Insights category - companies

AB InBev: The king of beer

The market has several concerns about brewer Anheuser-Busch InBev which are currently weighing on its share price. We believe the company’s fundamentals are robust, and have used the opportunity to build a material position for our clients. Jithen Pillay explains why investors could be missing out on a cheap round.

“Without question, the greatest invention in the history of mankind is beer. Oh, I grant you that the wheel was also a fine invention, but the wheel does not go nearly as well with pizza.” – Dave Barry, American author

Anheuser-Busch InBev (AB InBev or ANH) is the world’s largest and most profitable brewer, with more than 500 beer brands and operations in nearly 50 countries. ANH brews one in four beers globally – more than twice that of its nearest rival, Heineken.

Local consumers will be very familiar with South African Breweries (SAB), which ANH acquired in October 2016 for US$103bn. Since the acquisition, ANH has been a poor investment in both absolute and relative terms, as shown in Graphs 1 and 2: The share is down 34% cumulatively in rands versus the FTSE/JSE All Share Index (ALSI), which is up 44% over the same period. The picture is even worse in US dollars: ANH is down 48% for the period, in contrast to the S&P 500, which is up 81%.

Graph 1_ANH vs. FTSE_JSE All Share Index (rand)

Graph 2_ANH vs. S&P 500 (US dollar)

Our clients were material SAB shareholders at the time of acquisition by ANH. However, we did not reinstate a position in ANH immediately. At the time, it was our view that ANH paid a full price for SAB (taking on substantial debt to do this) and ANH’s valuation appeared expensive relative to its fundamentals. Notwithstanding this, we recognised ANH as a world-class brewer. As a result, we used the March 2020 COVID-19 sell-off to build a position for our clients.

… we believe ANH is a useful addition to our clients’ portfolios, particularly given a local market that is heavily exposed to South Africa- and China-specific risks …

Dispelling the market’s unease

Below we outline three of the market’s main concerns, and why we believe these risks are too severely discounted in ANH’s current share price.

Concern 1: Slim growth prospects for ANH’s beer volumes

Graph 3 shows ANH’s rolling 12-month organic sales volumes (per quarter). Volumes were flat in the three years following the SAB acquisition – a poor outcome given ANH’s mostly emerging market focus. However, there has been a step change since Michel Doukeris took over as chief executive officer in July 2021.

Graph 3_ANH rolling 12-month volumes

There are two main reasons for the change in trajectory:

While it is true that spirits took volume share of throat globally from beer in the decade to 2016, in the five years thereafter, beer grew its volume share ahead of both spirits and wine (driven by new innovations such as hard seltzer).

Concern 2: High input cost inflation will squeeze ANH’s margins

Barley and aluminium are material inputs in producing a can of beer. From their closing 2020 prices to their 2022 peaks, the barley and aluminium prices rose 134% and 77% respectively in US dollars. ANH also sells its beer mostly in emerging markets, whose currencies have been weak relative to the US dollar.

Given beer price increases tend not to reverse, longer term this is favourable for ANH’s margins.

The above were headwinds for ANH: Its gross profit margin for the nine months to September 2022 was 7% lower than 2019 (a period not impacted by COVID-19). However, we believe ANH is better positioned to weather high input cost inflation (that all consumer packaged goods companies are faced with) for the following reasons:

Table 1_Retail prices per serving of ANH brands

Graph 4_Brewer operating margins

Concern 3: ANH has too much debt

ANH’s net debt is high (US$76bn at end-June 2022) following its purchase of SAB. However, the terms of its debt are extremely favourable. It is low-cost (4% coupon) and almost fully fixed-rate. The debt is also long-dated (16-year weighted average maturity) with negligible near-term expiries. Lastly, the debt has no financial covenants attached to it.

We believe ANH could reduce its debt quickly if desired, given the company converts more than 100% of its earnings into cash flow (ANH only needs to pay suppliers after it receives payment from its customers). It is less likely that this cash flow would be wasted on expensive acquisitions going forward, given the company’s stated focus on organic growth. Emerging market currencies look overly weak compared to the US dollar; if this reverses, it will also be a tailwind for ANH, given most of its debt is US dollar- and euro-denominated.

In a high-inflation and rising interest rate world, a large quantum of cheap, fixed-rate and far-dated debt could be an advantage for ANH rather than a hindrance.

ANH’s prospects

On balance, we believe the market is overly pessimistic about ANH’s prospects. Current earnings are not high, and ANH can generate strong organic cash flows (which are more uncertain in other industries). Trading on less than 15 times our assessment of the company’s normal earnings, we believe ANH is a useful addition to our clients’ portfolios, particularly given a local market that is heavily exposed to South Africa- and China-specific risks (ANH earns 4% and 9% of its revenue in South Africa and China respectively).

ANH’s share price (measured in US dollar) is the same today as it was in 2012, as shown in Graph 5. We took advantage of the share’s underperformance to build a material position for our clients, such that ANH is now a top 10 equity holding.

Graph 5_Allan Gray ANH equity holdings vs. price

Select a site

The financial services, products or investments referred to on this website are not available to persons resident in jurisdictions where their availability or distribution would contravene local laws or regulations and the information on this website is not intended for use by these persons. This website is for information only and does not in any way constitute a solicitation or offer by Allan Gray Proprietary Limited or any of its associates or subsidiaries (collectively “Allan Gray”) to buy or sell any financial instruments or to provide any investment advice or service.

By selecting one of the countries below I confirm that I have read and understood the above and that:

(a) I am not a South African citizen; or 
(b) I do not reside in the Republic of South Africa; or 
(c) I am not otherwise a person to whom the communication of the information contained in this website is prohibited by the laws of my home jurisdiction; and 
(d) I am not acting for the benefit of any such persons mentioned in (a),(b) and (c) and 
(e) I confirm that any investment with Allan Gray is based on my own initiative and not due to any offer or solicitation by Allan Gray.