexico)

Crown Imports (USA)

Constellation Brands

(NYSE: STZ)

50% E 100% E

77% E

Free Float Series C Non Voting

633mm shares

Controlling Shareholders Series A Voting

1,458mm sharesAnheuser Busch InBev (ABI)

Series B Voting 1,141mm Modelo shares

plus 23% of Diblo35% times 77% = 27.2% plus 23% of Diblo

= ABI owns 50.2% of the Company

23% E

45% E 56% V 20% E 0% V35% E44% V

Source: Company reports (E=Economic right, V=Voting right)

… and we still think this would potentially be attractive for ABI shareholders … We have updated our scenario analysis to take account of estimate changes at Modelo and ABI, as well as current share prices and currency movements. On the basis of this scenario we now think such a transaction would be 3% earnings enhancing in FY11E the first full year, 5% in FY12E and rising to 7% by FY15E. We estimate an ROIC of 8.4% in FY11E rising to 10.7% in FY15E against a Group WACC for ABI which we estimate at 8.4% in our DCF analysis.

However, with the share price rise in Modelo (with the market) and reduced earnings expectations, we would now assume a 15% premium to the current Modelo share price which would equate to an adjusted 2010E EBITDA multiple of 15.5x for the whole of Modelo. All other assumptions are unchanged.

… but we do not think any transaction is likely in the near term We note that since our initial scenario analysis the arbitration case brought by Modelo against ABI ruled in ABI’s favour and more recently it has been reported that the family voting control group at Modelo has no desire to sell to ABI (Bloomberg Oct 4th).

Modelo has also chosen to appoint MolsonCoors as the distributor for its Corona brand in the UK (its third biggest export market) rather than ABI which has comparable distribution reach in the UK. The legal dispute between Modelo and its partner Constellation over marketing spend in the Crown Imports JV in US has also been resolved.

Finally on November 12th ABI indicated that that it had changed 4 of the 9 Board members of Grupo Modelo that it is entitled to elect. The new appointees include the CEO of ABI, Carlos Brito, the CFO, Felipe Dutra, ABI's Chief Legal and Corporate Affairs Officer, Sabine Chalmers, and John Blood, another member of the ABI legal team. In our view this indicates that ABI is keen to work with the Modelo Board and management to fully explore opportunities which benefit

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both ABI and Modelo and to exercise ABI’s powers of veto appropriately. We think this change might be read as making a full blown combination of Modelo and ABI less likely in the near term.

We see limited strategic merit in ABI acquiring the Fosters beer assets In our 7th July note we also examined a scenario where ABI acquired the Fosters beer business – again on an all debt financed basis. This was based on a valuation of that business at AUD 9,425mn which equated to a CY10E EBITDA multiple of 11.2x, relatively full compared to prior developed market brewing transactions.

On the basis of the assumptions laid out in the note we saw this as being 1% earnings enhancing in FY11E for ABI and 3% to 4% thereafter. We estimated ROIC of 8.5% in FY12E rising to 9.0% in FY15E against a Group WACC for ABI which we then estimated at 8.5% in our DCF analysis. This would have minimal impact on ABI’s gearing ratio.

We concluded that ABI could buy Foster’s but we could see limited financial or strategic logic other than at a multiple well below that now currently implied by Foster’s share price.

If we update this scenario analysis to incorporate our latest JPM valuation of the beer business at AUD 10,130mn (see 28th September note “An asset valuation methodology in valuing the wine trade business” by our Australian Foster’s Group analyst, Stuart Jackson) and the AUD at near parity we still end up with a similar low single digit enhancement based on all other assumptions being unchanged.

However we note that this Fosters beer business valuation when added to the value that our colleague Stuart Jackson puts on the wine business only validates AUD 5.26 per share for Fosters below the current share price of AUD 5.68. We cannot see ABI having any interest in a business where the implied multiple is still well over 13x EBITDA and which would be unlikely to create meaningful value.

We see limited need for “in-fill” acquisitions by ABI Beyond these obvious opportunities in global brewing we do not see where ABI would want to commit significant capital to augment existing platforms. We see ABI as a potential seller of the assets in China where it cannot see a route to full control and outside the key Budweiser, Harbin and Sedrin brands and breweries. In those businesses where ABI only has a minority participation it has no influence over strategy and we would contend that the capital tied up in these stakes could be re-invested in the controlled platform in China. ABI confirmed our contention at the investor conference in June in St Louis.

Elsewhere in Asia there may be a theoretical case for ABI to expand in fast growth markets such as India or Vietnam but we cannot see an obvious M&A route in. In Russia it may be that combining with another player to take on Carlsberg’s market share dominance may hold some strategic attraction but we do not see this as an imperative.

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ABI still has the option to buy back the Central European platform it sold to CVC for US$ 2.2bn should CVC decide to sell and an option to buy back the South Korea business sold to KKR for US$ 1.8bn after 5 years at a pre-determined price.

There may be capacity to make another very large-scale, debt financed acquisition in the medium term Of course it is possible that ABI seeks to repeat the success in large-scale transactions in the medium term. ABI has made no public comments on future large scale M&A transactions. By way of illustration we estimate ABI could acquire an asset of US$ 60bn in FY12E at a multiple of 12.5x EBITDA and still leave net debt/EBITDA at around 4.2x.

This illustration ignores any potential synergy capture. Given ABI management’s record in securing synergy capture as well as generating value through applying “appropriate” capital structures to acquired assets we think it reasonable to assume that ABI could “capitalise” value to drive an even larger scale transaction. We note that, in European beverages at least, this would not preclude assets as large as Diageo or SABMiller in our view, although ABI has made no public comments on any such transactions. .

SABMiller has three very significant partnerships We believe SABMiller still has significant opportunities to pursue further M&A which could add strategic value. We would contend that these opportunities might lie in SABMiller securing further equity participation, or indeed full control, of those assets where it has a joint venture partner, specifically, BGI/Castel in Africa, CR Snow in China and MillerCoors in the US.

However, these opportunities, self evidently, can only be explored in conjunction will a partner who is willing to sell. We examine each of these relationships in more detail below but first we revisit the potential opportunity presented by the Fosters beer business.

We would see limited financial value in SABMiller acquiring Fosters beer assets We have already discussed the potential scenario of SABMiller acquiring the Fosters beer business in our note “Revisiting the investment case; providing an update on Foster’s” 9th June 2010. In this analysis we used an enterprise value of US$ 11bn for the Fosters beer business which, at the time, equated to a very full multiple of 13.3x historical EBITDA when compared to prior developed beer market transactions. We also assumed 100% debt funding at an incremental debt cost of 6% and eventual cost synergy capture of US$ 153mn. On the basis of these assumptions we saw a transaction as being moderately earnings accretive for SABMiller and covering a deal specific WACC in year 5.

As we have noted above, our Australian analyst, Stuart Jackson, sees a fair sum of the parts value for Foster's Group at AUD 5.26 per share, below the current price at AUD 5.68. Within this valuation the EV of the beer business, with parity now between AUD and US$, and assuming the major proportion of Fosters existing debt

25



is allocated to the beer business, would still be close to the US$ 11bn valuation we used in our original scenario analysis.

So, on this basis, even without any further premium being paid, we would point out to investors that the current Fosters share price is assuming a valuation on the beer business in excess of that we used in our scenario analysis.

A full combination with Castel would offer strategic attractions in our view SABMiller owns a 20% equity stake in Castel’s African beverages businesses following the deal concluded in 2001 where SABMiller swapped a 38% stake in its Africa operations (outside South Africa). Since then the two partners have also jointly invested in a further five new markets as well as extending their presence in the original combined platform, though the equity participation of each partner in extending the platform has varied with each transaction.

Castel is a privately owned French company with interests in wine in France, as well as beer and soft drinks in Africa following the acquisition of Brasseries et Glacieres Internationales (BGI) in 1990. Initially Castel was concentrated in Francophone West Africa which complemented SABMiller’s historical focus on Southern and East Africa.

Given the longer term growth opportunities from increasing consumption driven by increasing wealth across beverage categories in Africa we think there would be a powerful strategic logic for SABMiller to secure a bigger slice of the growth in the Castel businesses.

However we note that, following recent speculation (Times Oct 7th) Castel Groupe has indicated that there are currently no talks between themselves and SABMiller over the BGI African assets (Bloomberg Oct 7th). SABMiller has made no public comment on these reports.

There are significant minority and associate partners in SABMiller’s Africa platform SABMiller’s Africa division accounted for a reported 11% of volumes, 10% of revenue and 13% of EBITA in FY10.

This includes the fully consolidated businesses where SABMiller has equity and/or management control. Here there are also often significant (over 30%) external minority shareholders. In addition SABMiller has associate stakes in businesses in Kenya and in Zimbabwe as well as the direct 20% stake in Castel/BGI itself.

In total SABMiller reported total Africa volumes of 27.8 mn hls in FY10 with lager beer volumes of 13.476 mn hls, soft drinks volumes of 10.442 mn hls and other beverages of 3.922mn hls.

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Table 9: SABMiller Africa businesses FY10E Country Share of Equity Mkt. Size Mkt. Share Volume Net Sales EBITA mhl % mhl $ $ Angola beer 4.2 16% 0.7 52 21 Angola soft drinks 28-37% 3.3 153 42 Botswana beer 31% 0.4 100% 0.4 33 20 Botswana soft drinks 31% 2.3 113 49 Ethiopia soft drinks 0.8 32 11 Ghana beer 43% 1.2 44% 0.5 32 18 Kenya beer 12% 4.4 21% 0.9 31 4 Lesotho beer 39% 0.6 73% 0.5 25 11 Lesotho soft drinks 39% 0.1 4 1 Malawi soft drinks 50% 1.0 48 14 Mozambique beer 49% 1.7 98% 1.6 88 43 Swaziland beer 37% 0.3 77% 0.2 17 10 Swaziland soft drinks 37% 0.2 10 5 Tanzania beer 33% 2.8 96% 2.7 171 94 Tanzania soft drinks 33% 0.3 11 4 Uganda beer 60% 2.3 52% 1.2 62 29 Uganda soft drinks 60% 0.8 24 9 Zambia beer 54% 1.0 100% 1.0 56 14 Zambia soft drinks 54% 2.0 62 10 Zimbabwe beer 22% 0.6 72% 0.4 3 0 Zimbabwe soft drinks 22% 4.2 20 -1 Castel beer (associate) 20% 25.6 22.6 990 119 Castel soft drinks (associate) 20% 15.0 397 39 Sub-Saharan Africa (Sub-Total) 23.9 2,434 565 - beer (ex-Zimbabwe, share of Castel) 13.5 - soft drinks (ex-Zimbabwe, share of Castel) 10.4 - other alcoholic beverages 3.9 Source: Plato Logic, JP Morgan estimates

SABMiller and Castel/BGI have complementary platforms across Africa In calendar 2009 Castel/BGI beer volumes were 21.7mn hls according to Plato Logic. In addition we estimate Castel/BGI sold a further 15mn hls of soft drinks and other beverages in FY10 across the region. The largest markets for Castel beer are Angola and Cameroon with significant soft drinks and beer exposure also in DR Congo, Tunisia and Ethiopia.

In the table below we show key metrics for the major beer markets in Africa. The markets where SABMiller has a presence are marked in dark blue with Castel/BGI’s major markets marked in light blue and those where both companies are present in grey. Clearly a full combination of SABMiller and Castel would lead to dominance across the continent with the notable exception of Nigeria where Heineken and Diageo are dominant in beer and Coca Cola Hellenic Beverages is the Coke bottler.

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Table 10: Key African beer markets volume, forecast growth and key economic metrics 2009 Beer consumption CAGR consumption Litres per capita GDP per capita GDP growth Population

000s hls 2009-2015 2009 PPP 2009 2009 mns South Africa 28505 2.0% 58.6 10300 -1.6% 48.8 Nigeria 14298 4.5% 9.1 2300 6.1% 156.7 Angola 8247 4.8% 45.4 8400 -0.3% 18.2 Cameroon 5255 3.0% 28.9 2300 0.9% 18.2 DR Congo 3863 6.5% 5.8 300 2.0% 66.1 Kenya 3748 4.4% 9.7 1600 2.6% 38.6 Ethiopia 3051 7.1% 3.8 900 8.7% 79.5 Tanzania 2966 4.2% 7.2 1400 6.0% 41.4 Uganda 2570 6.3% 8.2 1200 5.3% 31.4 Congo 1693 4.6% 42.3 3900 7.6% 4.0 Mozambique 1563 5.8% 7.1 900 6.3% 22.0 Ghana 1446 4.5% 6.1 1500 3.5% 23.5 Cote d'Ivoire 1386 2.6% 7.2 1700 3.8% 19.3 Burundi 1341 5.7% 16.4 300 3.5% 8.2 Algeria 1262 2.5% 3.6 7100 2.2% 35.3 Egypt 1224 3.7% 1.6 6000 4.7% 75.7 Tunisia 1219 4.4% 11.5 8200 3.0% 10.6 Zimbabwe 1103 5.9% 7.5 n/a -1.3% 14.7 Gabon 1094 3.1% 59.4 14000 -1.1% 1.8 Morocco 1001 3.1% 2.9 4700 4.9% 34.7 Namibia 936 2.9% 44.1 6600 -0.8% 2.1 Madagascar 916 5.8% 5.1 1000 -1.0% 18.1 Rwanda 885 5.1% 9.1 1000 4.5% 9.8 Burkina Faso 764 5.6% 5.2 1200 3.2% 14.7 Zambia 759 5.3% 5.9 1600 6.3% 12.9 Benin 622 5.2% 7.6 1500 2.7% 8.2 Sudan 571 8.8% 1.5 2300 4.2% 39.0 Togo 477 4.7% 7.9 900 3.1% 6.0 Botswana 407 2.8% 22.4 12800 -5.4% 1.8 Lesotho 360 1.6% 15.6 1600 1.6% 2.3 Chad 342 3.2% 3.4 1900 5.3% 10.0 Malawi 298 4.7% 2.2 800 7.6% 13.6 Senegal 208 3.3% 1.8 1600 1.7% 11.8 Swaziland 195 2.9% 17.9 4400 0.4% 1.1 Equatorial Guinea 37500 5.3% 0.6 Central African Republic 153 4.1% 3.5 700 1.7% 4.3 Sierra Leone 141 4.2% 2.5 900 4.0% 5.7 Mali 116 2.9% 0.9 1200 4.4% 13.4 Niger 80 2.2% 0.5 700 -1.2% 14.8 Gambia 36 4.2% 2.2 1400 5.2% 1.6 Source: Plato Logic, CIA World FactBook, Company data, JP Morgan estimates

Castel/BGI is one of the world's fastest growing brewers Since 1994 Castel/BGI beer volumes have growth at an average rate of near 10% and in excess of 11% since the deal with SABMiller was concluded in 2001. It is the word’s 13th largest brewer and is now nearly on a par with Anadolou EFES and Diageo.

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Figure 8: Castel/BGI beer volumes 1994-2009 mn hls

-

5.0

10.0

15.0

20.0

25.0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Plato Logic

We estimate 80% of Castel/BGI would be valued at US$ 10.3bn … Taking full control of Castel/BGI’s beer and soft drinks assets in Africa would make a very significant difference to SABMiller at the Group level. We estimate that pro forma, assuming full consolidation of our estimated FY10E EBITA for Castel/BGI Africa assets and SABMiller Africa (though there would still remember be minorities interest ex Castel here), Africa (ex South Africa) would be around a third of EBITA including associates.

Given the limited disclosure on the contribution from the various parts of the SABMiller/Castel assets in Africa it is not easy to put a value on them. In FY10 the African associates and joint ventures disclosed an EBITA contribution of US$ 248mn. We assume that the contribution from the Zimbabwe and Kenyan associates was minimal although the growth in Angola soft drinks, as well as SABMiller's direct owned Angolan beer assets (in what is now Africa’s third largest beer market) suggests the contribution from this market is now very significant.

We estimate the 20% of Castel/BGI might have contributed some US$ 180mn of EBITA therefore in FY10. This implies total Castel/BGI EBITA at around US$ 900mn and EBITDA, assuming relatively high depreciation at 1.3x EBITA in line with the reported SABMiller Africa business, of US$ 1.17bn.

If we assume a multiple of some 11x EBITDA trailing based on the blended multiples on the public minorities in Guinness Nigeria and Nigerian Breweries (per Bloomberg) this would put a value of US$ 12.9bn on the total Castel/BGI business in Africa and some US$ 10.3bn on the 80% not owned by SABMiller.

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… with some US$ 800mn for the 38% stake in SABMiller Africa ex minorities We estimate that SABMiller Africa, outside of the Castel and other JV/associates, contributed EBITA of US$ 316mn in FY10. The 38% stake in these businesses owned by Castel would equate to some US$ 80mn after stripping out an average "external" minority interest in these assets of 33%. At 10x EBIT Castel's stake in these assets might be worth some US$ 800mn.

In total then we estimate the “cost” of taking control of the entire combined Castel/BGI and SABMiller Africa platform (without buying out the remaining external minorities) might be reckoned at around US$ 11bn on our estimates. Once again we would stress however that, given the uncertainty of the contribution of the various component parts of the Africa platform, we think there is some margin for error here.

A combination with Castel would enhance SABMiller’s group growth What we do think we can say with some degree of certainty though is that taking control of the Castel/BGI assets in Africa would, like Fosters, utilise all of the balance sheet capacity of SABMiller. However, we think there would be a significant positive impact on SABMiller's top line growth which we think would be welcomed by shareholders.

In addition we would assume that there would be significant scope for both cost synergies (notably in route to market in countries where both SABMiller and Castel have a presence such as Angola and Nigeria) and from revenue synergies given the much enhanced full beverage portfolio. We would also contend that the pan Africa spread of a combined business would reduce the impact of specific country risk.

So all in all we believe a full combination with Castel in Africa would offer very significant strategic attractions. We note that SABMiller has the right of first refusal should Castel look to sell these assets.

SABMiller’s biggest volume platform is China SABMiller beer interests in China are owned through its 49% stake in the joint venture China Resources Snow formed in 1994. Its partner is China Resources Enterprise (CRE, covered by J.P. Morgan analyst Ebru Sener Kurumlu) which has retail and food processing businesses, as well as other beverages assets, in addition to its 51% stake in CR Snow. CRE in turn is controlled by China Resources National Corporation which has a 51.4% stake.

At end 1H10 CR Snow had 72 breweries across China and is the leading brewer with c. 20% market share in 2009, ahead of Tsingtao, ABI and Yanjing. .

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Figure 9: China beer market volume share 200-2009

0%

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2000 2003 2006 2007 2008 2009CR Snow Tsingtao ABI Beijing Yanjing Other

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2000 2003 2006 2007 2008 2009CR Snow Tsingtao ABI Beijing Yanjing Other

Source: Company data, JP Morgan estimates

The Chinese beer market is showing mid single digit volume growth and is now over twice the size of the US, the next largest market. However, overall profitability is still low at some USD 2 per hl. We estimate China is the ninth largest beer profit pool globally well below Russia and Australia and on a par with Spain.

Figure 10: China beer market volume and volume growth 1997-2010E Mn hls

6.4%5.5%

6.2%

1.8%

4.8%6.1%

14.3%

5.2%

14.5%

11.3%

5.0%6.2%

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E0

50000

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mn hls % y oy grow th Source: Plato Logic, JP Morgan estimates

The Snow brand family is now well over 85% of CR Snow’s total volume selling across four price points. CR Snow total volumes, including contributions from greenfield and acquired breweries have grown at a double digit compound rate over the last three years with total volume sales of 84mn hls in CY 2009. We estimate capacity utilisation is running at around 60% across the platform.

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Figure 11: SABMiller China reported organic lager beer volume growth FY07-H111

30%

25%22%

7%

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-5.0%

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FY07 Q108 H108 Q308 FY08 Q109 H109 Q309 FY09 Q110 H110 Q310 FY10 Q111 H111

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FY07 Q108 H108 Q308 FY08 Q109 H109 Q309 FY09 Q110 H110 Q310 FY10 Q111 H111 Source: Company data

Figure 12: CR Snow Brewery volume and average selling price growth (in HKD) CY03 to CY09

-10.0%

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2003 2004 2005 2006 2007 2008 2009

Total v olumes Av erage selling price Source: Company data, JP Morgan estimates

Figure 13: CR Snow Brewery capacity, sales volumes and utilisation CY02 to CY09 Mn hls

0%

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2002 2003 2004 2005 2006 2007 2008 20090

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Capacity Volumes Utilisation Source: Company data, JP Morgan estimates

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Margins vary significantly across the CR Snow platform In CY09 CR Enterprises reported EBITDA across the beverages division, which also includes its directly owned non-beer assets, of HKD 2,660mn or US$ 343mn. This equates to a 13% EBITDA margin. Gross margin on the beer business exceeded 38% and we estimate EBIT margin was around 8.5% for these assets.

For the more established breweries however EBIT margins are well into the teens, and in some cases over 20%, with overall margin held back by the more recent investment in the new breweries. Whilst the overall profitability of Snow is around USD 2 per hl (at EBIT) in line with the overall China market there are established regions and breweries at over USD 5 per hl we believe.

Margin expansion has also been held back by relatively muted pricing with the exception of 2008 when the industry passed on the significant input cost inflation. SABMiller has also we believe employed robust pricing in order to build share in the newer regions. Whilst we expect muted price inflation in the near term (although input cost inflation may drive prices up in CY11), over the longer term we do see the price environment firming, driven by industry consolidation, brand investment and increasing consumer affluence. This will be the main driver of industry profit expansion, we believe.

However, in the medium term continued investment in the platform at CR Snow is likely to constrain margins.

We value the CR Snow business at US$ 2.7bn In 1H10 CR Snow saw 5% volume growth but just 1% price/mix in local currency terms. Gross margins rose by some 100bps but increased sales and marketing investment left profit flat. In Q310 to end September volume growth accelerated to 16% with 3% price/mix and earnings up 30%.

The CR Snow capex budget for CY10 is some HKD 3.5bn on an existing asset base of HKD 33bn so the asset base is still growing at some 10%. Pre tax returns are still around 6% using EBITDA as a proxy for cash.

Figure 14: CR Enterprises beverages EBITDA margins CY05 to H110

0.0%

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2005 2006 2007 2008 2009 H1100.0%

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2005 2006 2007 2008 2009 H110 Source: Company data

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Our China consumer analyst, Ebru Sener Kurumlu, expects CY10E earnings from the beer division of China Resources Enterprises of HKD 836mn or US$ 108mn. In her sum of the parts valuation she puts these earnings on a multiple of 25x to give a total value of US$ 2.7bn with CRE’s 51% equity stake at US$ 1.37bn.

We note that shares in Tsingtao, the leading brewer in China, trade at a FY10E PE of 30.7x Bloomberg consensus estimates and for Yanjing Brewery, the fourth largest brewer at 27.0x.

We do not expect any near term change to the CR Snow ownership structure At present we believe that SABMiller is satisfied with the current ownership structure of CR Snow and we have no reason to believe that CRE is not also similarly content. In our view the partnership means a much “deeper engagement” with local stakeholders, including consumers, retailers distributors and government.

We think this partnership of local and global is still adding value and we would not expect any change in the structure in the medium term. However we note that SABMiller has a right of first refusal should CRE wish to sell.

