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Heady tale

13 Nov 2014 By Robert Cole

Perma-speculation that Belgian brewer AB InBev will make a bid probably accounts for most of the share price premium enjoyed by rival SABMiller. Without such support, the UK group’s stock could drift lower.

True, SAB generated a 16 percent improvement in pretax profit in the six months to Sept. 30, despite being held back by currency movements. But the headline figure was flattered by proceeds from the disposal of its investment in the Tsogo Sun hotel and gaming business in South Africa. The bright spot was SAB’s soft drinks business, where volumes rose 9 percent. This now accounts for 20 percent of total volumes – although margins are still better on alcohol.

SAB remains primarily a beer company and its weak beer volumes, sliding 1 percent in the first half, are a problem that looks here to stay. The developed markets in Europe and North America showed little or no growth in sales or profit. The going is especially tough in Australia, where SAB bulked up big time with the 2011 acquisition of Foster’s. It is too soon to conclude the deal is unravelling – management says the integration is nearly complete and the promised synergies are coming through. But the timing, just before an economic slowdown, is starting to look unfortunate.

Drinkers’ thirsts around the world may return. It is possible that M&A – in soft drinks and beer – will also propel SAB’s earnings in future as it has in the past. But large-scale targets are few and far between. Dutch rival Heineken’s stern rebuttal of an approach made earlier in the year makes that deal look unlikely in the near-term.

Shares in SAB trade on a multiple of 20 times forward earnings, according to Starmine. That is higher than each of its closest rivals, AB InBev and Heineken. It is 15 percent ahead of the European consumer staples sector and some 50 percent more than the average Stoxx 600 listing.

SAB has its attractions, with exposure to emerging African, Asian and Latin American markets. But it is far from certain that it can justify the premium to peers that are hardly cheap themselves.


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