SABMiller's (SAB) first-half sales figures were slightly below our expectations for the full year, but mid single-digit revenue growth in a sluggish global economy demonstrates that SAB is holding its own in most markets, and supports our wide economic moat rating. We will wait for the full interim results, due next month, to update our model, but do not expect any tempering of near-term growth rates to have a material impact on our £32 fair value estimate.
SABMiller's top line grew by 5% on a constant currency and organic basis in the first half of the year, driven by 3% pricing, 1% volume growth and favourable mix. One distraction is that it appears that volume/mix was negative in the second half, with revenue growth falling to 3% despite 4% pricing. Beer consumption is closely correlated to GDP per capita consumption in most markets, and with the International Monetary Fund recently lowering its GDP forecast for 2014 and 2015, it appears macroeconomic conditions will fail to provide much of a tailwind in the short term.
Nevertheless, SAB appears to be tracking or outperforming the beer industry in most markets. In Latin America, 7% revenue growth was in line with Ambev's second-quarter results, although Ambev holds dominant share in the troubled Argentinian market, which is weighing on its South American performance. Healthy, low double-digit revenue growth in Africa was driven in equal measure by volume and price. However, a weak performance in the Asia-Pacific region is a concern, with revenue declining 1% in the first half, but volume declines accelerating to 8% in the second quarter.
In Australia, the beer industry is in secular decline, and in China, management claimed weak volume was caused by poor weather. Despite cycling weak volumes a year ago, Europe sales were disappointing. Weak markets in Russia and Italy drove a 2% decline in first half revenue. Russia in particular could stabilise over the next twelve months, and we expect more positive results going forward.
Following a 15% decline in the stock over the last month, SABMiller is now trading close to our fair value estimate, and we believe the current market valuation fairly reflects the intrinsic value of the stock on a standalone basis. However, we acknowledge that the stock is likely to trade on rumours of industry consolidation in the near-term. We believe the derating of the stock in recent weeks makes the economics of an acquisition by Anheuser-Busch InBev more attractive, and in the absence of a revised SAB offer for Heineken, we think A-B InBev could make a move soon.
These results, particularly a relatively strong performance in Latin America, as well as the continued growth in Africa, could make SAB a moat-enhancing addition to ABI's portfolio. As we described in our June 2014 Select report The Case Against Anheuser-Busch Acquiring SABMiller, however, we believe value creation from the deal would depend heavily on the price paid, and that a deal above 16x EV/EBITDA could erode ABI shareholder value.