MillerCoors is the largest partnership in terms of contribution In terms of contribution SABMiller’s largest partnership is the MillerCoors joint venture with Molson Coors in the US. This combination was announced in October 2007 and closed in June 2008. This merged the US and Puerto Rico assets of Molson Coors and SABMiller on a debt free basis with SABMiller taking a 58% equity stake and Molson Coors 42%. The business had pro forma EBITDA of US$ 842mn at the time of the announcement.

Initial cost synergies to be generated from the combination were US$ 500mn which was subsequently revised upwards by a further US$ 200mn with an additional ongoing cost savings benefit of US$ 50mn coming from the legacy companies.

In CY10 we expect the MillerCoors JV to deliver EBITDA of at least US$ 1.5bn. Based on an EBITDA multiple of 10x this would mean that SABMiller's equity share would be valued at some US$ 8.7bn and Molson Coors’ share at US$ 6.3bn.

We note that “old” SAB, when it acquired Miller in 2002, paid a pro forma EBITDA multiple of 9x. The combination of Molson and Coors was valued at the time of the transaction in 2004 at a pro forma EBITDA multiple of 10x. The 2007 EV/EBITDA trailing multiple paid by ABI for Anheuser Busch was 11x.

We note that in FY10 SABMiller received US$ 707mn as a dividend from its joint ventures which primarily comprise MillerCoors and Pacific Beverages (with Coca Cola Amatil) in Australia. We do not think there is any dividend flow from Pacific Beverages. If we put this dividend on an 8% “yield” this would value SABMiller’s stake in MillerCoors at US$ 8.8bn in line with the EBITDA based

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multiple valuation. We forecast the dividend flow from MillerCoors and other JVs to rise by 20% in FY11E.

As with the other partnerships we do not envisage any near term change to the structure of the MillerCoors JV.

SABMiller may look to broaden its footprint further in South America Outside of these potential theoretical opportunities to take more control in the key partnerships we would also assume that SABMiller would be interested in expanding its footprint further in its key existing regions were opportunities to arise.

• We believe SABMiller would be keen to extend its footprint further in South America beyond Colombia, Peru and Ecuador based on recent public comments (Bloomberg 24th November). The recent acquisition of Isenbeck from Warsteiner in Argentina is a further step in this direction. It acquired the Isenbeck and Warsteiner beer brands which have c.3% market share selling 600k hls in Argentina, where AmBev (through Quilmes) has a 74% volume share and CCU (Heineken) a 22% share. SABMiller will try to sell these beers in “adjacent markets” such as Paraguay, Uruguay and south of Brazil.

• In Africa, outside of any combination with Castel, we assume the focus would be on capacity addition and expansion into other beverage categories.

• In China we assume the strategy of greenfield and brownfield investment in capacity will continue.

• In Europe, west and east, it is less clear to us where SABMiller might seek scale M&A opportunities.

Carlsberg may extend its footprint in emerging Asia For Carlsberg we think the focus, from an M&A perspective, is firmly on Asia.

We see limited opportunity to expand the footprint across the North West Europe or Eastern Europe platforms, a consequence of potential regulatory issues, strategic intent and limited opportunity.

Since the S&N acquisition Carlsberg has invested further in one of the holding companies of its partner in Wusu Brewery Group in China which gave it an effective stake of 63.4% and allowed it to fully consolidate this business. It has also signed an agreement to increase its stake in Habeco (Hanoi brewery) in Vietnam from 16.07% to 30% and to take control of its government partner's stake in Hue Brewery, also in Vietnam.

More importantly it has recently increased its stake in Chongqing Brewery in China by 12.25% to 29.71% for DKK 2.1bn (USD 385mn). The original stake was acquired with the S&N assets. Chongqing is the leader in Chongqing province with 15 breweries both there and in Sichuan, Guizhou, Guangxi, Hunan, Anhui, Zhejiang and Jiangsu provinces with sales volumes of 10 mn hls in 2009 and 2.3% national share.

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The Chongqing Brewery share price has more than doubled since Carlsberg extended its ownership and now has a total market cap of some US$ 5.4bn and trades on a calendar CY10E PE based on Bloomberg consensus of 169x.

We do think Carlsberg might look to extend the equity stakes across its China platform as well as in Vietnam. Carlsberg has indicated in recent investor presentations (September 15th) that Asia remains a key element of its long term growth strategy.

• Outside of Chongqing Carlsberg has equity stakes in groups with 20 breweries including the Huizhou plant in Guangdong which produces Carlsberg. It is a minority shareholder in Qinghai Huanghe brewery (33% stake), in Lanzhou Group in Ningxia (30%) and in the Lhasa brewery in Tibet (33%). In total Carlsberg estimates it has 60% volume share across Western China.

• In Vietnam in addition to the JV in the Hanoi Brewery through the current stake in Habeco and the Hue brewery JV, Carlsberg has a 60% stake in South East Asia Brewery and a 31% stake in the HaLong brewery.

• It has a 50% stake in the monopoly JV in Laos and in a Cambodia JV where market share is 41%. In India it has a 45% equity stake and 4 breweries, is now the majority partner in Nepal, and has a 17% stake in Lion in Sri Lanka.

• In the mature Asian markets it has fully owned subsidiaries in Singapore and Hong Kong and a 51% majority in publicly quoted Carlsberg Malaysia.

Figure 15: Carlsberg Asia assets Western ChinaMarket share ~ 60%*

NepalMarket share 71%Ownership share 49.8%

IndiaMarket share n.a.Ownership share 45%

Sri LankaMarket share n.a.Ownership share 17.4%

SingaporeMarket share 60%Ownership share 51%

Hong KongMarket share 19%

LaosMarket share 99%Ownership share 50%

VietnamMarket share 34%Ownership share:SEAB 60%Hue 50%Hanoi Brewery 16%Halong Beer & Bev. 31%

CambodiaMarket share 38%Ownership share 50%

MalaysiaMarket share 44%Ownership share 51%

China – Premium beerMarket share 6%

Western ChinaMarket share ~ 60%*

NepalMarket share 71%Ownership share 49.8%

IndiaMarket share n.a.Ownership share 45%

Sri LankaMarket share n.a.Ownership share 17.4%

SingaporeMarket share 60%Ownership share 51%

Hong KongMarket share 19%

LaosMarket share 99%Ownership share 50%

VietnamMarket share 34%Ownership share:SEAB 60%Hue 50%Hanoi Brewery 16%Halong Beer & Bev. 31%

CambodiaMarket share 38%Ownership share 50%

MalaysiaMarket share 44%Ownership share 51%

China – Premium beerMarket share 6%


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Heineken’s emerging market assets are not fully controlled Following the Femsa Cerveza acquisition Heineken now has around 60% of pro forma volume coming from emerging markets and, we estimate, 55% of pro forma FY10E profit.

However, we would remind investors that a significant proportion of Heineken’s emerging market exposure is not fully controlled and/or is held through associate stakes.

We would not expect Heineken to commit more capital to its platform across Europe, west and east, and in fact it has been reducing the capital employed across the region. There is still a 36.2% minority partner in the quoted Grupa Zywiec subsidiary in Poland with a current market value of €520mn, but we are not aware of any near terms plans by Heineken to buy out its partner. We would also be very surprised to see Heineken increase its equity stake in its German assets held via the Brau Holding International (BHI) JV with the Schorghuber Group.

Table 11: Heineken Germany breweries and ownership stake Company and equity stake Locations Paulaner Brauerei (25%) Munich, Rosenheim Kulmbacher Brauerei (31.4%) Chemnitz, Kulmbach, Plauen Fürstlich Fürstenbergische Brauerei (49.9%) Donaueschingen Hoepfner Brauerei (49.9%) Karlsruhe Schmucker Brauerei (49.8%) Mossautal, Odenwald Würzburger Hofbräu (31.4%) Würzburg, Poppenhausen Source: Company reports.

In Africa there are still significant minority interests in Heineken’s key subsidiaries, notably in Nigerian Breweries, where the public minority (45.9%) has an equity market value of US$ 1.8bn ,and in unquoted Consolidated Breweries (49.6% minority). In total we estimate the value of Heineken Africa minorities might be in the region of US$ 3bn. We believe Heineken however has no intention to buy in any of the minority stakes in Africa, though Heineken has made no public comment in this regard.

Table 12: Heineken Africa business structure end 2009 Country Company and equity stake No of plants Algeria Tango (100%) 1 Burundi Brarudi (59.3%) 2 Cameroon Brasseries du Cameroun (8.8%) 4 Congo Brasseries du Congo (50%) 2 Democratic Republic of Congo Bralima (95%) 4 Egypt Al Ahram Beverages Company (99.9%) 3 Ghana Guinness Ghana Breweries Ltd. (20%) 2 Israel Tempo Beverages Limited (40%) 1 Jordan General Investment (10.8%) 1 Lebanon Almaza (67%) 1 Morocco Brasseries du Maroc (2.2%) 3 Namibia Namibia Breweries (14.6%) 1 Nigeria Nigerian Breweries (54.1%) 7

Consolidated Breweries (50.4%) Réunion Brasseries de Bourbon (85.7%) 1 Rwanda Bralirwa (70%) 2 Sierra Leone Sierra Leone Brewery (83.1%) 1 South Africa Sedibeng Brewery (75%) 1 Tunisia Nouvelle de Brasserie ‘Sonobra’ (49.99%) 1 Source: Company reports.

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Heineken also has partnerships in other key regions, through CCU in South America, Asia Pacific Breweries and United Breweries in India. In all cases we see no medium term change to Heineken’s equity participation in these partnerships.

The ownership stake in Companias Cervercerias Unidas (CCU) in Chile and Argentina is jointly held through the Inversiones y Rentas holding company by Heineken and Quinenco, a Chilean conglomerate. This leaves Heineken with an effective 33.1% stake in the business in Chile and 30.7% in Argentina. In Argentina CCU is the number two brewer behind AmBev with, we estimate, a 22% volume share and 8% profit pool share. In Chile it is the dominant brewer with over 90% profit pool share but CCU is also involved in spirits (5% of Q310 EBITDA), wines (15%) and soft drinks (23%). CCU has delivered CAGR 2002-2009 revenue and EBITDA growth of 12%.

The current market cap of CCU is US$ 3.8bn with Heineken’s equity interest worth around US$ 1.2bn. Outside of CCU there are also still sizeable minority interests in Latin America (Surinam, Panama and Bahamas) and most of Heineken’s exposure to Central America and the Caribbean is through minority stakes.

In India Heineken has a 37.5% interest in United Breweries Limited (UBL), as does the shareholder group led by Vijay Mallya. Following the restructuring of interests at the end of last year, UBL now also owns what were Asia Pacific Breweries’ 3 breweries in India. In total UBL owns 18 breweries, with volume market share of 48%, sales volume of 6.4mn hls and EBIT of c. €30m. UBL’s total market cap is now some US$ 2.3bn.

Heineken now owns an effective interest of 41.9% in Asia Pacific Breweries (APB) which, following the recent restructuring, includes controlling stakes in Indonesia and New Caledonia as well as the “legacy” assets of APB which in some cases contain significant minorities. APB’s current market cap is US$ 3.7bn.

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Table 13: Heineken Asia Pacific business structures end 2009 Country Company and equity stake No of plants Cambodia Cambodia Brewery (33.5%) 1 China Shanghai Asia Pacific Brewery (46.0%) 1

Hainan Asia Pacific (46%) 1 Kingway Brewery (9.9%) 7 Guangzhou Asia Pacific Brewery (46%) 1

India Asia Pacific Breweries (Aurangabad) (41.9%) 2 Asia Pacific Breweries – Pearl Private (41.9%) 1 United Breweries (37.5%) 11 Millennium Alcobev (68.8%) 4

Indonesia Multi Bintang Indonesia (85.0%) 2 Laos Lao Asia Pacific Breweries (28.5%) 1 Malaysia Guinness Anchor Berhad (10.7%) 1 Mongolia MCS Asia Pacific Brewery (23.1%) 1 New Caledonia Grande Brasserie de Nouvelle Calédonie (87.3%) 1 New Zealand DB Breweries (41.9%) 3

DB South Island Brewery (27%) 1 Papua New Guinea South Pacific Brewery (31.8%) 2 Singapore Asia Pacific Breweries (Singapore) (41.9%) 1 Sri Lanka Asia Pacific Brewery (Lanka) (25.2%) 1 Thailand Thai Asia Pacific Brewery (15.4%) 1 Vietnam Vietnam Brewery (25.2%) 1

Hatay Brewery (41.9%) 1 VVBL Da Nang Co (25.2%) 1 VBL Tien Giang (25.2%) 1 VBL Quang Nam (20.1%) 1

Source: Company reports.

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The potential for distribution of cashflows • In our view it could be possible for ABI to escalate the dividend payout

whilst continuing to rapidly de-gear. To offer a 3% dividend yield in CY11E would require a doubling of the dividend we currently forecast but in cash terms this would only add a negligible 0.1x “turn” to the net debt/EBITDA ratio. If ABI were to increase the dividend payout to 80% in FY12E this would still leave the net debt to EBITDA at the 2x target level but deliver a yield of 4.0%.

• SABMiller already offers the most attractive dividend yield of the European brewers at 2.7% CY1E with the 1H10 dividend growing at an attractive 15%. We do not currently anticipate any change to this level of dividend payout for SABMiller given the potential M&A opportunities that may arise. We would remind investors that there are still substantial “block” shareholders in SABMiller, notably Altria Group (27.14% per Bloomberg) and Bevco Ltd (14.20% and who are now “unlocked”).

• We expect guidance from Carlsberg on potential cash distribution at the FY10 results. Carlsberg has already indicated that it would reassess its distribution policy following the successful de-gearing below the 2.5x net debt/EBITDA target. Carlsberg currently pays out a relatively low dividend, which equates to a dividend yield of 0.9% CY10E. Given Carlsberg’s FCF yield (9.7% in FY11E) any change in policy could herald a very meaningful change for investors.

• For Heineken there is a continuing call on free cashflow which stems from the buyback of NV shares to deliver to Group FEMSA as part of the consideration for the FEMSA Cerveza transaction. Based on the pace of buyback to date this would leave Heineken satisfying its obligation to deliver 29mn shares in 2H12E. We would assume that Heineken would make no change to its dividend policy as the buyback continues. We note that Group FEMSA, under the standstill arrangements, is free to start selling shares in both Heineken NV and Heineken Holdings from year 3 up to a maximum of 1% of the total equity in any quarter.

We see scope for accelerated dividend payout at ABI and Carlsberg Following debt paydown, and in the absence of accelerated capex or M&A activity, we think investors might look forward to a potential distribution of excess cashflow from the European brewers in the medium term.

However the “form” that this distribution is taking, or might take in future, will differ substantially for each company in our view.

ABI could commit to a higher dividend Whilst we believe de-leverage towards the 2.0x net debt/EBITDA optimum capital structure, as well as any potential M&A opportunity, would take precedence, in our view it could be possible for ABI to also simultaneously escalate the dividend payout.

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We would remind investors that the controlling shareholders took on significant “personal” debt to inject €2.8bn of new equity at the time of the AB deal and might therefore favour an enhanced dividend to reduce their leverage. The €2.44 dividend (on the old share base) paid by InBev in FY07 (an 80% payout) delivered some €950mn we estimate to the controlling shareholders but clearly this on its own was not enough to cover the equity injection required to partially finance the acquisition. We note that there have been regular sales of shares by the controlling shareholder vehicles since the ABI transaction, in total we estimate some 3.5% of the equity. We think this will have in part covered interest payments due on any “personal” debt. We also note that at end FY09 the Stitchting AK, which is subject to a long term shareholders agreement through to 2024 we believe, owned 45.05% of ABI with other predominantly Belgian shareholder vehicles taking total ownership by the Brazilian and Belgian control group to 53.44%.

We now assume a higher dividend based on a payout of “clean” net income ABI declared a dividend of €0.38 in FY09, a rise of 36%, and a payout ratio of 21%.

We currently assume a rise in the payout ratio to 30% in FY10E and to 35% in FY11E and FY12E in our ABI model to leave a dividend payout of €0.73 per share in FY12E. Our payout is now based on our forecast of “clean” net income in FY10E (previously we based this on reported net income) and we assume a closing USD/EUR rate of 1.40 in FY10E and 1.45 in FY11E. This means dividend growth of 40% in FY10E followed by 22% in FY11E and 12% in FY12E.

There is a wide range of dividend expectations Our FY10E €0.53 dividend per share forecast compares to a Bloomberg mean consensus of €0.45 with a very wide range of €0.32 to 0.62. By FY12E our €0.73 is in line with consensus but the range then is €0.39 to €1.58.

ABI’s “historical” stated dividend policy was to pay out an average of 25% of net earnings. However this would be postponed for 2 to 3 years post the AB acquisition to accelerate de-leverage. The payout in FY09 fell to 21% of adjusted EPS. With the pace of de-leverage running well ahead of market expectations we think there will be room to reassess this dividend payout. Management indicated at the 3Q10 results that the Board would make a decision on the payout level at the time of the FY10E results.

We believe ABI, post the deleverage phase, would aim to offer a dividend yield in line with large cap European consumer staples peers. This would imply a c. 3% yield in CY11E. This would require a doubling of the dividend we currently forecast in FY11E. In cash terms this would amount to an extra US$ 1.5bn but would only add a negligible 0.1x “turn” to the net debt/EBITDA ratio we estimate in FY11E.

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A higher payout could be accommodated within the leverage target If ABI were to increase the dividend payout to 70% in FY11E (to deliver the 3% yield as illustrated above) and then again to 80% in FY12E this would still leave the net debt to EBITDA at the 2x target level at FY12E on our estimates.

This would imply a €1.65 dividend per share in FY12E and a yield of 4% at the current share price and would cost an “extra” US$ 3.6bn in cash terms in FY11E and FY12E.

So we do think, in the absence of attractive M&A opportunities, ABI could accelerate the dividend payment whilst still ensuring de-leverage remained on track. Having said that, we would also expect AmBev's dividend payout to continue to accelerate if such a “distribution” strategy were pursued which would have some impact in terms of cash “leakage” for ABI.

Moreover we have assumed in our scenario analysis here that any cash distribution would be in the form of accelerating dividend rather than share buyback. We assume that, in the medium term at least, a dividend might prove more valuable to the controlling shareholders of ABI than a buyback of “public” shares, in order to reduce “personal” leverage.

Figure 16: Major European consumer staples stocks dividend yield CY11E

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

Carlsberg (Dkk)

Anheuser Busch InBev (€)

Pernod Ricard (€)

Heineken (€)

L'Oreal (€)

SABMiller (p)

Nestlé (SF)

Danone (€)

Reckitt (p)

Diageo (p)

Unilev er NV (€)

Imperial Tobacco (p)

BAT (p)

Source: J.P. Morgan estimates, priced at COB 29th Nov

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SABMiller already offers the best dividend yield SABMiller already offers by far and away the most attractive dividend yield of the European brewers at 2.7% with the 1H10 dividend growing at an attractive 15%. SABMiller has no stated dividend policy but we assume a dividend cover ratio for FY11E and beyond of 2.4x in line with the historical rate of pay out. Our FY10E DPS forecast of US$ 0.78 per share is in line with median Bloomberg consensus at US$ 0.76 and equates to some US$ 1.3bn in cash terms.

We do not currently anticipate any change to this level of dividend payout for SABMiller given the potential M&A opportunities which may arise. At the 1H11 results the CFO indicated that the first call on SABMiller’s post dividend free cash flow remains de-leverage. If management could see no alternative use for the cash in the “medium term” then it might “take a view on the distribution policy”.

We think a similar logic also applies in the case of any distribution in the form of a share buyback. We would remind investors that there are still substantial “block” shareholders in SABMiller, notably Altria Group (27.14% per Bloomberg) and Bevco Ltd (14.20% now unlocked).

We expect guidance from Carlsberg on potential cash distribution at the FY10E results Carlsberg has already indicated that it would reassess its distribution policy following the successful de-gearing below the 2.5x net debt/EBITDA target.

Carlsberg currently pays out a very low dividend, we estimate DKK 5 per share in FY10E, which equates to a dividend cover ratio of 7.6x and a yield of 0.9%.

We had initially assumed that Carlsberg might contemplate a limited share buyback to distribute “excess” cashflow to shareholders in the absence of M&A opportunities. Following the issue of equity to fund the acquisition of the S&N assets the Carlsberg Foundation’s economic interest in the company had fallen to c. 30% and we saw a share buyback of the public holding as a way for the Foundation to "rebuild" its effective economic interest in the Group as well as underpinning the shares in what is still a relatively illiquid stock, compared to beverages peers. By way of example we note that if Carlsberg used the DKK 9.3bn debt pay down capacity we estimate in FY11E to fund a share buyback this would equate to over 10% of the market cap.

However at its 3Q10 results Carlsberg management introduced the possibility that the dividend policy might be revisited at the time of the FY10E results. This might lead to an acceleration in the proportion of free cashflow paid out as dividend and given Carlsberg’s FCF yield (9.7% in FY11E) this could herald a meaningful change for investors. By way of example if Carlsberg were to increase the FY10E dividend to DKK 20 per share from the DKK 5 we currently assume this would still only imply a 0.2x increase in closing FY11E net debt/EBITDA to 1.6x and only dilute earnings by 2% or so. However this would equate to a dividend yield of some 3.7%.

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Heineken’s free cashflow will fund the buyback of shares to deliver to Group FEMSA Heineken now pays out slightly more of its earnings and cashflow in the form of a dividend than peers ABI and Carlsberg at some 30% of earnings which, on our forecast dividend of €0.71 (Bloomberg median consensus €0.73), equates to a CY10E yield of 2.0%. We expect this level of payout, which has applied since FY06, to continue in the medium term even as Heineken continues to de-gear.

This reflects the continuing call on free cashflow which stems from the buyback of NV shares to deliver to Group FEMSA as part of the consideration for the FEMSA Cerveza transaction. These 29mn “ADSI” shares have to be delivered within 5 years from the announcement of the transaction in twice yearly instalments. Heineken aims to satisfy this obligation through buyback of existing shares but has the right to issue new shares or pay cash (though this latter carries a “significant” penalty).

At the time of the announcement of the transaction these ADSI shares were valued at €1bn. As at 12th November 2010 Heineken had acquired 9.1mn shares (with 8mn delivered to Group FEMSA). On 17th November the next phase of the buyback was announced with authority to acquire a further €150mn of shares up to 16th June 2011. This would equate to approximately a further 4.1mn shares. Based on the pace of buyback to date this would leave Heineken satisfying its obligation in 2H12E.

We would assume that Heineken would make no change to its dividend policy as the buyback continues. With leverage down to 1.6x net debt/EBITDA at end FY12E, well below the 2.5x net debt/EBITDA target, we might anticipate that this stance might change at that time. However we note that Heineken has run with a very conservative balance sheet in the past (0.7x in FY07 prior to the S&N acquisition) and any dividend payout will presumably reflect the wishes of the family controlling shareholder group.

Group FEMSA can start selling Heineken shares in mid 2013 The Heineken family group maintains control of Heineken NV through its ownership of Heineken Holdings (where it has increased its equity stake since the transaction from the bare minimum 50.01%) and where Group FEMSA owns 14.94%. At the NV level, after receiving the ADSI shares, Group FEMSA will hold 12.53% of the equity with Heineken Holdings at 50.005%.

