Morningstar is initiating credit coverage of SABMiller with an A rating, reflecting the company's wide moat in a stable sector with good coverage and leverage metrics. SABMiller's emerging market exposure is one of the most developed of the global mega-brewers. While this lends itself to an attractive volume growth rate, it also leaves SABMiller relatively more exposed to the uncertainties of the developing world. The firm's joint venture with Molson Coors in the US has opened up large cost-cutting opportunities.
SABMiller is the second-largest brewer in the world, controlling roughly 15% of global volume, and we rate the company as having a wide moat (for more on how Morningstar measures moats, click here). The company was formed when South African Breweries bought Miller Brewing Company from Altria in 2002. SABMiller owns six of the top 50 beer brands in the world and has the number-one or -two spot in more than 90% of the markets in which it competes. SABMiller seeks to be a global leader in the beer industry through developing strong brand portfolios in growing markets such as China, Africa, and India. SABMiller has not shied away from making major acquisitions in the past, and we expect it to continue to use this as a means for growth.
Although SABMiller lost its number-one spot after the Anheuser-Busch InBev combination, we think the two giants can peacefully coexist. A-B InBev controls approximately 25% of global volume, but the two competitors only have minimal overlap. SABMiller has considerable exposure in the emerging markets, with roughly 64% of fiscal 2009 operating profits generated from Latin America, Asia, and Africa. Although emerging markets are less efficient and operationally riskier, this is a huge opportunity as per capita consumption in these markets lag those in developed markets. For example, the Chinese beer market is already 60% larger than the US market, but per capita consumption is only one third of American consumption. SABMiller is well-positioned to benefit from this potential consumption growth as it jointly owns the Chinese brand, Snow, the best-selling beer brand in the world. A-B InBev has effectively shut SABMiller out of the Brazilian and Canadian beer markets, but A-B Inbev has pulled back on its interest in China's Tsingtao. The two companies compete directly in the US, but we think SABMiller has the upper hand. There is a large downside risk to A-B InBev's current cost-cutting program, and any mistakes would directly benefit SABMiller.
With plenty of assets in the emerging markets up for grabs and with SABMiller's balance sheet in better condition than A-B InBev's, we wouldn't be surprised to see additional acquisitions by SABMiller. We do think that this management team has exhibited a disciplined acquisition strategy. SABMiller has walked away from acquisitions that were too pricey or not under the terms it wanted, like with FEMSA's recent sale of its beer business.
We forecast SABMiller to generate $13.6 billion of sales for the year ended March 2010 with resulting EBITDA of $4.9 billion. We estimate fiscal 2010 interest coverage of 4.2 times, debt/capital ratio of 0.37, and leverage of 2.0 times. For fiscal 2011 (ended March 2011) we are forecasting sales to increase 5.5% to $14.4 billion and EBITDA to increase 10% to $5.4 billion with resulting credit metrics of 5.2 times interest coverage, 0.35 debt/capital ratio, and 1.8 times leverage. Based on our five-year forecast, we expect SABMiller's cash and cash generation of $15.5 billion will cover total cash commitments of $9.5 billion by 163%.
Read our equity analyst's full report on SABMiller here.
