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Brewer SAB Miller Beats Expectations

SAB Miller is an inherently strong business, say equity analysts, particularly in Africa, and we think management is focused on the right drivers

Philip Gorham 14 May, 2015 | 1:07PM

SAB Miller (SAB) released more details on the firm's fourth-quarter and full-year performance in fiscal 2014/15, and margins and earnings per share were slightly ahead of our forecasts. In the near term, however, we are unlikely to change our £36 fair value estimates for the ADRs and ordinary shares, respectively, beyond the impact of the time value of money, as we have doubts over the sustainability of the margin improvement.

Our wide economic moat rating remains in place, as we continue to believe SAB Miller has a robust cost advantage in several African markets. We regard the stock as being fairly valued.

As previously reported, full-year revenue fell 2%, but increased 5% on an organic, constant currency basis. SAB Miller reported modest upside to profitability, with the EBIT margin of 27.0% slightly ahead of our estimate. Management stated that input costs were essentially flat (we had expected a small increase in raw material expense) and that cost savings were greater than the initial $75 million in savings for fiscal 2014/15.

We believe the gross margin benefit will reverse this year, but the cost savings beat could be more sustainable. Nevertheless, we are not likely to increase the $500 million in total savings from SAB Miller's cost programme, as we believe any upside to this figure is likely to be reinvested in the business.

Management has stated that a key strategic priority is to invest behind top line growth, and this is consistent with our thesis that the firm can recapture 2% organic volume growth, in line with our estimate of the mid-cycle global growth rate.

In general, trading conditions remain challenging, and competition stiff. However, we believe SABMiller is an inherently strong business, particularly in Africa, and we think management is focused on the right drivers – premiumisation, growing its beverage categories and deepening relationships with retailers – to grow its top line at least in line with the global industry.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Philip Gorham  

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