We note that Group FEMSA, under the standstill arrangements, is free to start selling shares in both Heineken NV and Heineken Holdings from year 3 up to a maximum of 1% of the total equity in any quarter. We assume that this right to sell takes effect from April 2013. If Group FEMSA were to exercise this right in full this could imply that it sold over €1bn of equity in Heineken on an annualised basis from that time based on current share prices.

It might be that Heineken’s free cashflow post dividends, which we estimate at some €1.5bn in FY13E could be used to buyback Group FEMSA equity which, depending on the price of the equity at the time, might be in the interests of both family and

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external shareholders. In any event we do think that this “opportunity cost” around the sale of equity by Group FEMSA will have some influence on Heineken’s M&A and cash distribution strategy over the medium term.

Figure 17: Heineken shareholder structure post Group FEMSA transaction

FEMSA PublicL’Arche Green N.V.

Heineken Holding N.V.

Heineken N.V.

Public

14.94%

50.005%

50.005%

35.06%

41.57%

8.43%

Heineken family Greenfee B.V.

88.42% 11.58%

FEMSA PublicL’Arche Green N.V.

Heineken Holding N.V.

Heineken N.V.

Public

14.94%

50.005%

50.005%

35.06%

41.57%

8.43%

Heineken family Greenfee B.V.

88.42% 11.58%


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Brewers still offer robust organic profit growth at low risk • Prior to 2008 robust double-digit EBIT growth was the rule not the

exception for the European brewers. This reflected a healthy volume environment particularly in emerging markets, a “positive” inflation differential, with output pricing generally ahead of input cost inflation, and the benefits of synergy capture from multiple transactions.

• In 2H07, and especially through 2008, growth slowed abruptly, first through an increase in input cost inflation and latterly from collapsing volumes. This led to a sharp deceleration in organic EBIT growth despite on average 5% pricing per hl.

• In 2009 margins once again expanded despite falling volumes. The combination of synergy capture, cost savings, improving input costs, lower depreciation and robust pricing underpinned double digit organic EBIT growth (with the exception of SABMiller).

• In 2010 to date we have seen a slowdown to mid to high single digit organic EBIT growth as the input cost tailwinds and synergy benefits eased and with slightly softer pricing. Volumes were still falling for Heineken and Carlsberg but were flat for SABMiller and returned to growth for ABI.

• We expect ABI organic EBIT growth to accelerate in Q410 to high teens in line with guidance. We also expect SABMiller to maintain its rate of organic EBIT growth at 10% through 2H11E. For Heineken we expect a similar level of EBIT growth in 2H10E at 6%. Carlsberg should also maintain a similar level of low to mid single digit organic EBIT growth in H210.

Double digit organic EBIT growth was the historical norm The table below shows the disclosed organic EBITA growth rates for the brewers since FY00 (note that the SABMiller growth rate is for the March year end closest to the calendar year end of peers i.e. 2008 is FY09 disclosed).

Prior to 2008 robust double digit EBIT growth was the rule not the exception. This reflected in most cases a healthy volume environment particularly in emerging markets, a “positive” inflation differential with output pricing generally ahead of input cost inflation and the benefits of synergy capture from multiple transactions.

In 2H07 and through 2008 growth slowed abruptly firstly through an increase in input cost inflation, notably on raw materials (malt, hops) and packaging into double digit per hl, and more latterly from collapsing volumes. This led to a sharp deceleration in organic EBIT growth despite an uplift in pricing per hl to an average 5%.

In 2009 margins once again expanded despite falling volumes. The combination of synergy capture, cost savings, improving input costs, lower depreciation and robust pricing underpinned double digit organic EBIT growth (with the exception of SABMiller).

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ABI forecasts “ex synergy” imply a lower rate of growth than delivered by these assets in the past • Old “Interbrew” was able to post consistent low double digit EBIT growth

through FY00 to FY04 on averagely mid single digit organic revenue growth. Remember this business was essentially the same as the current W Europe, Russia/Ukraine and now disposed Central European platforms together with Canada.

• The combination with AmBev at end 2004 increased the top line growth marginally in FY05-FY07 but organic EBIT growth jumped to 20% with the faster EBIT growth from the AmBev assets and from synergy capture.

• In FY08 although the overall volume and revenue growth rate was maintained, despite minimal volume growth in Brazil, margins fell as the synergy capture was exhausted and input cost inflation hit first in Europe and latterly in LatAm.

• In FY09 despite volume decline and slowing price/mix (mostly a function of geographical mix) ABI returned to 20% organic EBIT growth fuelled by synergy capture from AB, robust volume revenue growth in Brazil and minimal input cost inflation.

• In FY10E we expect an improved volume and revenue growth picture and double digit EBIT (11.7%) growth fuelled again by further synergy capture and robust revenue growth in LatAm. Thereafter we expect a return to mid single organic revenue growth with some margin expansion fuelled by the final tranche of synergy capture in FY11E but minimal margin expansion thereafter.

Carlsberg has delivered double digit organic EBIT growth in recent years • Carlsberg did not disclose organic growth until FY05 but we think EBIT, ex-

acquisitions, was falling. Growth accelerated as the proportion of profit consolidated from E Europe increased first from the Orkla minority buyout in 2004 (and then with S&N in 2008) and also through the sharp increase in profitability in NW Europe from cost reduction programmes. Volume growth in this period in Russia was extremely strong.

• In FY08 volume growth slowed as Russia slowed and this, together with input cost inflation, capped profit growth despite ongoing cost savings and synergy capture.

• In FY09 organic volumes declined across Europe but Carlsberg was still able to deliver very strong 26% organic EBIT growth driven by remarkable margin expansion in Russia on strong pricing, falling input costs, synergy capture and especially cost cutting.

• Given continuing volume decline in Russia we expect muted organic EBIT growth this year (3.2%) despite still ongoing cost reduction. As volumes recover however in FY11E and beyond we expect to see Carlsberg return to double digit organic EBIT growth.

Heineken cost cutting has maintained high single digit organic EBITA growth • Heineken overall has delivered the lowest level of organic EBIT growth

through the period which in large part reflects its more "mature"

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geographical profile. Through FY00 to FY02 with strong growth in the US import business, the increased penetration of the premium Heineken brand in W Europe and through synergy capture Heineken was able to deliver 10% organic EBIT growth and margin expansion in line with ABI.

• However growth slowed rapidly in FY04 and FY05 as the premium brand growth slowed notably in the US, sales fell in W Europe and some EM markets slowed.

• In FY06 and FY07 however, with the benefits of the F2F fixed cost savings programmes, an increased exposure to E Europe post acquisitions, through renewed investment in the premium Heineken brand and with a very significant acceleration in profit growth in Africa and Asia, Heineken was able to post very strong double digit EBITA growth comparable with peers.

• In FY08 whilst input cost deflation was only partially offset by price rises and organic profit fell in E Europe the remaining F2F cost savings, together with marketing cuts in Americas and very strong growth in Africa/ME (over 40% we estimate) drove healthy organic EBIT growth

• In FY09 organic volumes in Europe, West and East, declined sharply but the TCM cost savings programmes and input cost deflation still allowed Heineken to post mid double digit organic EBIT growth.

• In FY10E we expect volume decline to ease with marginal organic revenue growth but for the pace of EBIT growth to slow to 5.0% driven primarily by cost savings. Thereafter revenue growth should accelerate and organic EBIT growth continue at mid single digit fuelled by emerging markets (including synergies at FEMSA Cerveza) even as the cost saving contribution fades.

SABMiller has been hit by input cost deflation and limited recent synergy capture • From FY01 to FY05 post the London listing SABMiller saw very strong

double digit organic EBIT growth from strong revenue and growth in EM notably C&E Europe and latterly synergy capture in the acquired Miller business.

• However, growth slowed in FY06 and FY07 primarily from falling profitability in Miller as AB instituted a price war in the US and input cost inflation started to impact.

• In FY08 input cost inflation and slowing volumes impacted LatAm and South Africa and in FY09 much weaker volumes and input cost deflation saw organic profit decline in Europe and S. Africa.

• In FY10 (which is 2009 in the table below) softer pricing and the drag of investment combined again to constrain organic EBIT growth despite a step up in cost cutting.

• In FY11E (10.3%) and beyond we expect a recovery in volume growth together with, initially, an input cost tailwind. As the investment drag also eases this will allow SABMiller to return to double digit organic EBIT growth ahead of the peer group.

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Table 14: European brewers’ organic EBITA growth FY00-FY12E 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E

ABI 9.7% 12.0% 11.5% 12.8% 11.5% 20.4% 20.1% 20.4% 2.1% 20.3% 11.1% 9.7% 7.0% Carlsberg - - - - - 12.0% 16.6% 27.0% 7.0% 25.8% 3.2% 11.4% 9.7% Heineken 10.0% 10.0% 9.0% 6.9% 5.0% 2.9% 10.7% 20.0% 8.7% 14.0% 5.0% 6.5% 5.5% SABMiller 15.0% 15.0% 18.0% 22.0% 18.0% 8.8% 12.5% 8.8% 4.7% 6.3% 10.3% 9.9% 9.0% Source: J.P. Morgan estimates, Company data.

Organic growth in 2010 In 2010 to date we have seen a slowdown to mid single digit organic EBIT growth (with the exception of SABMiller) as the input cost tailwind and synergy benefits eased and with slightly softer pricing. Volumes were still falling for Heineken and Carlsberg, slightly up for SABMiller and returned to firm growth for ABI.

We expect ABI organic EBIT growth to accelerate in Q410E to 15% in line with guidance to reflect better volume growth, the timing of COGS hedging in LatAm and more muted investment in sales and marketing.

We also expect SABMiller to maintain its rate of organic EBIT growth at 10% through 2H11E as investment pressures ease and with still falling hedged input costs.

For Heineken we expect a similar level of EBIT growth in 2H10E at 5% as volumes improve (though still in decline), and with continued cost cutting even as input cost deflation benefits start to ease up.

Carlsberg should also maintain a similar level of low to mid single digit organic EBIT growth in H210 even as the growth in NW Europe eases and despite profit decline in Eastern Europe in Q410E.

• In 1H10 Heineken delivered 6% organic EBIT growth with organic volumes down -3.9% and revenues down -1.9%. Total expenses fell by -2.8% with input cost deflation and TCM driven cost savings. Marketing spend as a percentage of net sales increased from 11.8% to 12.5% with a 5.3% increase in organic terms. Heineken’s input costs fell by 6.7% in organic terms, or by c.3% on a per/HL basis. For 9M10 the pace of organic EBIT growth was maintained at “mid single digit” as volumes improved in 3Q10 to -2.2% though still with organic revenue decline running at -2%.

• Heineken is guiding to “at least low double digit growth in organic net profit (beia)” for FY10E. We estimate 14% based on organic EBIT growth of 5% in line with the H110 run rate.

• ABI saw 8.5% organic EBIT growth in 9M10 with organic volumes ahead of peers up 2.4% and revenues up 3.9%. COGS per hl fell -1.5% on an organic basis but sales and marketing grew ahead of revenue up 6.8% "funded" in part by cost synergies of $450mn.

• Organic EBITDA growth is expected to be “materially" higher in Q410E as volume and sales and marketing investment "comps" ease. Full year COGS per hl is expected to run flat or in low single digits. We expect FY10E organic EBIT growth of 11.7%.

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• Carlsberg delivered 8% organic EBIT growth in 9M10 in its beverage activities with Q309 up 15%. Beer volumes fell -1% (or +1% ex the impact of Q110 destocking in Russia) and were up 3% in Q310. Revenues fell organically by -2%. Organic gross margins expanded by 260 bps with a 270 bps gain in operating profit margins. This improvement came from efficiency improvements as well as synergy capture, cost savings, price increases and input costs deflation.

• In Q410, Eastern Europe “is expected to deliver significantly lower earnings than last year due to comparables (positively impacted last year by stocking in Russia), increased input costs and phasing of sales and marketing expenses this year”.

• Given SABMiller’s March year end we cannot directly compare SABMiller’s organic growth in 9M10 with its peers. However, for 1H11 covering April to September SABMiller saw organic lager beer volume growth of 1.5% across the group with 4.5% revenue growth and 10.2% organic EBIT growth, driven by falling hedged input costs and cost savings. Although these positive drivers are expected to ease in H211e we still expect SABMiller to drive a similar level of organic EBIT growth for the full year.

Table 15: European brewers’ organic volume, price/mix and EBIT through FY10 Volume Price/Mix EBIT

Q110 H110 FY10E Q110 H110 FY10E Q110 H110 FY10E AnheuserBusch InBev 0.8% 1.5% 2.1% 1.1% 1.6% 2.4% 6.6% 7.2% 11.1% Carlsberg -9.0% -3.0% 0.7% 2.0% -1.0% -3.9% -11.0% 4.0% 3.2% Heineken -5.3% -3.9% -2.5% 3.2% 1.9% 2.7% 5.0% 5.7% 5.0% Source: Company data, J.P. Morgan estimates

Sustained margin expansion across the brewers underpins the share price outperformance We think an examination of reported margins over the past few years for the four brewers is revealing. Of course reported margins conceal all sorts of acquisition, currency and geographical mix effects but, at the end of the day, we would argue that it is margin expansion that has driven the ”surprises” in brewer’s earnings and returns in recent years and therefore the relative re-rating of the sector.

• ABI saw substantial margin expansion post the combination of Interbrew and AmBev at end 2004. The acquisition of Anheuser Busch depressed margin in 2008 but this “mix” effect was recovered in 2009 through synergy capture and we expect further substantial expansion in FY10E and FY11E.

• Carlsberg has seen steady margin expansion over the last 5 years despite the volatility of consumer demand in Russia and the impact of input cost inflation through 2007-2009, common to all the brewers. This progress reflects both the mix impact of the S&N acquisition but also the continued cost cutting across the European platforms, West and East.

• Heineken’s faster growth in higher margin emerging markets has driven margin expansion historically with cost savings protecting margins especially in mature markets from the negative consequences of volume decline and input cost inflation. The Scottish & Newcastle acquisition depressed margins in 2008. Whilst we expect margins to improve in FY10E and FY11E in part from synergy capture and cost savings the rate of margin progression still lags peers.

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• SABMiller’s margin has declined since calendar 2006 in part from the geographical impact of faster growth in the lower margin markets notably in Asia, from the entry of a competitor into the US, and latterly from the impact of input cost inflation. In contrast to peers SABMiller has not had a significant synergy capture opportunity (except in MillerCoors) across the period and we think has derived less proportionate benefits from large scale restructuring programmes (in turn a function of its lower exposure to mature markets). We think cost cutting, price and mix improvement and the tailwind of input costs should drive near term expansion.

Figure 18: European brewers' group EBITA margins CY05-11E

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


2005 2006 2007 2008 2009 2010E 2011E


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Valuation: Brewing still preferred to spirits stocks Our DCF derived price targets suggest more upside in brewers compared to spirits stocks Our 2011DCF derived price targets are ABI €51, Carlsberg DKK 650, Heineken €38 and SABMiller 2290p. This equates to 19% upside for ABI and Carlsberg, 6% upside for Heineken and 10% upside for SABMiller. In contrast for the large cap spirits stocks we have downside of 8% for Diageo and just 1% upside for Pernod Ricard. We still assume very muted perpetuity growth rates of 1.5% for ABI and Carlsberg, 1.25% for Heineken and 1.75% for SABMiller and we still cap financial leverage at 30% for debt and equivalents/enterprise value. This is in line with the “actual” capital structure for Carlsberg and ABI but “reduces” the WACC for SABMiller where the actual gearing is lower. Heineken is actually slightly more geared than peers on this basis, when we “add” the future debt impact of the FEMSA ADSI buyback and the proportionately higher pension and other provision liability.

We assume a cost of debt of 5.5% for Carlsberg, 6.0% for Heineken, 6.2% for ABI and 6.6% for SABMiller. We use a common equity risk premium of 7.2% and beta of 0.9x.

This leaves us discounting cashflows with very similar WACCs of 8.3% for Heineken, 8.4% for ABI and SABMiller and 8.8% for Carlsberg.

We assume similar levels of perpetuity growth for large cap spirits peers, Diageo and Pernod Ricard, at 1.5% with similar WACCs at 8.0% for Pernod Ricard and 8.6% for Diageo. The prime difference between the two sub-sectors in terms of the “DCF upside” which drives our target prices is driven by the proportionately stronger free cash flow generation we see for the brewers.

Brewers have outperformed spirits stocks driven by their faster growth Over the last year the beer stocks have outperformed the large cap spirits stocks. The picture is a little more nuanced over the last three months as the overall sector itself has performed in line with European markets after prior outperformance.

This outperformance by the brewing stocks continues the pattern seen over the last five years with the exception of Heineken This reflects the superior earnings and cashflow growth of the brewers through the period, with the exception of the second half of 2008, when the dilution to earnings which came from the equity component of transactions in beer (for Carlsberg and ABI) and a perception of “overpaying” (for Heineken and to a lesser extent Carlsberg), as well as input cost pressures, saw a relative de-rating of the brewing stocks. .

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Figure 19: -3m share price performance

0% 5% 10% 15% 20% 25% 30%

Carlsberg

C&C

Heineken

CEDC

Britvic

Pernod Ricard

ABI

Diageo

Campari

SABMiller

Remy Cointreau

0% 5% 10% 15% 20% 25% 30%

Carlsberg

C&C

Heineken

CEDC

Britvic

Pernod Ricard

ABI

Diageo

Campari

SABMiller

Remy Cointreau

Source: Bloomberg

Figure 20: -12m share price performance

-20% -10% 0% 10% 20% 30% 40% 50% 60% 70%

CEDC

Pernod Ricard

Diageo

Heineken

SABMiller

C&C

ABI

Campari

Britvic

Carlsberg

Remy Cointreau

-20% -10% 0% 10% 20% 30% 40% 50% 60% 70%

CEDC

Pernod Ricard

Diageo

Heineken

SABMiller

C&C

ABI

Campari

Britvic

Carlsberg

Remy Cointreau

Source: Bloomberg

Figure 21: -3Y share price performance

-60% -40% -20% 0% 20% 40% 60%

CEDC

Heineken

C&C

Pernod Ricard

Carlsberg

Remy Cointreau

Diageo

ABI

Campari

Britvic

SABMiller

-60% -40% -20% 0% 20% 40% 60%

CEDC

Heineken

C&C

Pernod Ricard

Carlsberg

Remy Cointreau

Diageo

ABI

Campari

Britvic

SABMiller

Source: Bloomberg

Figure 22: -5Y share price performance

-60% -40%-20% 0% 20% 40% 60% 80% 100%120%

C&C

CEDC

Pernod Ricard

Heineken

Diageo

Remy Cointreau

Campari

ABI

SABMiller

Carlsberg

-60% -40%-20% 0% 20% 40% 60% 80% 100%120%

C&C

CEDC

Pernod Ricard

Heineken

Diageo

Remy Cointreau

Campari

ABI

SABMiller

Carlsberg

Source: Bloomberg

53



We would not yet switch into spirits Given this relative performance and the fact that the highest rated brewers, ABI (14.7x CY11E PE) and SABMiller (15.5x), are now trading at slight premiums to Diageo (14.2x) and Pernod Ricard (13.9x), we think the temptation for investors to shift from brewers to spirits may gather momentum. This temptation may also be compounded by the underperformance of the brewing stocks, with the exception of SABMiller, on the announcement of their latest sets of results, which raised concerns over rising input cost pressures for the brewers, and by the perception that the spirits stocks are more geared to global “recovery” in consumer demand, if indeed that is where we are headed.

We would resist this temptation. Whilst we do think in the very near tem we see limited scope for earnings upgrades for the brewers we do think that the combination of robust double digit earnings growth into CY11E and beyond as well as accelerating cash generation firmly underpins current relative valuation multiples for the brewers. Improving volume and pricing outlook could drive further upgrades, albeit muted, through next year.

In contrast we do not yet see sufficient evidence of improving price/mix in key mature markets for the major spirits players. This will continue to constrain gross margin. Spirits companies lack the “scale” cost savings programmes and synergy capture opportunities that drive expanding margins in brewing. Diageo has an undergeared balance sheet and the pace of Pernod Ricard’s debt pay-down lags the brewers on our estimates. Currency benefits are now reversing for spirits.

We still see superior earnings growth overall for brewers in CY11E, 19% for ABI, 16% for SABMiller, 14% for Carlsberg and 13% for Heineken. To be fair on our estimates Pernod Ricard will deliver comparable 14% earnings growth in CY11E, with a similar level of organic EBIT growth. However PR’s still carries a higher level of financial gearing with less visibility around cashflow generation in our view. Diageo’s earnings growth at just 7% on our estimates in CY11E continues to lag the brewing peers.

Figure 23: Organic sales growth of large cap Euro beverages

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

ABI

Carlsberg

Heineken

SABMiller

Diageo

Pernod Ricard

FY11E FY12E

Source: J.P. Morgan estimates

Figure 24: Organic EBIT growth of large cap Euro beverages

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

ABI

Carlsberg

Heineken

SABMiller

Diageo

Pernod Ricard

FY11E FY12E

Source: J.P. Morgan estimates

54



Into CY12E we might expect the top line growth rates to be similar between the sub-sectors but we still see more margin opportunity with brewers and more "optionality" around redeploying free cashflows.

If we move out to compare PE multiples in CY12E the gap closes to reflect the superior growth of the brewers. ABI trades on 12.9x, SABMiller on 13.8x, Heineken on 12.0x and Carlsberg on just 10.8x. In contrast Diageo trades on 13.0x, a premium to ABI and a minimal discount to SABMiller, although PR looks slightly more attractive at 12.1x

The picture is more mixed when we compare EV/EBITDA multiples with PR trading at 12.5x CY11E reflecting its still relatively high financial leverage with Diageo at 10.5x still ahead of the other brewers. ABI reflecting the elevated market value of the AmBev minority now commands an EV/EBITDA multiple of 10.7x.

In aggregate the four European brewers are trading on a CY11E free cashflow yield of 7.0% with Carlsberg and Heineken higher at 9.7% and 7.9% respectively. Even with the re-rating of beverages relative to other consumer staples sectors over the last year (up 6% relative to MSCI FBT index) this FCF yield is still just a par with spirits. and still ahead of the weighted average large cap FCF yield in CY11E for the food sector 6.1% and HPC at 5.7%.

