Brewer's Bogotá kicker

Despite a trading update recording lower sales in South Africa and the US, SABMiller, one of the world’s biggest brewers, was given a kicker by its new $7,8 billion acquisition based in Bogotá, Colombia, feared by some investors for its cocaine-trading militias, FARC and AUC. In its trading update for the three months to 31 December 2005, SABMiller said its South America lager volumes were up 7% above the prior year, in line with expectations when the acquisition of Bavaria closed on 12 October 2005. Bavaria, or Grupo Empresarial Bavaria, was seen as an attractive acquisition target for any major brewer, given its solid home market in Colombia. Since 2001, Bavaria had taken expansionist steps, raising $1,5-bn in debt to finance forays into Peru, Ecuador and other countries on the continent. The group bought 92% of Cerveceria Nacional in Panama, and a big chunk of Backus in Peru.Excluding volumes for Bavaria, as too new an acquisition, SABMiller reported group organic lager volume growth for its third 2006 quarter at 1,8% up, and 4,5% up for the year-to-date. Volumes were constrained ed by cool and wet weather during December in South Africa, and in the US, Miller's third quarter domestic sales to retailers were 1% below prior year comparable figures. In London, where SABMiller holds its primary listing, investors largely shrugged off the apparently lackluster trading update, marking the stock down 20 pence to 1095 pence a share. The price was down by a similar proportion in Johannesburg. Earlier this year, the stock hit a lifetime record of 1 136 pence, not least on a research note from CSFB on global equity strategy advising high exposure to emerging market consumers. CSFB said emerging market discretionary consumption growth could be as high as 10% a year on a trend basis. SAB Miller, Diageo, Unilever, Nestle, InBev and Nokia were noted as enjoying more than 25% revenue from emerging market consumers.Wednesday’s reaction to SABMiller’s trading update was generally positive. One trader said the figures were as expected, adding that the US news was potentially negative, given the apparent loss of market share to Anheuser-Busch, proud parent of the almighty Budweiser brand.Investment analysts at WestLB maintained SABMiller at ‘neutral’ following analysis of the trading update. SABMiller’s organic lager volume growth declined sharply from 5,6% at the first-half stage, to 1,8% in its third quarter, producing a nine-month rate of 4,5%. This, said WestLB, was ‘still ahead of our full year volume growth forecast of 3,8%’. The analysts added that one quarter of weaker volumes due to poor weather in South Africa ‘is not a fundamental change in the business’s quality’.In its reaction, Goldman Sachs maintained its ‘outperform’ rating on the stock, commenting that Miller was in fact ‘slightly better than we had expected’. Goldman Sachs says that SABMiller remains one of its preferred stocks within the beverages sector. Ahead of the trading update, Deutsche Bank said that ‘in many respects’, 2005 in the global beverages sector was a mirror image of 2004. The sector modestly outperformed, driven by InBev, Pernod Ricard and SABMiller. Deutsche Bank says ‘consistent out performance’ of the three mentioned stocks ‘reflects their geographic balance and successful corporate activity’. The three remain the preferred stocks.A number of professional investment analysts have made the case that SABMiller is not only a premium business, but that it also deserves a premium rating. Calculations on the stocks’ forward earnings profile indicate a 2006 price-to-earnings ratio of about 14.5 times. This puts SABMiller at roughly a 10% discount to its global peer group, which, beyond Anheuser-Busch and InBev includes Diageo and Heineken. For South African investors, SABMiller offers an entry into a global business that’s well hedged against changes and variations in currency values, weather patterns, and many other risks. With brewing or distribution agreements in over 60 countries across five continents, SABMiller offers one of the widest geographic profiles, thus optimizing geo-political risk. In its latest reporting period, the six months to 30 September 2005, Europe was SABMiller’s single major contributor at the earnings before interest, tax, depreciation and amortisation (EBITDA). The segment contributed $379m of a total EBITDA of $1264m. This was followed by South Africa (beverages) at $375m, North America at $286-m, Africa and Asia at $209m, South Africa (hotels and gaming) at $38m, and Central America at $32m. Going forward, the group profits profile will change as the impact of the Bavaria acquisition takes effect.

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