Table 16: European beverages calendarised valuation comparison

Rating Price Price Mkt. Cap. Upside/ P/E EV/EBITDA Dividend Yield FCF Yield EPS Growth Target US$ mn Downside 2011E 2012E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E

AnheuserBusch InBev EUR OW 42.80 51.00 90,635 19% 14.7x 12.9x 12.0x 10.7x 0.9% 1.2% 6.2% 7.8% 29.8% 18.7%Britvic Plc £/p OW 490.60 530.00 1,735 8% 12.1x 10.6x 9.1x 8.4x 3.8% 4.2% 3.2% 6.4% 17.5% 9.5%C&C Group EUR N 3.18 3.50 1,405 10% 12.1x 11.4x 9.8x 8.6x 2.2% 2.7% 4.2% 6.7% 4.7% 10.7%Carlsberg DKr OW 547.00 650.00 15,083 19% 12.7x 10.8x 8.7x 7.4x 0.9% 1.1% 7.1% 9.7% 38.7% 13.6%CEDC USD OW 24.47 25.50 1,730 4% 12.7x 10.4x 11.5x 10.1x 0.0% 0.0% 10.8% 5.9% -34.8% 24.8%Davide Campari EUR UW 4.64 4.30 3,547 -7% 14.9x 13.7x 11.1x 10.4x 1.4% 1.6% 3.2% 6.8% 127.6% 12.6%Diageo £/p N 1146.00 1050.00 44,588 -8% 14.2x 13.0x 11.4x 10.5x 3.4% 3.6% 6.9% 6.7% 4.8% 7.1%Heineken EUR N 35.98 38.00 27,075 6% 13.0x 12.0x 9.7x 8.6x 2.0% 2.2% 9.1% 7.9% 13.3% 13.0%Pernod Ricard EUR N 63.60 64.00 22,437 1% 13.9x 12.1x 14.1x 12.5x 2.1% 2.2% 6.0% 6.5% -0.7% 14.2%Remy Cointreau EUR N 52.15 47.00 3,343 -10% 19.0x 16.3x 16.0x 13.2x 2.7% 2.9% 3.6% 4.5% 20.2% 22.4%SABMiller £/p OW 2083.00 2290.00 51,872 10% 15.5x 13.8x 10.7x 9.4x 2.3% 2.7% 4.7% 4.6% 16.9% 15.9%Weighted average 14.4x 12.8x 11.4x 10.2x 1.9% 2.1% 6.3% 6.9% 19.8% 14.8%

Source: J.P. Morgan estimates, Bloomberg priced COB 1st Dec 2010

55



The European brewers also look relatively lowly valued on PE multiples when compared to other major brewers particularly those exposed directly to emerging markets.

Table 17: Major quoted global brewers CY10E PE and earnings growth Market cap USD bn 2010E PE 2010E EPS growth

Chongqing* 5.17 140.5 16% Zhujiang* 2.18 105.1 20% UBL* 2.08 51.1 36% Tsingtao 3.48 26.3 18% China Resources Enterprises 10.07 25.1 17% Beijing Yanjing* 3.50 22.8 22% Grupo Modelo* 19.11 21.5 11% East African Breweries* 2.11 18.6 17% Anadolou EFES* 6.24 16.9 16% CCU* 3.70 16.8 4% ABI 92.06 16.7 18% AmBev 79.13 16.5 15% SABMiller 51.76 15.8 16% Foster's Group 10.62 15.8 3% Nigerian Breweries* 3.79 15.6 16% Kirin Holdings* 13.70 15.0 65% Asahi Breweries* 9.48 13.5 7% Heineken 27.55 13.2 13% Guinness Nigeria* 1.67 13.2 32% Molson Coors 9.11 12.9 6% Carlsberg 14.96 12.7 14% Hite Brewery 1.03 11.7 24% Source: J.P. Morgan estimates, Bloomberg priced COB 30th Nov 2009 * is Bloomberg consensus estimates

56



Anheuser Busch InBev Still a core holding

Overweight Company Data Price (€) 42.80Date Of Price 01 Dec 10Price Target (€) 51.00Price Target End Date

01 Nov 11

52-week Range (€) 46.33 -33.50

Mkt Cap (€ bn) 68.6Shares O/S (mn) 1,604

Anheuser Busch InBev (ABI.BR;ABI BB) FYE Dec 2009A 2010E

(Old)2010E

(New)2011E

(Old)2011E

(New)2012E

Adj. EPS FY ($) 2.48 3.25 3.22 3.83 3.82 4.36Revenue FY ($ mn) 36,759 35,653 35,631 37,120 37,421 38,941EBITDA FY ($ mn) 13,036 13,796 13,726 14,870 14,881 15,754Pretax Profit Adjusted FY($ mn)

6,458 8,344 8,270 9,824 9,804 11,004

Adj P/E FY 22.7 17.3 17.5 14.7 14.7 12.9EBIT FY ($ mn) 10,248 11,215 11,146 12,198 12,181 12,925EBITDA margin FY 35.5% 38.7% 38.5% 40.1% 39.8% 40.5%EBIT margin FY 27.9% 31.5% 31.3% 32.9% 32.6% 33.2%Source: Company data, Bloomberg, J.P. Morgan estimates.

• We still see further capacity for ABI to show positive earnings and

shareholder value surprise over the medium and long term from multiple catalysts. These include a recovery in US consumer demand, gross margin expansion from sustained US price increases, marketing investment to drive sustained US market share gains, the resumption of margin expansion in Brazil following the recent drag from input cost inflation and revenue investment, continuing rapid profit growth from the enhanced platform in China, a sharp recovery in demand in Eastern Europe, the unfolding of the “global Budweiser” story, ongoing fixed cost reduction across the Group and finally, and most importantly, from the deployment of the massive cashflow post de-leverage in the form of a rising dividend and/or further M&A.

• However, we do think there will continue to be a healthy tension between those investors understandably looking to take profit in a stock which has more than quadrupled since the AB deal was consummated and those investors waiting to benefit from the multiple “slow burn” catalysts we identify. We also think until there is firm evidence of a return to growth in the US beer market some investors may remain sceptical around ABI’s brand strategy in that market.

• ABI's Q310 results were broadly in line with JPMCE and ABI has guided for organic EBITDA growth to be “materially” higher in Q410E. We think that our forecast of 8.9% growth for FY10E is underpinned by the easier volume, sales and marketing and admin expense comps, by the benefit of the US price increases and accelerated synergy capture and a lower Q410E bonus accrual.

• We have made minor changes to our estimates to reflect slightly more investment in sales and marketing in Q410E in the US and to reflect the changes to our dividend assumptions (see page 50 above). Our EPS estimates for FY11E and FY12E are broadly unchanged with a -1% downgrade to FY10E.

• Our new Nov 11E DCF derived PT is €51 (was €50). In USD terms our PT moves up to $67 from $63 to reflect a higher perpetuity growth rate at 1.5% and a FY13E steady state EBIT margin at 34%. The EUR PT does not rise as much given a translation rate of 1.31 vs 1.25 previously. ABI trades on a CY 11E PE of 14.7x now close to parity with the sector at 14.4x.

57



Table 18: ABI regional split 2010E £ mns

Sales EBIT EBIT margin Worldwide 35,631 11,146 31.3% North America 14,594 5,636 38.6% Latin America- North 9,813 4,008 40.8% Latin America- South 2,158 820 38.0% Western Europe 4,009 688 17.2% Central and Eastern Europe 1,667 164 9.8% Asia Pacific 1,811 89 4.9% Global Export and Holding 1,580 - 259 -16.4% Source: J.P. Morgan estimates.

Table 19: ABI organic EBIT growth by region 2009A 2010E 2011E 2012E

North America 27.0% 6.1% 6.7% 4.4% Latin America- North 13.1% 16.0% 13.1% 10.0% Latin America- South 22.3% 9.7% 10.2% 7.7% Western Europe 32.0% 5.9% 4.3% 4.3% Central and Eastern Europe 105.6% -9.6% 10.7% 13.9% Asia Pacific 20.2% 36.6% 32.6% 18.8% Global Export and Holding -20.7% -35.8% -9.3% 3.4% Worldwide 20.3% 11.1% 9.7% 7.0% Source: J.P. Morgan estimates, Company data.

Table 20: ABI summary income statement £ mns

2009A Growth 2010E Growth 2011E Growth 2012E Growth Net sales 36,759 -6% 35,631 -3% 37,421 5% 38,941 4% EBITDA 13,036 8% 13,726 5% 14,881 8% 15,754 6% EBIT 10,248 12% 11,146 9% 12,181 9% 12,925 6% Financial expenses -4,419 -3,597 -2,377 -1,921 PBT 6,458 -19% 8,270 28% 9,804 19% 11,004 12% Tax rate 25.0% 26.0% 26.0% 25.5% Tax charge -1,786 -2,098 -2,549 -2,806 Minority charge -1,264 -1,519 -1,732 -1,863 Net income 3,927 -27% 5,150 31% 6,134 19% 7,000 14% Shares in issue (m) 1593 1600 1605 1605 EPS 2.48 -54% 3.22 30% 3.82 19% 4.36 14% Source: J.P. Morgan estimates, Company data.

Table 21: ABI key ratios 2009A Change

(bps) 2010E Change

(bps) 2011E Change

(bps) 2012E Change

(bps) EBITDA margin 35.5% 470 38.5% 300 39.8% 130 40.5% 70 EBIT margin 27.9% 460 31.3% 340 32.6% 130 33.2% 60 Interest cover 2.3x 3.1x 5.1x 6.7x Dividend cover 4.7x 4.7x 4.1x 4.1x Net debt/EBITDA 3.7x 3.0x 2.4x 1.8x ROIC 8.0% 8.6% 9.5% 10.2% Capex as % of sales 4.7% 6.0% 5.3% 5.2% Depreciation as % of sales 7.6% 7.2% 7.2% 7.3% Net working capital as % of sales 1.8% 0.8% 0.5% 0.5% Source: J.P. Morgan estimates, Company data.

58



Table 22: ABI DCF model US$ mns

USDmn 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net Sales 35,631 37,421 38,941 40,406 41,804 43,126 44,360 45,497 46,526 47,438 47,252 % of growth -3.1% 5.0% 4.1% 3.8% 3.5% 3.2% 2.9% 2.6% 2.3% 2.0% 1.6% Operating profit 11,146 12,181 12,925 13,738 14,214 14,663 15,083 15,469 15,819 16,129 16,066 Margin 31.3% 32.6% 33.2% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% 34.0% Tax -2098 -2549 -2806 -2982 -3086 -3183 -3274 -3358 -3434 -3502 -3488 Tax rate on EBITDA (%) 18.8% 20.9% 21.7% 21.7% 21.7% 21.7% 21.7% 21.7% 21.7% 21.7% 21.7% NOPAT 9047 9632 10119 10755 11128 11480 11808 12111 12385 12627 12578 Depreciation 2580 2700 2829 2935 3037 3133 3223 3305 3380 3446 3433 % sales 7.2% 7.2% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% 7.3% CAPEX -2150 -1983 -2025 -2101 -2174 -2243 -2307 -2366 -2419 -2467 -2457 % sales 6.0% 5.3% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% Working capital 285 187 195 81 84 86 89 91 93 95 95 % sales -0.8% -0.5% -0.5% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2% -0.2%

Cash Flow for DCF 9762 10536 11118 11671 12075 12456 12813 13141 13438 13702 13648

Timing 0 1 2 3 4 5 6 7 8 9 10 Post tax discount rate 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% Value multiple . 0.92 0.85 0.78 0.72 0.67 0.61 0.57 0.52 0.48 0.44 PV of cashflow . 9714 9451 9147 8725 8299 7871 7442 7017 6597 6058 Perpetual growth % 1.50% Terminal multiple 14.4 PV of cashflows 80,321 PV of terminal multiple 87,032 Total firm value 167,353 Net Debt 40,919 Adj for MV of AmBev minorities 29,941 Adj for MV of Modelo stake 11,355 Equity Value 107,849 Shares in issue (m) 1600 Implied value per share ($) 67.4 USD/EUR rate 1.31 Implied value per share (€) 51.3 Current share price 42.8 Upside/(Downside) 20% Source: JP Morgan estimates. Share price as at cob on 1st Dec 2010

59



Carlsberg Our top pick for 2011

Overweight Company Data Price (Dkr) 547.00Date Of Price 01 Dec 10Price Target (Dkr) 650.00Price Target End Date

01 Nov 11

52-week Range (Dkr)

616.50 -357.00

Mkt Cap (Dkr bn) 83.7Shares O/S (mn) 153Free Float 70.0%


(Old)2010E

(New)2011E

(Old)2011E

(New)2012E

Adj. EPS FY (Dkr) 27.32 37.87 37.87 43.02 43.02 50.52Revenue FY (Dkr mn) 59,382 59,810 59,810 63,136 63,136 65,972EBITDA FY (Dkr mn) 13,169 14,337 14,337 15,652 15,652 16,933EBIT FY (Dkr mn) 9,390 10,500 10,500 11,700 11,700 12,863Pretax Profit Adjusted FY(Dkr mn)

6,400 8,630 8,630 9,885 9,885 11,578

Net Income FY (Dkr mn) 4,170 5,789 5,789 6,585 6,585 7,742Adj P/E FY 20.0 14.4 14.4 12.7 12.7 10.8DPS (Net) FY (Dkr) 3.50 5.00 5.00 6.00 6.00 7.00Source: Company data, Bloomberg, J.P. Morgan estimates.

• We see more scope for a positive earnings surprise in 2011 at Carlsberg than

in any other stock in the sector. We believe our assumption that the Russian beer market will grow by only 3% next year is conservative given that it will have fallen by 17% cumulative in 2009 and 2010, and given the clear improvement in local consumer sentiment. With only a modest duty increase scheduled for 2011, versus the 200% increase implemented in 2010, we believe the Russian beer market may well bounce back to mid single digit volume growth more quickly than we currently factor in.

• We forecast an Eastern Europe regional EBIT margin of 29.5% in FY2010, above the medium-term guidance range of 26-29%. We expect this margin to expand further in FY2011 (we forecast +50bps) as volumes recover and we expect pricing and ongoing cost savings to offset input cost inflation.

• We also believe that Carlsberg will be led by its gearing target of 2.5x net debt/EBITDA to consider initiating a share buyback programme or to enhance its dividend payout in 2011.

• We see the key catalysts in 2011 as the improving picture for volumes in the Russian beer market especially against easy comps in 1H, greater visibility on the interplay between input costs and pricing in Europe, continuing margin expansion and any indication on the utilisation of free cashflow post de-gearing.

• Q310 results beat consensus by 9% at the EBIT level and showed 15% organic EBIT growth even with a double-digit increase in marketing spend. However the stock has pulled back given Carlsberg's apparent caution around margin expansion in FY11E. We still believe that it is well-placed to meet our expectations of EBIT +11% to DKK11.7bn and clean EPS +14% to DKK43.

• Our Nov-11 DCF derived PT is unchanged at DKK650 (WACC 8.8%, perpetuity growth rate 1.5%). Carlsberg currently trades on a CY11E PE of 12.7x a discount to the European beverages sector on 14.4x and to peers, ABI 14.7x and SABMiller 15.5x, despite offering a comparable earnings growth rate of 14% vs ABI 19% and SABMiller 16%. It offers the highest CY11E FCF yield in the sector at 9.7%.

60



Table 23: Carlsberg summary income statement DKK mns

2009A Growth 2010E Growth 2011E Growth 2012E Growth Net sales 59,382 -1% 59,810 1% 63,136 6% 65,972 4% EBITDA 13,169 13% 14,337 9% 15,652 9% 16,933 8% EBIT 9,390 18% 10,500 12% 11,700 11% 12,863 10% Financial expenses -2,990 -1,870 -1,815 -1,285 PBT 6,400 42% 8,630 35% 9,885 15% 11,578 17% Tax rate 29.2% 27.0% 27.0% 27.0% Tax charge -1,666 -2,222 -2,588 -3,045 Minority charge -565 -619 -712 -790 Net income 4,170 45% 5,789 39% 6,585 14% 7,742 18% Shares in issue 152.7 152.9 153.1 153.3 EPS 27.3 13% 37.9 39% 43.0 14% 50.5 17% Source: J.P. Morgan estimates, Company data.

Table 24: Carlsberg key ratios

2009A Change

(bps) 2010E Change

(bps) 2011E Change

(bps) 2012E Change

(bps) EBITDA margin 22.2% 280 24.0% 180 24.8% 80 25.7% 90 EBIT margin 15.8% 250 17.6% 180 18.5% 90 19.5% 100 Interest cover 4.3x 5.4x 7.5x 11.9x Dividend cover 6.9x 7.8x 7.6x 7.2x Net debt/EBITDA 2.7x 2.2x 1.4x 0.9x ROIC 6.0% 7.0% 8.0% 8.8% Capex as % of sales 4.9% 5.5% 5.0% 4.9% Depreciation as % of sales 6.4% 6.4% 6.3% 6.2% Net working capital as % of sales 2.6% 2.4% 2.2% 2.2% Source: J.P. Morgan estimates.

61



Table 25: Carlsberg DCF model DKK mns

DKK m 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net Sales 59,810 63,136 65,972 68,611 71,012 73,143 74,971 76,621 78,076 79,404 80,674 % of growth 0.7% 5.6% 4.5% 4.0% 3.5% 3.0% 2.5% 2.2% 1.9% 1.7% 1.6% Operating profit 10,384 11,580 12,740 13,635 14,112 14,535 14,899 15,226 15,516 15,779 16,032 Margin 17.4% 18.3% 19.3% 19.9% 19.9% 19.9% 19.9% 19.9% 19.9% 19.9% 19.9% Tax -2222 -2588 -3045 -3423 -3543 -3650 -3741 -3823 -3896 -3962 -4025 Tax rate on EBIT (%) 21.4% 22.3% 23.9% 25.1% 25.1% 25.1% 25.1% 25.1% 25.1% 25.1% 25.1% NOPAT 8162 8992 9695 10211 10569 10886 11158 11403 11620 11817 12007 Depreciation 3836 3951 4070 4192 4339 4469 4581 4681 4770 4852 4929 % sales 6.4% 6.3% 6.2% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% CAPEX -3300 -3150 -3250 -4050 -4192 -4318 -4425 -4523 -4609 -4687 -4762 % sales 5.5% 5.0% 4.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% Working capital 150.0 0.0 -300.0 -300.0 -310.5 -319.8 -327.8 -335.0 -341.4 -347.2 -352.7 % sales -0.3% 0.0% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4%

Cash Flow for DCF 8848 9794 10215 10053 10405 10717 10985 11227 11440 11635 11821

Timing 0 1 2 3 4 5 6 7 8 9 10 Post tax discount rate 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% Value multiple 0.92 0.84 0.78 0.71 0.66 0.60 0.55 0.51 0.47 0.43 PV of cashflow 0 9000 8627 7802 7421 7025 6617 6215 5820 5439 5078 Perpetual growth % 1.50% Terminal multiple 13.7 PV of cashflows 69,044 PV of terminal multiple 69,415 Total firm value 138,459 Net Debt 39,328 Equity Value 99,131 Shares in issue (m) 153 Total DCF value 648 Current share price 547 Upside/(Downside) 18% Source: J.P. Morgan estimates. Share price as at cob on 1st Dec 2010.

62



Heineken Still our least favoured brewer

Neutral Company Data Price (€) 35.98Date Of Price 01 Dec 10Price Target (€) 38.00Price Target End Date

01 Nov 11

52-week Range (€) 38.88 -31.52


Heineken (HEIN.AS;HEIA NA) FYE Dec 2009A 2010E

(Old)2010E

(New)2011E

(Old)2011E

(New)2012E

Adj. EPS FY (€) 2.15 2.43 2.44 2.74 2.76 3.00Revenue FY (€ mn) 14,701 16,513 16,513 17,737 17,737 18,310EBIT FY (€ mn) 2,095 2,497 2,497 2,846 2,846 3,018Pretax Profit Adjusted FY(€ mn)

1,552 1,994 1,999 2,349 2,362 2,568

DPS (Net) FY (€) 0.62 0.71 0.71 0.78 0.78 0.86Adj P/E FY 16.7 14.8 14.7 13.1 13.0 12.0FCF Yield FY 9.9% 8.6% 9.1% 7.5% 7.9% 9.0%EBIT margin FY 14.3% 15.1% 15.1% 16.0% 16.0% 16.5%Source: Company data, Bloomberg, J.P. Morgan estimates.

• In our view Heineken is more reliant on cost savings to drive profit growth

given its heavy exposure to mature markets such as Western Europe and the US. Heineken has shifted its geographical exposure towards the emerging markets, both through organic growth (Africa) and acquisitions (Mexico). However, in our view this exposure still lacks the quality of ABI's business in Brazil, the scope for recovery of Carlsberg’s business in Russia, or the sheer scope of SABMiller’s emerging market exposure. Heineken does not fully “control” substantial parts of its EM platform and its free cashflow through FY11E and much of FY12E is already "committed" to buying equity to deliver to Group FEMSA.

• Organic profit growth in Q310 at “mid single digit” was in line with JPMC expectations and with our 5.0% forecast for FY10E. However the volume “miss” reminded investors of Heineken’s less favourable geographical exposure with consolidated organic beer volumes down -2.2% vs JPMCE -1.4%, driven by the UK (in a market down -10%), and Russia, where Heineken is still seeing “significant” volume decline in a market which has returned to mid single digit growth in the quarter we believe. We also think that the market may not have been fully braced for volume declines in the acquired Mexican business

• Heineken expects to price up in FY11E to offset the impact of gently rising input cost inflation to leave gross margins stable. This would mean further TCM cost savings can drive mid single digit organic EBIT growth (we have +6%) as well as fund investment back into brands and innovation. However, we still think that the interplay between volumes, pricing, mix, input costs, marketing investment and TCM cost savings for Heineken, (especially in Europe, 47% FY11E EBIT), is still less visible than for peers and that this rightly warrants a discount.

• We have made very minor changes to our estimates to reflect the timing of the ADSI share buyback through to mid 2012. Our Nov 11E DCF derived PT is unchanged at €38. Heineken now trades on CY11E PE of 12.7x, a deserved discount to ABI 14.7x, SABMiller 15.5x and in line with Carlsberg at 12.7x.

63



Table 26: Heineken summary income statement EUR mns

2009A Growth 2010E Growth 2011E Growth 2012E Growth Net sales 14,701 3% 16,513 12% 17,737 7% 18,310 3% EBITDA 3,099 1% 3,620 17% 4,011 11% 4,227 5% EBIT 2,095 8% 2,497 19% 2,846 14% 3,018 6% Financial expenses -329 -498 -484 -449 PBT 1,552 0% 1,999 29% 2,362 18% 2,568 9% Tax rate 25.0% 28.0% 28.0% 28.0% Tax charge -286 -568 -628 -691 Minority charge -124 -129 -138 -146 Net income 1,055 4% 1,335 27% 1,588 19% 1,728 9% Shares in issue (m) 490 547 576 576 EPS 2.15 4% 2.44 13% 2.76 13% 3.00 9% Source: J.P. Morgan estimates, Company data.

Table 27: Heineken key ratios 2009A Change

(bps) 2010E Change

(bps) 2011E Change

(bps) 2012E Change

(bps) EBITDA margin 21.1% -40 21.9% 80 22.6% 70 23.1% 50 EBIT margin 14.3% 80 15.1% 80 16.0% 90 16.5% 50 Interest cover 6.4x 5.0x 5.9x 6.7x Dividend cover 3.5x 3.4x 3.5x 3.5x Net debt/EBITDA 2.6x 2.3x 1.9x 1.6x ROIC 9.8% 8.6% 9.8% 10.5% Capex as % of sales 5.3% 4.9% 6.7% 6.5% Depreciation as % of sales 7.4% 7.3% 7.1% 7.1% Net working capital as % of sales -1.3% -1.0% -0.7% -0.5% Source: J.P. Morgan estimates.

64



Table 28: Heineken DCF model EUR mns

€m 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2017E 2018E 2019E Net Sales 16,513 17,737 18,310 18,806 19,276 19,721 20,136 20,519 20,869 21,183 21,459 % of growth 12.3% 7.4% 3.2% 2.7% 2.5% 2.3% 2.1% 1.9% 1.7% 1.5% 1.3% Operating profit 2,497 2,846 3,018 3,184 3,264 3,339 3,409 3,474 3,534 3,587 3,634 Margin 15.1% 16.0% 16.5% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% 16.9% Tax -568 -628 -691 -760 -779 -797 -814 -829 -844 -856 -867 Tax rate on EBITA(%) 22.7% 22.1% 22.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% 23.9% NOPAT 1929 2218 2326 2424 2485 2542 2595 2645 2690 2730 2766 Depreciation 1123 1165 1209 1248 1280 1309 1337 1362 1385 1406 1425 % sales 6.8% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6% CAPEX -805 -1187 -1190 -1222 -1292 -1321 -1349 -1375 -1398 -1419 -1438 % sales 4.9% 6.7% 6.5% 6.5% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% 6.7% Working capital -30.0 -40.0 -30.0 -50.0 -51.3 -52.4 -53.5 -54.6 -55.5 -56.3 -57.1 % sales 0.2% 0.2% 0.2% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%

Cash Flow for DCF 2217 2156 2316 2400 2422 2477 2530 2578 2622 2661 2696

Timing 1 2 3 4 5 6 7 8 9 10 Post tax discount rate 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% 8.3% Value multiple 0.92 0.85 0.79 0.73 0.67 0.62 0.57 0.53 0.49 0.45 PV of cashflow 1991 1975 1890 1761 1664 1569 1477 1387 1300 1217 Perpetual growth % 1.25% Terminal multiple 14.2 PV of cashflows 16,233 PV of terminal multiple 17,300 Total firm value 33,533 Net Debt & other adjustments 11,401 Equity Value 22,132 Shares in issue (m) 576 Implied value per share (€) 38.4 Current share price 36.0 Upside/(Downside) 7% Source: J.P. Morgan estimates. Share price as at cob on 1St Dec 2010

65



SABMiller Margins now rebounding

Overweight Company Data Price (p) 2,083Date Of Price 01 Dec 10Price Target (p) 2,290Price Target End Date

01 Dec 11

52-week Range (p) 2,166 -1,638



(Old)2011E

(New)2012E

(Old)2012E

(New)2013E

Adj. EPS FY ($) 1.61 1.88 1.88 2.17 2.17 2.41Adj P/E FY 20.2 17.3 17.3 15.0 15.0 13.5Revenue FY ($ mn) 21,783 23,177 23,177 24,816 24,816 26,382Adj EBITDA FY ($ mn) 5,262 5,916 5,916 6,515 6,515 7,003EBIT FY ($ mn) 4,381 4,993 4,993 5,567 5,567 6,029Pretax Profit Adjusted FY($ mn)

3,803 4,400 4,400 5,067 5,067 5,629

Net Income FY ($ mn) 2,507 2,971 2,971 3,447 3,447 3,829EBIT margin FY 20.1% 21.5% 21.5% 22.4% 22.4% 22.9%Source: Company data, Bloomberg, J.P. Morgan estimates.

• In our view SABMiller’s superior long-term growth prospects fully support

the stock’s premium rating. 85% of group EBIT arises in the emerging markets, suggesting faster volume growth than the peers over time. We also see scope for further margin expansion due to (i) the pricing power provided by SABMiller’s high market shares and (ii) the change from a national to a regional/global operational approach, facilitated by the Business Capability programmes.

• SABMiller reported H111 results 5% ahead of our expectations at the EBIT line and 8% above at the EPS level. However the outlook statement, in our view, was designed to warn against extrapolating all of the positive H1 developments fully into H2. Although SABMiller expects to continue to “benefit from lower raw material costs and our productivity and efficiency initiatives” in the second half, in both cases this is expected to be “at a more moderate rate than in the first six months of the year”. Although currency is set to be a larger benefit in H2 than H1 given the recent weakness of the $US, SABMiller is therefore indicating that this will be at least partly offset by a slightly less favourable cost environment.

• We would also note that our expectation of an improvement in organic volume growth in H2 (+2% for the full year after +1% in H1) will have to overcome tougher comps, particularly in Q4. Price increases will also continue to be “selective” rather than across the board. However, the 15% increase in the H1 dividend, almost in line with the H1 EPS growth of 16%, suggests that SABMiller expects another strong half in H2. Current consensus is for 15% EPS growth for the full year.

• The level of exceptional costs associated with the Business Capability initiatives are now expected to be c.$1bn vs $800mn previously. We believe that these additional costs represent an increase in the scope if the programme, potentially bringing additional savings in time, although for now the expected savings at $300m remain unchanged.

• Our DCF derived Dec-11E PT is unchanged at 2290p. SABMiller trades on 15.5x CY2011E PE, an 8% premium to the sector on 14.4x.

66



Table 29: SABMiller regional split FY11E US$ mns

Sales EBIT EBIT margin US 4,506 777 17.2% Latin America 4,719 1,607 34.0% Europe 4,312 840 19.5% Africa 2,801 593 21.2% Asia 1,788 131 7.3% South Africa 4,584 1,037 22.6% Hotels & Gaming 467 141 30.1% Source: J.P. Morgan estimates.

Table 30: SABMiller summary income statement US$ mns

2009A Growth 2010A Growth 2011E Growth 2012E Growth Net sales 20,919 7% 21,783 4% 23,177 6% 24,816 7% EBITDA 4,958 -1% 5,262 6% 5,916 12% 6,515 10% EBIT 4,129 0% 4,381 6% 4,993 14% 5,567 12% Financial expenses -724 -578 -593 -500 PBT 3,405 -6% 3,803 12% 4,400 16% 5,067 15% Tax rate 30.2% 28.5% 28.5% 28.0% Tax charge -1,028 -1,084 -1,254 -1,419 Minority charge -312 -210 -175 -202 Net income 2,065 -4% 2,507 21% 2,971 19% 3,447 16% Shares in issue (m) 1502 1558 1580 1585 EPS 137.46 -4% 160.88 17% 188.03 17% 217.46 16% Source: J.P. Morgan estimates, Company data.

Table 31: SABMiller key ratios

2009A Change

(bps) 2010A Change

(bps) 2011E Change

(bps) 2012E Change

(bps) EBITDA margin 23.7% -190 24.2% 50 25.5% 130 26.3% 80 EBIT margin 19.7% -160 20.1% 40 21.5% 140 22.4% 90 Interest cover 5.7x 7.6x 8.4x 11.1x Dividend cover 2.4x 2.4x 2.4x 2.4x Net debt/EBITDA 1.9x 1.7x 1.4x 1.0x ROIC 10.2% 11.0% 12.5% 14.0% Capex as % of sales 9.9% 6.6% 5.6% 4.8% Depreciation as % of sales 4.0% 4.0% 4.0% 3.8% Net working capital as % of sales 0.4% 2.8% 3.3% 3.5% Source: J.P. Morgan estimates.

67



Table 32: SABMiller DCF model US$ mns

USD m 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net Sales 23,906 25,570 27,158 28,805 30,349 31,764 33,022 34,100 34,973 35,624 % of growth 6.1% 7.0% 6.2% 6.1% 5.4% 4.7% 4.0% 3.3% 2.6% 1.9% Operating profit 3,656 4,175 4,522 4,898 5,160 5,401 5,615 5,798 5,947 6,057 Margin 15.3% 16.3% 16.6% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% 17.0% Tax -873 -1029 -1154 -1287 -1356 -1420 -1476 -1524 -1563 -1592 Tax rate on EBITA (%) 23.9% 24.6% 25.5% 26.3% 26.3% 26.3% 26.3% 26.3% 26.3% 26.3% NOPAT 2783 3146 3368 3610 3804 3981 4139 4274 4384 4465 Depreciation 923 948 974 1001 1055 1104 1147 1185 1215 1238 % sales 3.9% 3.7% 3.6% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% CAPEX -1270 -1170 -1170 -1070 -1127 -1180 -1227 -1267 -1299 -1323 % sales 5.3% 4.6% 4.3% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% 3.7% Working capital 150 100 50 0 -61 -64 -66 -68 -70 -71 % sales -0.6% -0.4% -0.2% 0.0% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

Cash Flow for DCF 2586 3024 3222 3541 3670 3842 3994 4124 4230 4308

Timing 1 2 3 4 5 6 7 8 9 10 Post tax discount rate 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% Value multiple 0.92 0.85 0.78 0.72 0.66 0.61 0.56 0.51 0.47 0.44 PV of cashflow 2380 2561 2511 2540 2423 2333 2233 2122 2002 1877 Perpetual growth % 1.75% Terminal multiple 14.5 PV of cashflows 22,981 PV of terminal multiple 27,150 Total firm value 50,131 Net Debt, JV value & other adjustments

-5,488

Equity Value 55,620 Shares in issue (m) 1558 USD/GBP Fx 1.56 Implied value per share (p) 2,288 Current share price 2,083 Upside/(Downside) 10% Source: J.P. Morgan estimates. Share price as at cob on 1st Dec 2010

68



69



JPM Q-ProfileAnheuser-Busch InBev (BELGIUM / Consumer Staples)As Of: 26-Nov-2010 [email protected]

Local Share Price Current: 43.95 12 Mth Forward EPS Current: 3.71

Earnings Yield (& local bond Yield) Current: 6% Implied Value Of Growth* Current: 27.11%

PE (1Yr Forward) Current: 15.8x Price/Book Value Current: 3.1x

ROE (Trailing) Current: 17.37 Dividend Yield (Trailing) Current: 0.61

Summary

Anheuser-Busch InBev 94462.09 As Of:BELGIUM 116.93786 SEDOL 4755317 Local Price: 43.95Consumer Staples Beverages EPS: 3.71

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 15.85x 6.35 35.14 16.78 16.95 24.18 9.72 -60% 122% 6% 7%P/BV (Trailing) 3.09x 0.91 3.33 1.94 2.08 3.13 1.04 -70% 8% -37% -32%Dividend Yield (Trailing) 0.61 0.33 13.19 1.42 1.77 4.99 -1.45 -45% 2073% 134% 191%ROE (Trailing) 17.37 -34.42 17.37 11.39 9.75 34.14 -14.65 -298% 0% -34% -44%Implied Value of Growth 27.1% -0.75 0.72 0.33 0.32 0.68 -0.04 -378% 166% 21% 18%

Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs * Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)

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70



JPM Q-ProfileCarlsberg As Ord Cl B (DENMARK / Consumer Staples)As Of: 26-Nov-2010 [email protected]





Summary

Carlsberg As Ord Cl B 14936.67 As Of:DENMARK 51.24738 SEDOL 4169219 Local Price: 545.00Consumer Staples Beverages EPS: 40.23

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 13.55x 5.86 31.26 17.13 17.34 25.20 9.49 -57% 131% 26% 28%P/BV (Trailing) 1.34x 0.43 3.05 1.64 1.75 3.02 0.48 -68% 127% 22% 30%Dividend Yield (Trailing) 0.60 0.60 2.75 1.21 1.27 2.05 0.49 0% 361% 103% 113%ROE (Trailing) 7.72 4.99 17.01 11.36 10.40 17.01 3.79 -35% 120% 47% 35%Implied Value of Growth 6.7% -1.37 0.66 0.42 0.35 0.90 -0.20 -2138% 888% 529% 420%


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JPM Q-ProfileHeineken Holding N.V. (NETHERLANDS / Consumer Staples)As Of: 26-Nov-2010 [email protected]


Earnings Yield (& local bond Yield) Current: 12% Implied Value Of Growth* Current: -56.30%



Summary

Heineken Holding N.V. 10939.76 As Of:NETHERLANDS 7.435719 SEDOL B0CCH46 Local Price: 31.50Consumer Staples Beverages EPS: 3.91

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 8.06x 6.72 19.90 13.47 13.38 19.37 7.38 -17% 147% 67% 66%P/BV (Trailing) 1.77x 1.36 4.64 3.13 3.06 4.59 1.53 -23% 162% 77% 73%Dividend Yield (Trailing) 2.13 0.69 3.64 1.63 1.65 2.73 0.57 -67% 71% -24% -22%ROE (Trailing) 17.28 4.24 29.26 18.61 18.71 30.53 6.90 -75% 69% 8% 8%Implied Value of Growth -56.3% -0.71 0.47 0.17 0.09 0.61 -0.42 -27% 183% 130% 117%


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72



JPM Q-ProfileHeineken N.V. (NETHERLANDS / Consumer Staples)As Of: 26-Nov-2010 [email protected]





Summary

Heineken N.V. 23766.61 As Of:NETHERLANDS 51.88684 SEDOL 7792559 Local Price: 36.31Consumer Staples Beverages EPS: 2.79

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 13.00x 8.61 32.82 17.97 19.58 31.59 7.57 -34% 152% 38% 51%P/BV (Trailing) 2.04x 1.92 13.01 3.93 4.93 9.92 -0.06 -6% 537% 92% 141%Dividend Yield (Trailing) 1.81 0.56 3.42 1.11 1.28 2.36 0.20 -69% 89% -39% -29%ROE (Trailing) 16.12 4.23 54.98 20.87 21.50 39.76 3.25 -74% 241% 29% 33%Implied Value of Growth 3.1% -0.34 0.70 0.40 0.39 0.86 -0.07 -1205% 2186% 1207% 1173%


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73



JPM Q-ProfileSABMiller PLC (BRITAIN / Consumer Staples)As Of: 26-Nov-2010 [email protected]





Summary

SABMiller PLC 52687.48 As Of:BRITAIN 61.88885 SEDOL 0483548 Local Price: 21.07Consumer Staples Beverages EPS: 2.00

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 16.65x 9.77 24.48 15.27 15.45 21.67 9.24 -41% 47% -8% -7%P/BV (Trailing) 2.52x 0.99 4.23 2.50 2.46 3.73 1.19 -61% 68% -1% -2%Dividend Yield (Trailing) 2.18 0.00 4.15 2.43 2.53 4.56 0.51 -100% 90% 12% 16%ROE (Trailing) 10.27 7.26 25.05 13.64 14.85 25.64 4.06 -29% 144% 33% 45%Implied Value of Growth 24.1% -0.23 0.55 0.29 0.28 0.61 -0.05 -195% 130% 21% 15%


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74



Valuation Methodology and Risks Anheuser Busch InBev (Overweight; Price Target €51.00) Valuation Methodology Our target price of €51 for Nov 2011 is derived from our DCF analysis. We assume a perpetuity growth rate of 1.50%. We fade sales growth down from 3.8% in FY13E to this level. We assume stable EBIT margins at 34.0% from FY14E. We assume a WACC of 8.5%. This is based on a group pretax cost of debt of 6.2% and a cost of equity of 9.9%, which is common across our large cap universe. Risks to Our View The key risks, in our view, that could keep our rating and target price from being achieved include the following: 1. A failure to realize the expected US$2.25bn of cost synergies. 2.· Any significant volume decline in key markets, notably the US and Brazil. 3.· A significant adverse shift in key currencies, notably a weakening Real.

Carlsberg (Overweight; Price Target Dkr 650.00) Valuation Methodology Our November 2011E DCF-derived PT is DKK 650 based on a WACC of 8.8% and a perpetuity growth rate of 1.50%. Risks to Our View 1. If the Russian Rouble falls sharply against the Euro we would see earnings downgrades at both the EBIT level and in the financials line. 2. The Russian beer market could prove less resilient than we expect to regulatory/demographic pressures. 3. Carlsberg could be unable to sell the Valby site at an acceptable price in 2011, thus slowing the process of debt reduction.

Heineken (Neutral; Price Target €38.00) Valuation Methodology Our target price €38 for Oct 2011 is derived from our discounted cash flow analysis for which we assume a perpetuity growth rate of 1.25% and an overall WACC of 8.3%. Risks to Our View The key risks that in our view could keep our rating and target price from being achieved include the following: Upside risks 1. Faster volume recovery in mature markets. 2. Significant positive surprise on the TCM cost-savings capture. 3. A significant revenue synergy capture at FEMSA Cerveza. Downside risks 1. Weaker volume recovery in mature markets 2. A failure to secure expected TCM cost savings 3. Negative currency impacts, notably EUR strengthening vs USD and MXN

75



SABMiller (Overweight; Price Target 2,290p) Valuation Methodology Our December 11E DCF derived PT is 2,290p based on a WACC of 8.7% and perpetuity growth rate of 1.75%. Risks to Our View 1 - Sentiment could shift against emerging market stocks (SABMiller generates over 80% of group EBIT in these markets) which could lead to a de-rating of the company. 2 - SABMiller's major trading currencies (notably the South African Rand and the Colombian Peso) could fall against the $US, leading to earnings downgrades via both the translation and transaction effects. 3 - Heineken could introduce a mainstream brand in South Africa, resulting in further market share loss for SABMiller in its largest single market. 4 - The recent rise in input costs could ultimately put downward pressure on SABMiller's gross margins as current contracts and hedging arrangements roll over.

76



Anheuser Busch InBev: Summary of Financials Profit and Loss Statement Cash flow statement $ in millions, year end Dec FY09 FY10E FY11E FY12E $ in millions, year end Dec FY09 FY10E FY11E FY12E Revenues 36,759 35,631 37,421 38,941 EBIT 10,248 11,146 12,181 12,925

% change Y/Y -6.1% -3.1% 5.0% 4.1% Depreciation & amortization 2,788 2,580 2,700 2,829 Change in working capital 787 285 187 195EBITDA 13,036 13,726 14,881 15,754 Taxes (1,786) (2,098) (2,549) (2,806)

% change Y/Y 8.0% 5.3% 8.4% 5.9% Other operating cash flows - - - -EBITDA Margin (%) 35.5% 38.5% 39.8% 40.5% Cash Flow from Operations 13,823 14,011 15,068 15,949

EBIT 10,248 11,146 12,181 12,925 % change Y/Y 12.3% 8.8% 9.3% 6.1% Capex (1,713) (2,150) (1,983) (2,025)EBIT Margin (%) 27.9% 31.3% 32.6% 33.2% Net Interest (3,790) (2,676) (2,327) (1,921)

Net Interest (3,790) (2,676) (2,327) (1,921) Free Cash Flow 7,738 6,637 8,160 9,587Earnings before tax 7,150 7,349 9,804 11,004 Disposal/(purchase) 6,399 0 0 0

% change Y/Y - 2.8% 33.4% 12.2% Tax (1,786) (2,098) (2,549) (2,806) Equity raised/ (repaid) 76 0 0 0

as % of EBT 25.0% 26.0% 26.0% 25.5% Debt raised/ (repaid) 13,283 4,484 5,547 6,706Net Income (Analyst) 3,927 5,150 6,134 7,000 Other - - - -

% change Y/Y - 31.2% 19.1% 14.1% Dividends Paid (1,313) (2,152) (2,613) (2,881)Shares Outstanding 1,593 1,600 1,605 1,605 EPS (Analyst) - - - - DPS 0.38 0.53 0.65 0.73

% change Y/Y - - - - Balance sheet Ratio Analysis $ in millions, year end Dec FY09 FY10E FY11E FY12E $ in millions, year end Dec FY09 FY10E FY11E FY12E Cash and cash equivalent 3,689 3,689 3,689 3,689 EBITDA Margin (%) 35.5% 38.5% 39.8% 40.5%Others 711 711 711 711 EBIT Margin (%) 27.9% 31.3% 32.6% 33.2%Current Assets 10,853 10,663 10,538 10,408 Net Profit Margin (%) 10.7% 14.5% 16.4% 18.0% LT investments & Intangibles 85,211 85,211 85,211 85,211 Dividend payout - - - -Net Fixed Assets 16,461 16,031 15,314 14,510 Total Assets 112,525 111,905 111,063 110,130 Capex/sales 4.7% 6.0% 5.3% 5.2% Capex/Depreciation 0.6 0.8 0.7 0.7Liabilities Net Working Capital/Sales 2% 1% 0% 0%ST Loans 2,043 2,043 2,043 2,043 Others 12,211 12,306 12,368 12,433 Total Current Liabilities 14,254 14,349 14,411 14,476 Interest Coverage (x) 2.7 4.2 5.2 6.7 Net Debt/EBITDA 3.7 3.0 2.4 1.8Long Term Debt 47,049 42,565 37,017 30,311 Net Debt to Equity 126.0% 98.2% 73.6% 51.5%Other Liabilities 18,051 17,701 17,701 17,701 Total Liabilities 79,354 74,615 69,130 62,488 Sales/Total Assets 0.3 0.3 0.3 0.4Shareholders' Equity 33,171 37,290 41,934 47,641 ROCE - - - - Source: Company reports and J.P. Morgan estimates.

77



Carlsberg: Summary of Financials Profit and Loss Statement Cash flow statement Dkr in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Dkr in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Revenues 59,944 59,382 59,810 63,136 65,972 EBIT 7,979 9,390 10,500 11,700 12,863

% change Y/Y 34.0% -0.9% 0.7% 5.6% 4.5% Depreciation & amortization 3,631 3,779 3,836 3,951 4,070 Change in working capital 1,674 2,000 150 0 (300)EBITDA 11,610 13,169 14,337 15,652 16,933 Taxes (1,514) (1,374) (2,222) (2,588) (3,045)

% change Y/Y 42.7% 13.4% 8.9% 9.2% 8.2% Other operating cash flows - - - - -EBITDA Margin (%) 19.4% 22.2% 24.0% 24.8% 25.7% Cash Flow from Operations 13,284 15,169 14,487 15,652 16,633

EBIT 7,979 9,390 10,500 11,700 12,863 % change Y/Y 51.6% 17.7% 11.8% 11.4% 9.9% Capex - (2,923) (3,300) (3,150) (3,250)EBIT Margin (%) 13.3% 15.8% 17.6% 18.5% 19.5% Net Interest (2,754) (1,597) (1,945) (1,565) (1,085)

Net Interest (3,456) (2,990) (1,870) (1,815) (1,285) Free Cash Flow 5,162 11,820 8,056 9,156 9,692Earnings before tax 4,523 6,400 8,630 9,885 11,578 Disposal/(purchase) - - - - -

% change Y/Y 11.4% 41.5% 34.8% 14.5% 17.1% Tax (1,072) (1,666) (2,222) (2,588) (3,045) Equity raised/ (repaid) - - - - -

as % of EBT 23.7% 29.2% 27.0% 27.0% 27.0% Debt raised/ (repaid) - - - - -Net Income (Analyst) 2,876 4,170 5,789 6,585 7,742 Other (482) (507) (450) (300) (200)


% change Y/Y (32.2%) 12.7% 38.7% 13.6% 17.4% Balance sheet Ratio Analysis Dkr in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Dkr in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Cash and cash equivalent 2,857 2,734 2,734 2,734 2,734 EBITDA Margin (%) 19.4% 22.2% 24.0% 24.8% 25.7%Others 16,261 12,107 12,007 12,007 12,207 EBIT Margin (%) 13.3% 15.8% 17.6% 18.5% 19.5%Current Assets 19,118 14,841 14,741 14,741 14,941 Net Profit Margin (%) 4.8% 7.0% 9.7% 10.4% 11.7% Intangible assets 84,678 81,611 81,611 81,611 81,611 Dividend payout 14.4% 12.8% 13.2% 13.9% 13.9%Net Fixed Assets 34,043 31,825 30,935 27,633 26,813 Total Assets 143,306 134,515 134,576 131,273 130,657 Capex/sales 8.7% 4.9% 5.5% 5.0% 4.9% Capex/Depreciation 1.4 0.8 0.9 0.8 0.8Liabilities Net Working Capital/Sales - - - - -ST Loans 5,291 3,322 3,322 3,322 3,322 Others 20,309 21,638 21,588 21,588 21,688 Total Current Liabilities 25,600 24,960 24,910 24,910 25,010 Interest Coverage (x) 2.3 3.1 5.6 6.4 10.0 Net Debt/EBITDA - 2.7 2.2 1.4 0.9Long Term Debt 43,230 36,075 31,975 22,709 15,091 Net Debt to Equity 72.7% 60.0% 49.6% 32.0% 19.2%Other Liabilities 34,034 35,629 35,579 35,579 35,679 Total Liabilities 82,555 75,026 70,876 61,610 54,092 Sales/Total Assets - - - - -Shareholders' Equity 60,751 59,489 63,701 69,663 76,565 ROCE 6.5% 9.5% 10.6% - - Source: Company reports and J.P. Morgan estimates.

78



Heineken: Summary of Financials Profit and Loss Statement Cash flow statement € in millions, year end Dec FY08 FY09 FY10E FY11E FY12E € in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Revenues 14,319 14,701 16,513 17,737 18,310 EBIT 1,932 2,095 2,497 2,846 3,018

% change Y/Y 14.0% 2.7% 12.3% 7.4% 3.2% Depreciation & amortization 1,206 1,083 1,213 1,255 1,299 Change in working capital (47) 220 (30) (40) (30)EBITDA 3,138 3,178 3,710 4,101 4,317 Taxes (251) (245) (568) (628) (691)

% change Y/Y 20.2% 1.3% 16.7% 10.6% 5.3% Other operating cash flows 75 163 102 174 187EBITDA Margin (%) 21.9% 21.6% 22.5% 23.1% 23.6% Cash Flow from Operations 3,166 3,561 3,782 4,236 4,474

EBIT 1,932 2,095 2,497 2,846 3,018 % change Y/Y 4.7% 8.4% 19.2% 14.0% 6.0% Capex (1,260) (777) (805) (1,187) (1,190)EBIT Margin (%) 13.5% 14.3% 15.1% 16.0% 16.5% Net Interest (309) (467) (498) (484) (449)

Net Interest (485) (329) (498) (484) (449) Free Cash Flow 498 1,741 1,788 1,642 1,857Earnings before tax 595 1,428 2,029 2,242 2,468 Disposal/(purchase) (3,541) 31 (1,324) 0 0

% change Y/Y -57.5% 140.0% 42.1% 10.5% 10.1% Tax (394) (373) (534) (636) (694) Equity raised/ (repaid) (15) (13) (355) (426) (248)

as % of EBT 25.5% 25.0% 28.0% 28.0% 28.0% Debt raised/ (repaid) 3,590 -1,119 281 -765 -1,111Net Income (Analyst) 1,013 1,055 1,335 1,588 1,728 Other 46 (68) 0 0 0

% change Y/Y -9.5% 4.1% 26.6% 18.9% 8.8% Dividends Paid (485) (392) (390) (452) (497)Shares Outstanding 489 489 547 576 576 EPS (Analyst) 2.07 2.16 2.44 2.76 3.00 DPS 0.62 0.62 0.71 0.78 0.86

% change Y/Y (9.4%) 4.2% 13.0% 13.0% 8.8% Balance sheet Ratio Analysis € in millions, year end Dec FY08 FY09 FY10E FY11E FY12E € in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Cash and cash equivalent 712 379 379 379 379 EBITDA Margin (%) 21.9% 21.6% 22.5% 23.1% 23.6%Others 3,981 3,509 3,529 3,556 3,576 EBIT Margin (%) 13.5% 14.3% 15.1% 16.0% 16.5%Current Assets 4,693 3,888 3,908 3,935 3,955 Net Profit Margin (%) 7.1% 7.2% 8.1% 9.0% 9.4% Intangible assets - - - - - Dividend payout 29.9% 28.7% 29.2% 28.5% 28.8%Net Fixed Assets 6,314 6,017 6,934 6,865 6,756 Total Assets 20,563 20,024 24,887 24,845 24,756 Capex/sales 8.8% 5.3% 4.9% 6.7% 6.5% Capex/Depreciation 1.1 0.8 0.7 1.0 1.0Liabilities Net Working Capital/Sales 0% -1% -1% -1% -0%ST Loans 969 1,145 1,145 1,145 1,145 Others 3,931 3,696 3,686 3,673 3,663 Total Current Liabilities 4,900 4,841 4,831 4,818 4,808 Interest Coverage (x) 4.0 6.4 5.0 5.9 6.7 Net Debt/EBITDA 3.0 2.6 2.3 1.9 1.5Long Term Debt 9,084 7,401 7,682 6,917 5,806 Net Debt to Equity 185.6% 137.4% 79.2% 66.6% 51.7%Other Liabilities 2,108 2,431 2,560 2,698 2,844 Total Liabilities 16,092 14,673 15,073 14,433 13,458 Sales/Total Assets 0.7 0.7 0.7 0.7 0.7Shareholders' Equity 4,752 5,647 10,238 10,975 12,007 ROCE 8.3% 10.8% 12.7% 11.8% 12.4% Source: Company reports and J.P. Morgan estimates.

79












80



Other Companies Recommended in This Report (all prices in this report as of market close on 01 December 2010) Diageo (DGE.L/1,146p/Neutral), Pernod-Ricard SA (PERP.PA/€63.42/Neutral)



• Market Maker/ Liquidity Provider: J.P. Morgan Securities Ltd. is a market maker and/or liquidity provider in Anheuser Busch InBev, Carlsberg, Diageo, Heineken, Pernod-Ricard SA, SABMiller.

• Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Anheuser Busch InBev, Diageo within the past 12 months.

• Client of the Firm: Anheuser Busch InBev is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Carlsberg is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company non-investment banking securities-related service and non-securities-related services. Diageo is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Heineken is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. Pernod-Ricard SA is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services. SABMiller is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-related services.

• Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services from Anheuser Busch InBev, Diageo, Heineken, Pernod-Ricard SA, SABMiller.

• Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Anheuser Busch InBev, Diageo, Heineken, Pernod-Ricard SA, SABMiller.

• Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other than investment banking from Anheuser Busch InBev, Carlsberg, Diageo, Heineken, Pernod-Ricard SA, SABMiller. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from Anheuser Busch InBev, Carlsberg, Diageo, Heineken, Pernod-Ricard SA, SABMiller.


Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgan’s website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800-477-0406)

https://mm.jpmorgan.com/disclosures/company

81



0

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Price(€)

Sep06

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Jun10

Anheuser Busch InBev (ABI.BR) Price Chart

OW €33OW €37 OW €45 OW €53

OW €32OW €36 OW €42 OW €49 OW €50

OW €29OW €35 OW €40 OW €47 OW €51

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Initiated coverage Jan 26, 2009. This chart shows J.P. Morgan's continuing coverage of this stock; the current analystmay or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (€)

Price Target (€)

26-Jan-09 OW 18.45 29.00 09-Mar-09 OW 18.86 32.00 01-May-09 OW 23.32 33.00 07-May-09 OW 23.95 35.00 22-May-09 OW 24.41 36.00 25-Jun-09 OW 25.79 37.00 17-Sep-09 OW 31.62 40.00 12-Nov-09 OW 32.59 42.00 27-Jan-10 OW 34.38 45.00 05-Mar-10 OW 36.52 47.00 29-Mar-10 OW 37.80 49.00 18-Jun-10 OW 41.61 53.00 21-Jul-10 OW 40.54 51.00 04-Nov-10 OW 43.45 50.00

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Mike J Gibbs: Anheuser Busch InBev (ABI.BR), Anheuser-Busch InBev (ADR) (BUD), C&C Group (GCC.I), Campari (CPRI.MI), Heineken (HEIN.AS), Pernod-Ricard SA (PERP.PA), Remy Cointreau SA (RCOP.PA)

J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010

Overweight (buy)

Neutral (hold)

Underweight (sell)






82




Other Disclosures



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83



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“Other Disclosures” last revised September 1, 2010.


84



Major global brewers 2009 pro forma Mn hls


Europe Equity Research 24 May 2011

SABMiller

Overweight SAB.L, SAB LN

Updating forecasts following FY2011 results

Price: 2,210p

Price Target: 2,400p

Beverages

Matthew WebbAC

(44-20) 7155 6154 [email protected]




1,800

2,100

2,400

p

May-10 Aug-10 Nov-10 Feb-11 May-11

Price Performance

SAB.L share price (p)MSCI-Eu (rebased)

YTD 1m 3m 12mAbs -2.1% -0.2% 8.3% 15.8%Rel -1.5% 2.0% 11.3% 1.0%


(Old)2012E

(New)2013E

(Old)2013E

(N ew)2014E

Adj. EPS FY ($) 1.91 2.17 2.20 2.41 2.42 2.66Adj P/E FY 18.6 16.4 16.2 14.8 14.7 13.4Revenue FY ($ mn) 23,317 24,816 25,341 26,382 26,951 28,620Adj EBITDA FY ($ mn) 5,948 6,515 6,590 7,003 7,087 7,628EBIT FY ($ mn) 5,044 5,567 5,659 6,029 6,128 6,641Pretax Profit Adjusted FY ($ mn)

4,491 5,067 5,172 5,629 5,701 6,274

Net Income FY ($ mn) 3,018 3,447 3,485 3,829 3,842 4,228EBIT margin FY 21.6% 22.4% 22.3% 22.9% 22.7% 23.2%Source: Company data, Bloomberg, J .P. Morgan est im ates.

Company DataPrice (p) 2,210Date Of Price 23 May 11Price Target (p) 2,400Price Target End Date 01 Jun 1252-week Range (p) 2,328 - 1,810Mkt Cap (£ bn) 34.96Shares O/S (mn) 1,582

See page 5 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan 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.

• Following last Thursday’s results we upgrade our SABMiller EPS forecasts for FY2012 and FY2013 by 1% to 220.5 cents and 242.2 cents respectively. This is due to the higher base, with SABM having reported CY2011 EPS of 191.5 cents, 2% above our estimate of 188 cents. Our upgrade is slightly constrained by more conservative assumptions on SABM’s prospective capex and the average interest rate payable on its net debt.

• Our DPS forecasts for FY2012 and FY2013 increase by 3% to 93 cents and 102 cents respectively.

• SABM remains our top pick in the European beverages sector, with its valuation premium (15.6x CY2012E PE versus the sector on 14.1x) more than justified in our view by its superior long-term growth prospects, and by the scope for earnings upgrades if the Business Capability Programme delivers ahead of the company’s initial guidance.

• Our June-12E DCF-based 2,400p price target remains unchanged.

2



Valuation Methodology and Risks SABMiller (Overweight; Price Target 2,400p) Valuation Methodology Our June 12E DCF derived PT is 2,400p based on a WACC of 8.7% and perpetuity growth rate of 1.75%. Risks to Our View 1 - Sentiment could shift against emerging market stocks (SABMiller generates over 80% of group EBIT in these markets) which could lead to a de-rating of the company. 2 - SABMiller's major trading currencies (notably the South African Rand and the Colombian Peso) could fall against the $US, leading to earnings downgrades via both the translation and transaction effects. 3 - Heineken could introduce a mainstream brand in South Africa, resulting in further market share loss for SABMiller in its largest single market. 4 - The recent rise in input costs could ultimately put downward pressure on SABMiller's gross margins as current contracts and hedging arrangements roll over.

3



JPM Q-ProfileSABMiller PLC (BRITAIN / Consumer Staples)As Of: 20-May-2011 [email protected]





Summary


Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 16.54x 9.77 24.48 15.39 15.50 21.60 9.40 -41% 48% -7% -6%P/BV (Trailing) 2.78x 0.99 4.23 2.50 2.47 3.72 1.22 -65% 52% -10% -11%Dividend Yield (Trailing) 1.90 0.00 4.15 2.41 2.51 4.51 0.52 -100% 119% 27% 33%ROE (Trailing) 10.27 7.26 25.05 13.58 14.66 25.38 3.94 -29% 144% 32% 43%Implied Value of Growth 26.2% -0.23 0.55 0.29 0.28 0.60 -0.04 -188% 112% 11% 6%


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% change Y/Y 4.1% 7.0% 8.7% 6.4% 6.2% Depreciation & amortization 655 665 685 705 727 Change in working capital 542 40 25 25 25EBITDA 5,262 5,948 6,590 7,087 7,628 Taxes (620) (885) (1,298) (1,496) (1,707)


EBIT 4,381 5,044 5,659 6,128 6,641 % change Y/Y 6.1% 15.1% 12.2% 8.3% 8.4% Capex (1,436) (1,189) (1,200) (1,200) (1,200)EBIT Margin (%) 20.1% 21.6% 22.3% 22.7% 23.2% Net Interest (640) (640) (487) (427) (367)

Net Interest (578) (553) (487) (427) (367) Free Cash Flow 2,496 2,663 3,310 3,678 3,998Earnings before tax 3,803 4,491 5,172 5,701 6,274 Disposal/(purchase) (78) (60) 0 0 0

% change Y/Y 11.7% 18.1% 15.2% 10.2% 10.0% Tax (1,084) (1,266) (1,448) (1,596) (1,757) Equity raised/ (repaid) 114 73 25 25 25


% change Y/Y 21.5% 20.3% 15.5% 10.2% 10.0% Dividends Paid (1,084) (1,215) (1,448) (1,654) (1,815)Shares Outstanding 1,558 1,576 1,581 1,586 1,591 EPS (Analyst) 1.61 1.91 2.20 2.42 2.66 DPS 1 1 1 1 1

% change Y/Y 17.2% 18.8% 15.1% 9.9% 9.7% Balance sheet Ratio Analysis $ in millions, year end Mar FY10 FY11 FY12E FY13E FY14E $ in millions, year end Mar FY10 FY11 FY12E FY13E FY14E Cash and cash equivalent 779 1,067 1,067 - - EBITDA Margin (%) 24.2% 25.5% 26.0% 26.3% 26.7%Others - - - - - EBIT Margin (%) 20.1% 21.6% 22.3% 22.7% 23.2%Current Assets 3,739 4,010 3,985 - - Net Profit Margin (%) 11.5% 12.9% 13.8% 14.3% 14.8% Intangible assets 15,938 16,313 16,188 - - Dividend payout 42.2% 42.3% 42.2% 42.1% 42.1%Net Fixed Assets 8,915 9,330 9,524 - - Total Assets 37,504 39,042 39,287 - - Capex/sales - - - - - Capex/Depreciation 2.2 1.8 1.8 - -Liabilities Net Working Capital/Sales - - - - -ST Loans 1,605 1,345 1,345 - - Others 1,100 1,053 1,053 - - Total Current Liabilities 7,014 6,773 6,773 - - Interest Coverage (x) 7.6 9.1 11.6 14.4 18.1 Net Debt/EBITDA - - - - -Long Term Debt 7,809 7,115 5,367 - - Net Debt to Equity 43.4% 33.6% 23.4% - -Other Liabilities - - - - - Total Liabilities 16,905 16,283 14,535 - - Sales/Total Assets - - - - -Shareholders' Equity 19,910 22,008 24,119 - - ROCE - - - - - Source: Company reports and J.P. Morgan estimates.

5





• Market Maker/ Liquidity Provider: J.P. Morgan Securities Ltd. is a market maker and/or liquidity provider in SABMiller. • Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for SABMiller

within the past 12 months. • Client of the Firm: SABMiller is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the

company investment banking services, non-investment banking securities-related service and non-securities-related services. • Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services

from SABMiller. • Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking

services in the next three months from SABMiller. • Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other

than investment banking from SABMiller. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from SABMiller.


0

535

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SABMiller (SAB.L) Price Chart

OW 1,535pOW 1,525pOW 1,365pOW 1,175pOW 985p N 1,400p OW 2,075p

OW 1,250p OW 1,520pOW 1,580pOW 1,618pOW 1,125pOW 1,005pN 1,235pN 1,350pN 1,670pOW 2,165p

OW 1,215p OW 1,565pOW 1,650pOW 1,583pOW 1,310pOW 1,050p OW 1,140pN 1,300pN 1,470p OW OW 2,290pOW 2,400p

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage Jun 07, 2007 - Nov 09, 2007, and Feb 26, 2010 - Mar 01, 2010. This chart shows J.P. Morgan'scontinuing coverage of this stock; the current analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (p)

Price Target (p)

19-Mar-07 OW 1065 1215 16-May-07 OW 1192 1250 09-Nov-07 OW 1405 1565 14-Nov-07 OW 1358 1520 19-Nov-07 OW 1306 1535 09-Jan-08 OW 1448 1650 17-Jan-08 OW 1244 1580 07-Apr-08 OW 1121 1525 14-May-08 OW 1203 1583 15-May-08 OW 1203 1618 10-Jul-08 OW 1060 1365 01-Aug-08 OW 1039 1310 14-Oct-08 OW 950 1125 06-Nov-08 OW 986 1175 14-Nov-08 OW 958 1050 15-Jan-09 OW 1060 1005 16-Apr-09 OW 1063 985 15-May-09 OW 1231 1140 22-May-09 N 1243 1235 04-Sep-09 N 1401 1300 17-Sep-09 N 1526 1350 22-Sep-09 N 1514 1400 15-Oct-09 N 1642 1470 20-Nov-09 N 1730 1670 01-Mar-10 OW 1720 -- 28-Mar-10 OW 1959 2165 28-May-10 OW 1956 2075 22-Nov-10 OW 2114 2290 27-Apr-11 OW 2263 2400

6




Coverage Universe: Matthew Webb: Britvic (BVIC.L), CEDC (CEDC), Carlsberg (CARLb.CO), Diageo (DGE.L), SABMiller (SAB.L)


Overweight (buy)

Neutral (hold)

Underweight (sell)






Other Disclosures



Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a


7



Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB010675237/INB010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 025/01/2011 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMSL. Investment research issued by JPMSL has been prepared in accordance with JPMSL's policies for managing conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to “wholesale clients” only. JPMSAL does not issue or distribute this material to “retail clients.” The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms “wholesale client” and “retail client” have the meanings given to them in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd., Frankfurt Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The 1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may be based on the month end data from two months’ prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein or the merits of the

8



securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules.




Europe Equity Research 12 January 2011

SABMiller

Overweight SAB.L, SAB LN

Fiscal Q3 trading statement (preview)

Price: 2,244p

Price Target: 2,290p

Beverages

Matthew WebbAC





1,600

1,900

2,200p

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Price Performance

SAB.L share price (p)MSCI-Eu (rebased)

YTD 1m 3m 12mAbs -0.6% 3.0% 11.1% 24.6%Rel -0.9% 2.2% 5.0% 17.4%

SABMiller plc (SAB.L;SAB LN) FYE Mar 2010A 2011E 2012E 2013EAdj. EPS FY ($) 1.61 1.88 2.17 2.41Adj P/E FY 21.7 18.6 16.1 14.5Revenue FY ($ mn) 21,783 23,177 24,816 26,382Adj EBITDA FY ($ mn) 5,262 5,916 6,515 7,003EBIT FY ($ mn) 4,381 4,993 5,567 6,029Pretax Profit Adjusted FY ($ mn) 3,803 4,400 5,067 5,629Net Income FY ($ mn) 2,507 2,971 3,447 3,829EBIT margin FY 20.1% 21.5% 22.4% 22.9%Source: Company data, Bloomberg, J.P. Morgan estimates.

Company Data Price (p) 2,244Date Of Price 11 Jan 11Price Target (p) 2,290Price Target End Date 01 Dec 1152-week Range (p) 2,328 - 1,638Mkt Cap (£ bn) 35.50Shares O/S (mn) 1,582


• We expect SABMiller to report only 1% organic lager volume growth for fiscal Q3 (calendar Q4) when it reports on 18th January (next Tuesday). This volume performance would leave our FY2011 volume forecast of 2%, which requires 3% growth in H2, looking challenging. In our view it would come as a disappointment to the market, although we expect SABM to be able to report that financial performance is in line with management (and implicitly market) expectations, helped by the recent strength of the Rand.

• Our cautious view on the fiscal Q3 volume performance is largely driven by our expectation of a sharp (c.10%) volume decline in Colombia. We believe that trading in Colombia will have been severely affected by the disastrous weather conditions, with torrential rainfall (the worst for 50 years) having caused widespread damage to infrastructure and property, with 80% of roads affected and a State of Emergency declared.

• The high-margin Colombian market accounts for c.15% of full year group EBIT, and more in this quarter which covers the Southern Hemisphere summer. Such a volume decline would therefore be financially costly. Calendar Q4 will also be a difficult quarter for all those operating in the Russian beer market, with the comparable period having seen substantial stocking-up ahead of the 200% duty increase on 1st January 2010. We expect SABM’s fiscal Q3 volumes to be down 20% in Russia and down 6% in the European division.

• We expect these negative markets to be offset by strong performances in Africa and Asia, leaving group volumes up 1%, but with a negative mix effect given the low price/unit achieved in Asia.

• With SABMiller trading on 14.7x CY2012E PE, a 10% premium to the European beverages sector on 13.4x, we think that this muted volume growth could lead to some short-term weakness in the shares after a strong run (+10% over the last 3 months, +7% versus the sector), hence our caution ahead of next Tuesday’s trading statement.

2



Fiscal Q3 preview SABMiller is scheduled to release its fiscal Q3 trading statement on 18th January (next Tuesday). We expect organic lager volume growth (ex-Zimbabwe) of 1% based on our regional forecasts set out in Table 1 below.

Table 1: Fiscal Q3 organic lager volume forecasts Latin America -2% Europe -6% North America (STRs) -2% Africa +8% Asia +10% South Africa +2% GROUP +1%


Latin America (31% of group EBIT) We expect SABM’s organic lager volume in Latin America to be down 2% in fiscal Q3. Within this we expect volumes in Colombia to be down 10% due to the disastrous weather conditions affecting the country. Torrential rainfall (the worst for 50 years) has caused widespread damage to infrastructure and property, with 80% of roads affected and a State of Emergency declared. We expect a 5% lager volume decline in Central America, which has also been adversely affected, albeit to a lesser extent.

Even before the damage caused by the extreme weather conditions, the economic recovery in Colombia was more tentative than in many other regional markets. The combination of this, plus wet weather and "dry days" around elections (when alcohol cannot be sold) led to a 7% decline in fiscal Q2. Colombia also faces a relatively tough comp of +6% in Q3, helped by good weather last year, although that figure was itself up against an easy comp of -6% from the previous year (i.e. the two-year volume performance was broadly flat).

Fortunately, we expect a negative number from Colombia to be partly offset by another very strong quarter of growth from Peru. We expect volumes in Peru to be up 10%, in line with the performance in Q2, as the economy continues to grow strongly. Peru has not been affected by the weather issues afflicting neighbouring Colombia. Moreover, Peru apparently faces an easy comp of only +1%, although that was up against a comp of +14% from the previous year so the two-year average was “only” +7%.

In Ecuador we forecast 5% volume growth, against a tough comp of +9%. This would be slightly ahead of the fiscal H1 performance of +4%, although a marked improvement on the 1% decline in fiscal Q2.

South Africa (20% of group EBIT) We expect organic lager volumes to be up 2% in South Africa, with weather conditions broadly in line with last year, and market share losses to brandhouse having been stemmed, at least for now. We expect soft drinks volumes to be up 4%.

Eastern Europe (16% of group EBIT) We expect organic lager volumes to be down 6% in Eastern Europe in fiscal Q3, with Poland down 2%, the Czech Republic down 6%, Romania down 7% and Russia down 20%.

3



Calendar Q4 will be a difficult quarter for all those operating in the Russian beer market, with the previous year having seen such material stocking-up ahead of the 200% duty increase implemented on 1st January 2010. SABM faces a particularly tough comp, although the +34% volume growth in fiscal Q3 last year was helped by a very easy comp (down 22%) in the previous year.

The US (15% of group EBIT) We expect US depletions to be down 2% despite an easy comp of -3.6%. The US beer market is still seeing a slight underlying decline given the very high level of blue-collar unemployment, particularly amongst younger consumers. We expect December’s very cold weather to have exacerbated this weakness.

Africa (12% of group EBIT) We forecast organic lager volumes in Africa (ex-Zimbabwe) to be up 8%. Although the comp appears tough at +7%, this was helped by new capacity in Mozambique and Angola, which should in fact have facilitated further growth this year. In fact, the comps in Tanzania (-8% due to poor weather and a soft economy) and Botswana (-29%, despite having lapped the draconian duty increase) are undemanding.

Asia (3% of group EBIT) We expect Asia volumes to be up 10% driven by China, which faces a relatively weak comp. SABM's volumes in China "only" rose by 6% in fiscal Q3 last year due to heavy snow and rain across much of the country.

Although Asia accounts for only 3% of group EBIT, and is therefore immaterial at the group level on a financial basis, it contributes almost 20% of group volume, and is therefore a key driver of the group volume number.

Valuation SABMiller trades on 14.7x CY2012E PE, a 10% premium to the European beverages sector on 13.4x. The premium rating to the brewing peers is more substantial, at 14% to ABI (on 12.9x), 20% to Heineken (on 12.3x) and 34% to Carlsberg (on 11x).

In our view SABMiller’s superior long-term growth prospects support this premium rating, at least to the sector if not to all of the other brewers. 85% of group EBIT arises in the emerging markets, suggesting faster volume growth than the peers over time. We also see scope for further margin expansion due to (i) the pricing power provided by SABMiller’s high market shares and (ii) the change from a national to a regional/global operational approach, facilitated by the Business Capability programmes.

However, we would acknowledge that the current rating leaves little room for disappointment, hence our note of caution ahead of next Tuesday’s trading statement.

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Valuation Methodology and Risks SABMiller (Overweight; Price Target 2,290p) Valuation Methodology Our December 11E DCF derived PT is 2,290p based on a WACC of 8.7% and perpetuity growth rate of 1.75%. Risks to Our View 1 - Sentiment could shift against emerging market stocks (SABMiller generates over 80% of group EBIT in these markets) which could lead to a de-rating of the company. 2 - SABMiller's major trading currencies (notably the South African Rand and the Colombian Peso) could fall against the $US, leading to earnings downgrades via both the translation and transaction effects. 3 - Heineken could introduce a mainstream brand in South Africa, resulting in further market share loss for SABMiller in its largest single market. 4 - The recent rise in input costs could ultimately put downward pressure on SABMiller's gross margins as current contracts and hedging arrangements roll over.

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JPM Q-ProfileSABMiller PLC (BRITAIN / Consumer Staples)As Of: 17-Dec-2010 [email protected]





Summary


Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 17.18x 9.77 24.48 15.33 15.47 21.66 9.27 -43% 42% -11% -10%P/BV (Trailing) 2.63x 0.99 4.23 2.50 2.46 3.73 1.20 -63% 61% -5% -6%Dividend Yield (Trailing) 2.23 0.00 4.15 2.43 2.53 4.55 0.51 -100% 86% 9% 14%ROE (Trailing) 10.27 7.26 25.05 13.64 14.81 25.59 4.03 -29% 144% 33% 44%Implied Value of Growth 30.6% -0.23 0.55 0.29 0.28 0.60 -0.05 -175% 81% -5% -9%


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• Market Maker/ Liquidity Provider: J.P. Morgan Securities Ltd. is a market maker and/or liquidity provider in SABMiller. • Client of the Firm: SABMiller is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the

company investment banking services, non-investment banking securities-related service and non-securities-related services. • Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services

from SABMiller. • Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking

services in the next three months from SABMiller. • Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other

than investment banking from SABMiller. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from SABMiller.


0

535

1,070

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Nov07

Aug08

May09

Feb10

Nov10

SABMiller (SAB.L) Price Chart

OW 1,535pOW 1,525pOW 1,365pOW 1,175p OW 985p N 1,400p OW 2,075p

OW 1,250p OW 1,520pOW 1,580pOW 1,618pOW 1,125pOW 1,005pN 1,235pN 1,350pN 1,670pOW 2,165p

OW 1,215p OW 1,565pOW 1,650pOW 1,583pOW 1,310pOW 1,050p OW 1,140pN 1,300pN 1,470p OW OW 2,290p

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage Jun 07, 2007 - Nov 09, 2007, and Feb 26, 2010 - Mar 01, 2010. This chart shows J.P. Morgan'scontinuing coverage of this stock; the current analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (p)

Price Target (p)

19-Mar-07 OW 1072 1215 16-May-07 OW 1192 1250 09-Nov-07 OW 1358 1565 14-Nov-07 OW 1358 1520 19-Nov-07 OW 1344 1535 09-Jan-08 OW 1421 1650 17-Jan-08 OW 1187 1580 07-Apr-08 OW 1119 1525 14-May-08 OW 1203 1583 15-May-08 OW 1250 1618 10-Jul-08 OW 1103 1365 01-Aug-08 OW 1049 1310 14-Oct-08 OW 970 1125 06-Nov-08 OW 986 1175 14-Nov-08 OW 930 1050 15-Jan-09 OW 1060 1005 16-Apr-09 OW 1063 985 15-May-09 OW 1217 1140 22-May-09 N 1252 1235 04-Sep-09 N 1428 1300 17-Sep-09 N 1526 1350 22-Sep-09 N 1523 1400 15-Oct-09 N 1642 1470 20-Nov-09 N 1714 1670 01-Mar-10 OW 1797 -- 28-Mar-10 OW 1956 2165 28-May-10 OW 1956 2075 22-Nov-10 OW 2113 2290

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

8



J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Matthew Webb: Anadolu Efes (AEFES.IS), Britvic (BVIC.L), CEDC (CEDC), Carlsberg (CARLb.CO), Coca-Cola Icecek (CCOLA.IS), Diageo (DGE.L), SABMiller (SAB.L)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010

Overweight (buy)

Neutral (hold)

Underweight (sell)

J.P. Morgan Global Equity Research Coverage

46% 42% 12%

IB clients* 53% 50% 38% JPMS Equity Research Coverage 43% 49% 8% IB clients* 71% 63% 59%





Other Disclosures



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Carlsberg

Overweight CARLb.CO, CARLB DC

It's a small quarter

Price: Dkr 608.00

Price Target: Dkr 670.00

Beverages

Matthew WebbAC





400

500

600

Dkr

May-10 Aug-10 Nov-10 Feb-11 May-11

Price Performance

CARLb.CO share price (Dkr)MSCI-Eu (rebased)

YTD 1m 3m 12mAbs 8.9% 4.7% 6.9% 33.2%Rel 7.3% 4.2% 8.5% 21.8%


(Old)2011E

(New)2012E

(Old)2012E

(New)Adj. EPS FY (Dkr) 35.90 42.57 42.57 49.63 49.63Revenue FY (Dkr mn) 60,055 63,982 63,982 66,606 66,606EBITDA FY (Dkr mn) 14,236 15,646 15,646 16,947 16,947EBIT FY (Dkr mn) 10,249 11,500 11,500 12,634 12,634Pretax Profit Adjusted FY (Dkr mn)

8,094 9,655 9,655 11,224 11,224

Net Income FY (Dkr mn) 5,476 6,497 6,497 7,585 7,585Adj P/E FY 16.9 14.3 14.3 12.3 12.3DPS (Net) FY (Dkr) 5.00 6.00 6.00 7.00 7.00Source: Company data, Bloomberg, J .P. Morgan est im ates.

Company DataPrice (Dkr) 608.00Date Of Price 11 May 11Price Target (Dkr) 670.00Price Target End Date 01 Apr 1252-week Range (Dkr) 617.00 - 438.90Mkt Cap (Dkr bn) 92.7Shares O/S (mn) 153Free Float 70.0%


• With Carlsberg’s Q1 results having been ahead of our excessively cautious expectations, we return to our fundamentally bullish view on the stock. We continue to see upside to consensus estimates for 2011, with our EBIT forecast of DKK11,500m being 4% ahead of (Bloomberg) consensus of DKK11,058m. We see even more upside to 2012 estimates, where we believe that both we and the market are underestimating the scope for margin expansion in Russia in the event of a normal or good regional harvest this year.

• Carlsberg trades on 12.3x CY2012E PE, a 12% discount to the sector on 14x. We see the extent of this discount as unjustified given Carlsberg’s superior earnings growth.

• Carlsberg's Q1 results were in line with company consensus and 9% ahead of our cautious forecast at the key EBIT level. At the sales level they were 4% above company consensus and 2% above our forecast. Carlsberg's FY2011 guidance is unchanged.

• The variation versus our forecast in a small quarter (Q1 is less than 10% of full year EBIT) is close to irrelevant and we keep our full year EBIT forecast unchanged.

• Net sales were DKK12,528m (JPM estimate DKK12,246m, company consensus DKK12,063m), so 4% above consensus.

• EBIT was DKK1,003m (JPM estimate DKK920m, company consensus DKK1,010m), so in line with consensus.

• Headline net income was DKK173m (JPM estimate DKK188m, company consensus DKK288m). The financials charge of DKK569m was much higher than our forecast of DKK470m and company consensus of DKK469m. However, the core interest charge of DKK430m was in line with our expectations, with the volatile “other net financial items” charge accounting for the variation.

2



Results by region Western Europe Volume Volume decline in Western Europe was in line with our expectations at -3% (-2% organic), a good performance given an estimated (by us) 1-2% negative effect from the timing of Easter. Carlsberg’s regional market share was up, driven by the UK and Poland, with Sweden apparently negative due to price competition and France still slightly negative.

Price/mix Regional price/mix was also in line with our estimate at +3%. This included a 3% benefit from currency, so excluding this price/mix was flat (including soft drinks, or +1% for beer). However, that included a negative geographical mix effect as low-value markets such as the UK and Poland grew as a proportion of Carlsberg’s regional sales. This demonstrates a good underlying performance with “positive pricing in the majority of the markets in the region”.

Margin The regional EBIT margin was slightly better than our forecast at 5.9% (+30bps) versus our estimate of 5.5% (-10bps). We overestimated the negative effect of higher marketing spend and higher input costs.

Eastern Europe Volume Off-take The key volume number in Eastern Europe was the 1% growth in Russian “off-take” (i.e. depletions), in line with the Russian market. In our view this market growth rate is slightly disappointing. We retain our 5% forecast for the full year (Carlsberg’s guidance is 2-4%), but accept that this is a bullish call given the Q1 number and the tough Q3 comp (with Russian beer sales having been boosted by a heat-wave in Q3 2010).

Market share Carlsberg’s market share was down 20bps in Q1 according to Neilsen data. In our view this is as close to flat as makes no difference in a small quarter, particularly given the margin for error in the data. We continue to view the market’s concerns around Carlsberg’s short-term market share movements as unwarranted given the clear positive long-term trend. Carlsberg (rightly, in our view) continues to expect to gain market share over the year as a whole.

Shipments miles ahead of depletions Contrasting sharply with the 1% growth in Russian “off-take” volume was the 40% growth in Russian shipments. There are two reasons for this difference.

Duty-related de-stock The first is the easy comp from Q1 2010, when the Russian wholesalers de-stocked following the January 1st 2010 200% duty increase. This accounted for 32% points

3



of Russian volume growth and 22% points of regional volume growth (or 1.6m HL in absolute terms on our calculations, broadly in line with the 1.5m previous guidance). We had factored this into our forecast.

Stocking up ahead of peak season The second is stock-building ahead of the peak selling season. This accounted for 7% points of Russian volume growth and (we estimate) 5% of regional volume growth (or 0.35m HL in absolute terms). Although this is a normal feature of Q1, it did not happen in 2010 as Carlsberg and its wholesalers were expecting a sharp fall in final demand in the summer due to the c.20% price increases being implemented to pass on the duty increase. This additional gap between Russian shipments (+8%) and Russian “off-take” (+1%) was therefore an unusual feature of this quarter. However, given that it was Q1 2010 that had the unusual pattern (with little stocking up), with Q1 2011 representing a return to normality, we would not expect this to reverse in Q2, particularly with Carlsberg having stated that it is comfortable with current stock levels.

Regional numbers For the Eastern European region as a whole (i.e. not just in Russia) volume was 9.3m HL, 3% ahead of our forecast of 9.0m. However, it was actually slightly below our forecast on an underlying basis as we had not factored in the “additional” stocking-up effect explained immediately above. Organic beer volume growth in the region was 6%, excluding the 2010 de-stocking in Russia, but again this number is flattered by the “additional” stocking-up effect.

Price/mix Price/mix was even stronger than our forecast at +18% (JPM estimate +15%) for the region and +22% for Russia. This included 4% boost from currency in the region (JPM estimate +3%), and a 2% boost from mix in Russia (and, we assume, similar for the region).

Very strong pricing due to easy comp This leaves a 17% pricing effect. As we set out in our preview note, an improvement of this magnitude should not have come as a surprise given that Carlsberg did not start to implement the c.20% price increase required to pass on the 200% duty increase implemented in 1st January 2010 until late in Q1 2010. Carlsberg therefore effectively took a material hit to its net pricing in Q1 2010 as it temporarily absorbed the duty increase.

Pricing will be more modest from now To be clear, nothing like this level of positive price/mix will therefore apply for the rest of the year, although it should still be strongly positive as a series of c.4% price increases have been passed through in the meantime. Moreover, Carlsberg expects the +2% mix effect to be higher in the balance of the year, and the Rouble remains strong against the Euro despite the inflation differential.

Surprising level of low-end price competition We were surprised to see Carlsberg report a high level of price competition in the lower mainstream segment, with our logic having been that input price increases will have a greater percentage impact lower down the pricing ladder, thus forcing the value players into significant price increases. Carlsberg seems to have been referring to Efes with its comments, which makes the intensity of competition all the more

4



surprising given that Efes has indicated that a 10% price increase is required to pass on its higher input costs this year.

We assume that the second competitor obliquely referred to by Carlsberg as gaining market share was Heineken, which was cycling its nightmare quarter when it inadvertently took on the role of price-leader in the Russian market in Q1 2010. With Heineken having since reduced its prices one would naturally expect some market share recovery.

Sales ahead of our forecast With both volume and price/mix ahead of our expectations by c.3%, Eastern Europe sales of DKK3,569m were 6% ahead of our forecast of DKK3,375m.

Margin Actual margin disappointing The reported regional margin in Eastern Europe of 13.7% (+30bps) was even lower than our low forecast (of 15%, +150bps). Consensus was 16.6% (+320bps).

“Underlying” margin down very sharply The “underlying” decline in the regional margin was very marked. Adding back to Q1 2010 numbers DKK300m of EBIT and 1.5m HL of volume (in line with Carlsberg’s guidance on the effect of the duty-related de-stock), and DKK621m of sales, assuming that the “lost” volume was at the average price/HL for the region, would imply an “underlying” Q1 2010 margin of 21.6%. This implies a 790bps fall in the “underlying” margin.

But “It's a small quarter” However, here more than anywhere else, the small nature of the quarter and the odd nature of the comparable quarter severely limit the merit of this kind of analysis. In particular, to take out the benefit of the re-stocking but keep in the drag from sharply higher marketing spend (which was unusually low in Q1 2010 as Carlsberg expected a sharp fall in sales as prices were increased to pass on the January 1st 2010 duty increase) clearly presents too gloomy a view of the underlying margin.

Drag will ease over the rest of the year The drag from higher marketing spend will be much reduced in the balance of the year, which bodes well for margin progression, as does the company’s expectation (which we share) of higher market growth and improved market share performance. Higher input and distribution costs, which started to become an issue in Q4, will affect margins in Q2 and Q3, but this is already factored into guidance for a small fall in the regional margin this year. We continue to forecast a flat margin for the full year.

Outlook Carlsberg remains bullish on the outlook for the Russian consumer, which is entirely consistent with the data that we see. For example, March retail sales data growth of 4.8% was well above consensus of 3.4%, and March unemployment fell to 7.1% versus the consensus expectation of 7.4% (source: J.P.Morgan Global Data Watch, 29th April 2011). This also makes intuitive sense given the obvious benefit of the high oil price on the Russian economy. The only exception is real wage growth, which remains negative and below consensus expectations, but this is being offset by falling household savings.

5



Asia Volume Actual Asia volume was +15%, in line with our forecast. Organic volume growth was 6%, held back by weather in Vietnam.

Price/mix Organic price/mix of 10% was very impressive, even factoring in relatively high inflation rates in some of Carlsberg’s markets, with line extensions helping drive general premiumisation.

Margin Margin expansion of 50bps was below our expectation of +130bps. Moreover, we would note that this was certainly not being held back by acquisitions/consolidations (Chongqing and Gorkha), which added 15% to operating profit, well ahead of their 8% contribution to sales. Currency also added more to operating profit (+10%) than sales (+15%). The underlying margin was thus down, with organic sales growth of 16% well ahead of EBIT growth of 10%. This was despite the stronger growth of premium brands (reflected in the strong price/mix). We assume that Carlsberg is investing heavily in driving this premiumisation, as it should in our view given the opportunity.

Central costs Central costs were lower than we expected at DKK246m (JPM DKK270m).

“Other activities” EBIT from “Other activities” was DKK26m, whereas we forecast a DKK25m loss. We only include these numbers on this occasion as the difference here accounted for DKK51m of the DKK83m gap between our forecast and the actual outcome. The fact that the line, which is normally irrelevant and does not pertain to Carlsberg’s core brewing business, had this effect shows how small the quarter is and how irrelevant the beat versus our estimate is. Putting this together with the difference on central costs accounts for almost all of the difference between our forecast and the actual outcome.

Financials charge As we observed in our earlier note, the financials charge of DKK569m was much higher than our forecast of DKK470m and consensus of DKK469m. However, the core interest charge of DKK430m was in line with our expectations, with the volatile “other net financial items” charge accounting for the variation.

Carlsberg is still guiding to an “all-in” interest rate of just over 6%, including other net financial income. We already assume 6.4% so see no need to change our assumption despite the negative surprise in Q1.

Input costs Finally, Carlsberg provided a useful reminder of the likely phasing of input cost pressures in 2011. This will be a negative issue all through the year in Western Europe and Asia, but only up to Q4 in Russia where higher input costs started to affect this business in Q4 2010. Carlsberg is effectively hedged for barley for 2011

6



other than for Russia in Q4 where Carlsberg (rightly in our view) expects prices to fall after this year’s harvest.

7



Valuation Methodology and Risks Carlsberg (Overweight; Price Target Dkr 670.00) Valuation Methodology Our April 2012E DCF-derived PT is DKK 670 based on a WACC of 8.8% and a perpetuity growth rate of 1.5%. Risks to Our View 1. If the Russian Rouble falls sharply against the Euro we would see earnings downgrades at both the EBIT level and in the financials line. 2. The Russian beer market could prove less resilient than we expect to regulatory/demographic pressures. 3. Carlsberg could be unable to sell the Valby site at an acceptable price in 2011, thus slowing the process of debt reduction.

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Carlsberg: Summary of Financials Profit and Loss Statement Cash flow statement Dkr in millions, year end Dec FY09 FY10 FY11E FY12E Dkr in millions, year end Dec FY09 FY10 FY11E FY12E Revenues 59,382 60,055 63,982 66,606 EBIT 9,390 10,249 11,500 12,634

% change Y/Y -0.9% 1.1% 6.5% 4.1% Depreciation & amortization 3,779 3,987 4,147 4,313 Change in working capital 2,000 150 0 (300)EBITDA 13,169 14,236 15,646 16,947 Taxes (1,374) (1,890) (2,452) (2,860)

% change Y/Y 13.4% 8.1% 9.9% 8.3% Other operating cash flows - - - -EBITDA Margin (%) 22.2% 23.7% 24.5% 25.4% Cash Flow from Operations 15,169 14,386 15,646 16,647

EBIT 9,390 10,249 11,500 12,634 % change Y/Y 17.7% 9.1% 12.2% 9.9% Capex (2,923) (3,575) (3,626) (3,676)EBIT Margin (%) 15.8% 17.1% 18.0% 19.0% Net Interest (1,597) (2,089) (1,595) (1,160)

Net Interest (2,990) (2,155) (1,845) (1,410) Free Cash Flow 11,820 9,110 8,914 9,800Earnings before tax 6,400 8,094 9,655 11,224 Disposal/(purchase) - - - -

% change Y/Y 41.5% 26.5% 19.3% 16.3% Tax (1,666) (2,009) (2,452) (2,860) Equity raised/ (repaid) - - - -

as % of EBT 29.2% 24.8% 26.0% 26.0% Debt raised/ (repaid) - - - -Net Income (Analyst) 4,170 5,476 6,497 7,585 Other (507) (446) (400) (300)

% change Y/Y 45.0% 31.3% 18.7% 16.7% Dividends Paid (534) (581) (828) (916)Shares Outstanding 153 153 153 153 EPS (Analyst) 27.33 35.90 42.57 49.63 DPS 3.50 5.00 6.00 7.00

% change Y/Y 12.9% 31.3% 18.6% 16.6% Balance sheet Ratio Analysis Dkr in millions, year end Dec FY09 FY10 FY11E FY12E Dkr in millions, year end Dec FY09 FY10 FY11E FY12E Cash and cash equivalent 2,734 2,735 2,735 2,735 EBITDA Margin (%) 22.2% 23.7% 24.5% 25.4%Others 12,107 12,007 12,007 12,207 EBIT Margin (%) 15.8% 17.1% 18.0% 19.0%Current Assets 14,841 14,742 14,742 14,942 Net Profit Margin (%) 7.0% 9.1% 10.2% 11.4% Intangible assets 81,611 87,813 87,813 87,813 Dividend payout 12.8% 13.9% 14.1% 14.1%Net Fixed Assets 31,825 32,420 29,399 28,763 Total Assets 134,515 143,451 140,382 139,893 Capex/sales 4.9% 6.0% 5.7% 5.5% Capex/Depreciation 0.8 0.9 0.9 0.9Liabilities Net Working Capital/Sales - - - -ST Loans 3,322 3,959 3,959 3,959 Others 21,638 23,012 23,012 23,112 Total Current Liabilities 24,960 26,971 26,971 27,071 Interest Coverage (x) 3.1 4.8 6.2 9.0 Net Debt/EBITDA 2.7 2.3 1.5 1.0Long Term Debt 36,075 32,587 24,071 16,843 Net Debt to Equity 60.0% 50.9% 34.4% 22.0%Other Liabilities 35,629 37,130 37,130 37,230 Total Liabilities 75,026 73,676 65,160 58,032 Sales/Total Assets - - - -Shareholders' Equity 59,489 64,345 70,362 77,276 ROCE 9.5% 10.2% - - Source: Company reports and J.P. Morgan estimates.

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• Market Maker/ Liquidity Provider: J.P. Morgan Securities Ltd. is a market maker and/or liquidity provider in Carlsberg. • Client of the Firm: Carlsberg is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the

company non-investment banking securities-related service and non-securities-related services. • Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other

than investment banking from Carlsberg. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from Carlsberg.

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Carlsberg (CARLb.CO) Price Chart

OW Dkr795OW Dkr830OW Dkr585OW Dkr443 OW Dkr360 N Dkr480OW Dkr625 OW Dkr67

OW Dkr765OW Dkr808OW Dkr604OW Dkr525OW Dkr330 N Dkr345 N Dkr465OW Dkr575OW Dkr625

OWOW Dkr829OW Dkr820OW Dkr615OW Dkr315OW Dkr425OW Dkr440 N N Dkr520OW Dkr650

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage Feb 26, 2010 - Mar 01, 2010. This chart shows J.P. Morgan's continuing coverage of this stock; thecurrent analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (Dkr)

Price Target (Dkr)

09-Nov-07 OW 531.96 - 15-Nov-07 OW 522.27 765.00 03-Jan-08 OW 497.25 795.00 25-Jan-08 OW 431.86 829.00 19-Feb-08 OW 462.54 808.00 01-May-08 OW 524.69 830.00 07-May-08 OW 529.54 820.00 10-Jul-08 OW 430.00 604.00 21-Jul-08 OW 416.50 585.00 06-Aug-08 OW 464.00 615.00 06-Oct-08 OW 302.00 525.00 06-Nov-08 OW 228.00 443.00 03-Feb-09 OW 182.00 315.00 10-Mar-09 OW 191.75 330.00 06-May-09 OW 301.50 360.00 21-May-09 OW 340.50 425.00 17-Sep-09 OW 374.00 440.00 12-Oct-09 N 349.00 345.00 01-Mar-10 N 422.10 -- 28-Mar-10 N 465.00 465.00 12-May-10 N 456.30 480.00 21-Jul-10 N 480.80 520.00 26-Jul-10 OW 510.00 575.00 24-Aug-10 OW 524.50 625.00 01-Nov-10 OW 594.00 650.00 17-Jan-11 OW 534.50 625.00 27-Apr-11 OW 596.00 670.00

Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s

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coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Matthew Webb: Britvic (BVIC.L), CEDC (CEDC), Carlsberg (CARLb.CO), Diageo (DGE.L), SABMiller (SAB.L)


Overweight (buy)

Neutral (hold)

Underweight (sell)






Other Disclosures



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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual

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client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.




Carlsberg

Overweight CARLb.CO, CARLB DC

Q4 results preview - outlook should reassure ▼

Price: Dkr 542.00

Price Target: Dkr 625.00 Previous: Dkr 650.00

Beverages

Matthew WebbAC





For Specialist Sales advice, please contact Natasha Cobden (44-20) 7325 3092 [email protected]

350

500

650

Dkr

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11

Price Performance

CARLb.CO share price (Dkr)MSCI-Eu (rebased)

YTD 1m 3m 12mAbs -2.7% -3.1% -9.0% 37.8%Rel -5.7% -5.6% -15.5% 28.5%


(Old)2010E

(New)2011E

(Old)2011E

(New)2012E

Adj. EPS FY (Dkr) 27.32 37.87 36.76 43.02 42.00 49.23Revenue FY (Dkr mn) 59,382 59,810 60,092 63,136 63,685 66,522EBITDA FY (Dkr mn) 13,169 14,337 14,162 15,652 15,459 16,721EBIT FY (Dkr mn) 9,390 10,500 10,310 11,700 11,492 12,635Pretax Profit Adjusted FY (Dkr mn)

6,400 8,630 8,275 9,885 9,572 11,195

Net Income FY (Dkr mn) 4,170 5,789 5,619 6,585 6,429 7,546Adj P/E FY 19.8 14.3 14.7 12.6 12.9 11.0DPS (Net) FY (Dkr) 3.50 5.00 5.00 6.00 6.00 7.00Source: Company data, Bloomberg, J.P. Morgan estimates.

Company Data Price (Dkr) 542.00Date Of Price 13 Jan 11Price Target (Dkr) 625.00Price Target End Date 01 Feb 1252-week Range (Dkr) 616.50 - 357.00Mkt Cap (Dkr bn) 82.9Shares O/S (mn) 153Free Float 70.0%


• The Carlsberg share price has recently underperformed the European beverage sector quite markedly, by 5% over the last month and 10% over the last three months. We believe that this has largely been due to concerns about input cost pressures. This was raised as an issue at the Q3 results, with further increases in agricultural commodity prices having subsequently added to market nervousness.

• We believe that Carlsberg will reassure on this issue at its FY2010 results on 21st February. We believe that Carlsberg is almost entirely covered on its 2011 commodity requirements across its business (including Russia) through a combination of contracts with Western European suppliers and hedging, at least until the autumn harvest. We continue to believe that the Bloomberg consensus EBIT forecast for FY2011 of DKK11.3bn is very realistic, and will be underpinned by Carlsberg’s guidance. We retain our Overweight recommendation.

• We do think that Carlsberg will slightly disappoint on FY2010 numbers, with EBIT DKK250m (2%) below consensus of DKK10.55bn. This is largely due to the (artificially) tough comp in Russia, with Q4 2009 volumes having been boosted by stocking-up ahead of the subsequent duty increase. We also think that Carlsberg is investing in expectation of a recovery in the Russian beer market. We cut our FY2010E forecasts by 2% at the EBIT level (to DKK10.3bn) and 4% at the EPS level. Our FY2011 EBIT forecast also falls by 2% (to DKK11.5bn) due to the lower base. Our FY2011 EPS forecast falls by only 2%, cushioned by a lower expected tax rate. For FY2011 we increase our forecast for the underlying growth of the Russian beer market from 3% to 5%, but slightly reduce our margin forecast from +50bps to flat, with no net effect on the expected growth rate.

• On our new forecasts Carlsberg trades on 11x CY2012E PE, a 20% discount to the European beverages sector on 13.7x. Our price target falls by 4% from DKK650 to DKK625, 15% above the current share price.

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Q4 results preview Our Q4 forecasts, including a split by region, are set out in Tables 1 & 2 below.

Table 1: Q4 group forecasts DKK millions

Q4 2009A Q4 2010E Growth Clean numbers Net sales 13,628 13,437 -1% Operating profit 1,642 1,161 -29% - margin 12.1% 8.6% Financials -773 -493 Clean PBT 869 668 -23% Tax 170 140 Tax (%) 19.5% 21.0% Clean PAT 700 528 -25% Minority charge 121 67 -45% Clean PAT (Carlsberg share) 579 461 -20% Headline numbers Special items -324 -150 PBT 545 518 -5% PAT 376 378 1% PAT (Carlsberg share) 255 311 22%

Source: Company reports and J.P. Morgan Cazenove estimates.

Table 2: Q4 regional forecasts DKK millions

Q4 2009A Q4 2010E Growth North & Western Europe Sales 8,451 8,378 -1% EBIT 657 763 16% - margin 7.8% 9.1% Eastern Europe Sales 4,103 3,727 -9% EBIT 1,092 524 -52% - margin 26.6% 14.1% Asia Sales 1,041 1,227 18% EBIT 148 200 35% - margin 14.2% 16.3% "Not distributed" Sales 34 105 EBIT -272 -304 Carlsberg A/S EBIT 18 -22

Source: Company reports and J.P. Morgan Cazenove estimates.

Northern & Western Europe (45% of EBIT) Volume We believe that Carlsberg’s market share gains in Northern & Western Europe continued in Q4, again led by the UK and Poland. We therefore expect Carlsberg to outperform the industry, but expect the environment to have been particularly difficult given the very bad weather across much of the region. We expect Carlsberg’s volumes to have fallen by 2% in the quarter.

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Pricing Carlsberg’s price per HL was +1% in Q3 and we expect a similar increase in Q4. Currency was a (larger) positive in Q4, but the country mix effect caused by the growth of (relatively low value) UK and Polish volumes will be negative.

Sales This would result in a slight decline in regional net sales from DKK8,451m to DKK8,378m.

Margin We expect another strong quarter of regional margin expansion in Q4, helped by the favourable hedging position that Carlsberg has enjoyed this year on its commodity costs, as well as Carlsberg’s ongoing cost savings programmes. We forecast a 130bps increase in the EBIT margin from 7.8% to 9.1%.

EBIT This would result in 16% regional EBIT growth, from DKK657m to DKK763m.

Eastern Europe (46% of EBIT) Volume As was disclosed at the time, Carlsberg’s Q4 2009 volumes were boosted by 1.5m HL from stocking-up ahead of the January 2010 duty increase. The underlying Q4 2009 volume number is therefore 9.6m HL not the reported 11.1m.

We believe that underlying demand in Q4 2010 has been broadly flat, and therefore expect Q4 2010 volumes of 9.6m HL, down 14% on the actual Q4 2009 figure.

Pricing We expect a decline in Carlsberg’s regional sales per HL in Rouble terms, with Carlsberg having increased prices by 4% in Q4 2009 as the first step in passing on the subsequent duty increase. With Carlsberg having completed the process of passing on the duty increase (but no more) over 2010, the average net price achieved in Q4 2010 will mathematically be slightly below that of Q4 2009. However, positive forex movements mean that we still expect a 5% increase in the achieved price in Danish Krona terms.

Sales This would result in a 9% decline in regional net sales from DKK4,103m to DKK3,727m.

Margin We expect the consequently negative operational gearing to see a sharp decline in the regional EBIT margin from 26.6% to 14.1%, exacerbated by Carlsberg’s decision to increase investment in anticipation of a recovery in the Russian beer market this year.

EBIT This would result in a 52% decline in regional EBIT, from DKK1,092m to DKK524m.

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Asia (9% of EBIT) Volume The Q4 2009 regional volume number was artificially boosted by the inclusion of a full year of volumes from Chongqing. The underlying volume number, including only one quarter of Chogqing volume was therefore 3.3m HL rather than the reported 4.6m. We assume 12% organic volume growth in Q4, taking Carlsberg to 3.7m HL.

Pricing With the inclusion of newly-acquired Chongqing volumes now behind it, we expect the falling underlying sales/HL of Carlsberg’s regional business to moderate, although with (low value) volumes in China and Vietnam growing ahead of (high value) volumes in Malaysia, Singapore and Hong Kong we still expect a negative geographical mix effect. However, in Q4 we expect this to be offset by positive forex movement, with sales/HL thus increasing by 5%.

Sales This would result in an 18% increase in regional net sales from DKK1,041m to DKK1,227m.

Margin Carlsberg’s regional EBIT margin expanded by 400bps over the first nine months of the year. We expect a 210bps expansion in Q4, from 14.2% to 16.3%.

EBIT This would result in 35% regional EBIT growth, from DKK148m to DKK200m.

Central and A/S costs We forecast an increase in central costs from DKK272m to DKK304m, in part as timing issues left the Q3 2010 charge artificially low at only DKK35m. We expect losses at the A/S level of DKK22m.

Below EBIT We expect a financial charge of DKK493m, with some benefit from a positive forex movement. We forecast a tax charge of DKK140m, equating to a 21% rate on clean PBT and a 31% rate on reported PBT. We forecast a DKK67m minority charge, well down on 2009 with Western Europe (where there is no minority charge) being a larger proportion of EBIT than in the comparable quarter.

We forecast special items of DKK150m in Q4, largely consisting of the DKK130m charge associated with the sale of the Dresden brewery. This would be well down on the DKK324m charge in the comparable quarter.

We consequently forecast a 20% fall in clean net income, from DKK579m to DKK461m, but a 22% increase in reported net income from DKK255m to DKK311m due to the lower special items charge.

2011 guidance We expect Carlsberg to guide to “at least DKK11bn” of EBIT for FY2011 when it reports its FY2010 results on 21st February. We expect this to be interpreted as underpinning the current Bloomberg consensus forecast of DKK11.3bn. It must be

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remembered that Carlsberg has a long record of conservative guidance. 2010 was a case in point, with Carlasberg initially guiding for EBIT to be in line with 2009, i.e. DKK9.4bn. We believe that the actual outcome will be 10% higher at DKK10.3bn.

Our new 2011 forecasts As noted above, we have cut our FY2011 EBIT forecast from DKK11.7bn to DKK11.5bn due to the lower base. We have reduced our forecast for the Eastern Europe margin from +50bps to flat to reflect Carlsberg’s desire to increase investment in the Russian market. However, this has been offset by an increase in our forecast for the underlying growth of the Russian beer market, from 3% to 5%. Including the benefit from the weak 2010 comp, with this year having been adversely affected by the stocking up in Q4 2009 ahead of the duty increase, we expect industry shipments in Russia to be up 8% (previously up 5%).

Change to price target The working behind our new price target is shown in Table 3 below.

Table 3: DCF valuation DKK millions

DKK m 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Net Sales 60,092 63,685 66,522 69,183 71,604 73,752 75,596 77,259 78,727 80,066 81,347 % of growth 1.2% 6.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.2% 1.9% 1.7% 1.6% Operating profit 10,194 11,372 12,513 13,391 13,860 14,276 14,632 14,954 15,238 15,498 15,746 Margin 17.0% 17.9% 18.8% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% 19.4% Tax -2059 -2457 -2887 -3237 -3351 -3451 -3537 -3615 -3684 -3746 -3806 Tax rate on EBIT (%) 20.2% 21.6% 23.1% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% 24.2% NOPAT 8134 8915 9625 10154 10509 10825 11095 11339 11555 11751 11939 Depreciation 3851 3967 4086 4209 4356 4487 4599 4700 4789 4871 4949 % sales 6.4% 6.2% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% 6.1% CAPEX -3300 -3150 -3250 -4050 -4192 -4318 -4425 -4523 -4609 -4687 -4762 % sales 5.5% 4.9% 4.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% 5.9% Working capital 150.0 0.0 -300.0 -300.0 -310.5 -319.8 -327.8 -335.0 -341.4 -347.2 -352.7 % sales -0.2% 0.0% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4%

Cash Flow for DCF 8836 9732 10161 10012 10363 10674 10941 11181 11394 11587 11773

Timing 0 1 2 3 4 5 6 7 8 9 10 Post tax discount rate 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% Value multiple 0.92 0.84 0.77 0.71 0.65 0.60 0.55 0.51 0.46 0.43 PV of cashflow 0 8937 8569 7754 7370 6971 6562 6159 5763 5383 5022 Perpetual growth % 1.50% Terminal multiple 13.5 PV of cashflows 68,492 PV of terminal multiple

67,932 Total firm value

136,424 Net Debt

40,877 Equity Value

95,547 Shares in issue (m) 153 Total DCF value 625 Current share price 544 Upside/(Downside) 15% Source: J.P. Morgan Cazenove estimates.

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JPM Q-ProfileCARLSBERG AS ORD CL B (DENMARK / Consumer Staples)As Of: 16-Sep-2010 [email protected]





Summary

CARLSBERG AS ORD CL B 15161.85 As Of:DENMARK 44.41504 SEDOL 4169219 Local Price: 568.00Consumer Staples Beverages EPS: 39.81

Latest Min Max Median Average 2 S.D.+ 2 S.D. - % to Min % to Max % to Med % to Avg12mth Forward PE 14.27x 5.86 31.26 17.20 17.39 25.21 9.57 -59% 119% 21% 22%P/BV (Trailing) 1.33x 0.43 3.05 1.65 1.75 3.02 0.48 -67% 128% 24% 32%Dividend Yield (Trailing) 0.63 0.63 2.75 1.22 1.28 2.04 0.51 0% 335% 93% 102%ROE (Trailing) 7.72 4.99 17.01 11.36 10.45 17.05 3.84 -35% 120% 47% 35%Implied Value of Growth 9.0% -1.37 0.66 0.42 0.35 0.90 -0.20 -1615% 635% 370% 292%


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Valuation Methodology and Risks Carlsberg (Overweight; Price Target Dkr 625.00) Valuation Methodology Our January 2012E DCF-derived PT is DKK 625 based on a WACC of 8.8% and a perpetuity growth rate of 1.5%. Risks to Our View 1. If the Russian Rouble falls sharply against the Euro we would see earnings downgrades at both the EBIT level and in the financials line. 2. The Russian beer market could prove less resilient than we expect to regulatory/demographic pressures. 3. Carlsberg could be unable to sell the Valby site at an acceptable price in 2011, thus slowing the process of debt reduction.

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Carlsberg: Summary of Financials Profit and Loss Statement Cash flow statement Dkr in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Dkr in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Revenues 59,944 59,382 60,092 63,685 66,522 EBIT 7,979 9,390 10,310 11,492 12,635

% change Y/Y 34.0% -0.9% 1.2% 6.0% 4.5% Depreciation & amortization 3,631 3,779 3,851 3,967 4,086 Change in working capital 1,674 2,000 150 0 (300)EBITDA 11,610 13,169 14,162 15,459 16,721 Taxes (1,514) (1,374) (2,059) (2,457) (2,887)


EBIT 7,979 9,390 10,310 11,492 12,635 % change Y/Y 51.6% 17.7% 9.8% 11.5% 9.9% Capex - (2,923) (3,300) (3,150) (3,250)EBIT Margin (%) 13.3% 15.8% 17.2% 18.0% 19.0% Net Interest (2,754) (1,597) (2,010) (1,670) (1,190)

Net Interest (3,456) (2,990) (2,035) (1,920) (1,440) Free Cash Flow 5,162 11,820 8,076 9,157 9,729Earnings before tax 4,523 6,400 8,275 9,572 11,195 Disposal/(purchase) - - - - -

% change Y/Y 11.4% 41.5% 29.3% 15.7% 16.9% Tax (1,072) (1,666) (2,059) (2,457) (2,887) Equity raised/ (repaid) - - - - -

as % of EBT 23.7% 29.2% 27.0% 26.5% 26.5% Debt raised/ (repaid) - - - - -Net Income (Analyst) 2,876 4,170 5,619 6,429 7,546 Other (482) (507) (450) (300) (200)


% change Y/Y (32.2%) 12.7% 34.6% 14.3% 17.2% Balance sheet Ratio Analysis Dkr in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Dkr in millions, year end Dec FY08 FY09 FY10E FY11E FY12E Cash and cash equivalent 2,857 2,734 2,734 2,734 2,734 EBITDA Margin (%) 19.4% 22.2% 23.6% 24.3% 25.1%Others 16,261 12,107 12,007 12,007 12,207 EBIT Margin (%) 13.3% 15.8% 17.2% 18.0% 19.0%Current Assets 19,118 14,841 14,741 14,741 14,941 Net Profit Margin (%) 4.8% 7.0% 9.4% 10.1% 11.3% Intangible assets 84,678 81,611 81,611 81,611 81,611 Dividend payout 14.4% 12.8% 13.6% 14.3% 14.2%Net Fixed Assets 34,043 31,825 30,920 27,603 26,766 Total Assets 143,306 134,515 136,065 132,747 132,114 Capex/sales 8.7% 4.9% 5.5% 4.9% 4.9% Capex/Depreciation 1.4 0.8 0.9 0.8 0.8Liabilities Net Working Capital/Sales - - - - -ST Loans 5,291 3,322 3,322 3,322 3,322 Others 20,309 21,638 21,588 21,588 21,688 Total Current Liabilities 25,600 24,960 24,910 24,910 25,010 Interest Coverage (x) 2.3 3.1 5.1 6.0 8.8 Net Debt/EBITDA - 2.7 2.3 1.6 1.0Long Term Debt 43,230 36,075 33,524 24,362 16,811 Net Debt to Equity 72.7% 60.0% 52.3% 34.7% 21.6%Other Liabilities 34,034 35,629 35,579 35,579 35,679 Total Liabilities 82,555 75,026 72,425 63,263 55,812 Sales/Total Assets - - - - -Shareholders' Equity 60,751 59,489 63,293 69,136 75,904 ROCE 6.5% 9.5% 10.3% - - Source: Company reports and J.P. Morgan estimates.

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• Market Maker/ Liquidity Provider: J.P. Morgan Securities Ltd. is a market maker and/or liquidity provider in Carlsberg. • Client of the Firm: Carlsberg is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the

company non-investment banking securities-related service and non-securities-related services. • Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other

than investment banking from Carlsberg. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment banking from Carlsberg.

0

160

320

480

640

800

960

Price(Dkr)

Feb07

Nov07

Aug08

May09

Feb10

Nov10

Carlsberg (CARLb.CO) Price Chart

OW Dkr795OW Dkr830OW Dkr585OW Dkr443 OW Dkr360 N Dkr480OW Dkr625

OW Dkr765OW Dkr808OW Dkr604OW Dkr525OW Dkr330 N Dkr345 N Dkr465OW Dkr575

OWOW Dkr829OW Dkr820OW Dkr615 OW Dkr315OW Dkr425OW Dkr440 N N Dkr520OW Dkr650

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.Break in coverage Feb 26, 2010 - Mar 01, 2010. This chart shows J.P. Morgan's continuing coverage of this stock; thecurrent analyst may or may not have covered it over the entire period.J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.

Date Rating Share Price (Dkr)

Price Target (Dkr)

09-Nov-07 OW 531.96 - 15-Nov-07 OW 522.27 765.00 03-Jan-08 OW 487.56 795.00 25-Jan-08 OW 450.43 829.00 19-Feb-08 OW 462.54 808.00 01-May-08 OW 524.69 830.00 07-May-08 OW 529.54 820.00 10-Jul-08 OW 430.00 604.00 21-Jul-08 OW 416.50 585.00 06-Aug-08 OW 439.50 615.00 06-Oct-08 OW 325.00 525.00 06-Nov-08 OW 228.00 443.00 03-Feb-09 OW 182.00 315.00 10-Mar-09 OW 201.50 330.00 06-May-09 OW 301.50 360.00 21-May-09 OW 342.50 425.00 17-Sep-09 OW 383.25 440.00 12-Oct-09 N 349.00 345.00 01-Mar-10 N 422.10 -- 28-Mar-10 N 465.00 465.00 12-May-10 N 480.40 480.00 21-Jul-10 N 480.00 520.00 26-Jul-10 OW 506.00 575.00 24-Aug-10 OW 524.50 625.00 01-Nov-10 OW 594.00 650.00


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Coverage Universe: Matthew Webb: Anadolu Efes (AEFES.IS), Britvic (BVIC.L), CEDC (CEDC), Carlsberg (CARLb.CO), Coca-Cola Icecek (CCOLA.IS), Diageo (DGE.L), SABMiller (SAB.L)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010

Overweight (buy)

Neutral (hold)

Underweight (sell)

J.P. Morgan Global Equity Research Coverage

46% 42% 12%

IB clients* 53% 50% 38% JPMS Equity Research Coverage 43% 49% 8% IB clients* 71% 63% 59%





Other Disclosures



Legal Entities Disclosures U.S.: JPMS is a member of NYSE, FINRA and SIPC. J.P. Morgan Futures Inc. is a member of the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC and is authorized and regulated in the UK by the Financial Services Authority. U.K.: J.P. Morgan Securities Ltd. (JPMSL) is a member of the London Stock Exchange and is authorized and regulated by the Financial Services Authority. Registered in England & Wales No. 2711006. Registered Office 125 London Wall, London EC2Y 5AJ. South Africa: J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (ABN 52 002 888 011/AFS Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (ABN 61 003 245 234/AFS Licence No: 238066) is a Market Participant with the ASX and regulated by ASIC. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB010675237/INB010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities (Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Philippines: J.P. Morgan Securities Philippines Inc. is a member of the Philippine Stock Exchange and is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange Commission. Singapore: This material is


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issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited (JPMSS) [MICA (P) 025/01/2011 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated by the MAS. Malaysia: This material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.


General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic

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updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.



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