Three beer brewers under the microscope: who is…

Heineken is of course number one for many Dutch investors, but if you look at which brewer worldwide sells the most hectoliters of beer, it is Anheuser-Busch InBev. This global group, headquartered in Belgium, has held this royal position since it took over SABMiller in 2015. To give you an idea of ​​the size difference between these two brewers, AB InBev (ABI) produced more than twice as many hectoliters of beer as Heineken (HEIA) last year, writes Morningstar analyst Philip Gorham in his recent analysis of Heineken.

How are the brewers doing after the recent years of lockdowns and other corona-related suffering? AB InBev performed strongly in the second quarter of this year, according to analyst Gorham, considering how high inflation is. In the first half of 2022, revenues increased by no less than 11.5%, compared to the same period last year, and the brewer sold more than 3% more beer.

Still, investors are not satisfied with AB InBev’s figures. This is partly because the group’s good performance in itself could not fully compensate for cost inflation. In short: the group cannot pass on all the increased costs to the customer one-to-one and therefore makes less profit. But, says analyst Gorham, that’s true for most consumer goods companies.

Investors did find more reasons to be dissatisfied with AB InBev’s latest figures. For example, they found the performance in North America to be weak, where revenues rose only slightly in the first half of this year (by 2.4%). Gorham expects AB InBev to raise prices further in the second half of the year – and then it remains to be seen whether the consumer will accept that or drop out.

Major competitive advantages AB InBev

Gorham himself is not negative about AB InBev: he points out that due to its enormous size, it has by far the greatest cost advantages of the three brewers discussed. This provides major competitive advantages. It is no coincidence that Morningstar was the only one of the three brewers to award AB InBev a Wide Moat rating, which indicates that the company has ‘great competitive advantages’. At Heineken this is a Narrow Moat (limited competitive advantage), while Carlsberg has a No Moat rating.

However, investors should not expect any more acquisitions at AB InBev for the time being, Gorham warns. He expects it to take another year (or two) before the balance sheet of the largest brewer allows that again. It takes longer (partly due to all the corona misery) than previously thought before the costs of the SABMiller acquisition from 2015 are recouped.

But on its own, analyst Gorham does believe in AB InBev’s M&A strategy, which is to buy brands that hold the promise of great growth. It then distributes it on a large scale around the world, which it can do thanks to its rock-solid distribution network. In the meantime, the brewer is making a merciless austerity campaign to reduce costs. Furthermore, it has a monopoly-like position in Latin America and Africa – two huge markets.

Heineken: lower return

And how does the flag hang at Heineken? It is important for investors in this share to know that the return on invested capital at the Dutch brewer is structurally lower than at AB InBev. Since Heineken presented its so-called ‘green diamond strategy’, which focuses on growth, profitability, capital efficiency and sustainability, it has even scored less well in terms of return on invested capital.

But that is mainly due to the corona lockdowns, according to Morningstar analyst Gorham, which caused a much lower demand for Heineken beer and the group’s other drinks. He therefore thinks that things will work out well in this regard in the long run.

In any case, Heineken is investing heavily in order to grow and achieve greater competitive advantages – as witnessed, among other things, by the initiative to buy pubs in the United Kingdom. However, Gorham believes that clear growth targets are lacking at the Heineken management, although he believes that the growth in net turnover will ultimately be above average. This could include volume growth in parts of Africa, brand positioning in developed markets such as the United States and Brazil, and higher prices.

tough cuts

The biggest challenge for Heineken is the ambitious austerity program it has announced of €2 billion. CEO Dolf van den Brink hopes to achieve this goal by reducing the number of employees by 9% and reducing operational and capital costs.

He will have a nice float to keep productivity at the same level with so much less staff. Gorham believes, however, that there are ways to steer that process in the right direction, for example by focusing more on process standardization and digitization.

And then there’s something else: Heineken appears to be the world’s largest producer of cider, according to Gorham’s report. And the growth in this product category is about 2.5 times that of beer.

Carlsberg: difficult position

Heineken may not be number one worldwide, but it is by far the second largest when it comes to beer sales. Measured in hectoliters of beer sold, after number two Heineken, nobody follows for a long time and only at a great distance does the Danish brewer Carlsberg (CARL B) appear on the scene. And then Carlsberg’s largest market, measured in beer volumes and revenues, is also Western Europe.

There the competition is fierce and the price pressure is therefore strong and, moreover, Carlsberg has a really large market share in Western Europe in only a few countries – unlike Heineken. In its home country of Denmark it has more than half of the market and in neighboring Sweden and also in Switzerland it is the largest beer seller. In addition, it is still large in Poland and Norway, but for the rest its market share in Western European countries is usually fairly small and is below 10%.

When it comes to lager sales, it is also not only pitted against the strong brands of its two major competitors AB InBev and Heineken, but beer drinkers today are also fond of Belgian specialty beers and craft beers from America and increasingly also from their own country. This makes Carlsberg’s competitive position in Western Europe weak.

And then Carlsberg is also prominent in Russia, or rather was, because the brewer, like Heineken, has resolutely decided to leave Russia because of the war in Ukraine and the sanctions. That hurts Carlsberg quite a bit, as it has a 17% market share and has eight breweries in the country. This makes Russia the largest market for the beer brewer after its home market in Denmark. It also controls 2% of the Chinese beer market.


Competitive Advantage in Asia

That did not bode well for the half-year figures, but Carlsberg surprised many analysts last month with the presentation of the half-year figures. For example, the group appeared to have succeeded in increasing profit margins – a remarkable achievement in these times of savage inflation.

In China, the group was lucky: because it is mainly active in the western part of the country, it barely got involved in the severe and long lockdowns due to the corona pandemic that did affect eastern cities such as Beijing. Measured across Asia, Carlsberg actually grew quite fast: by 12.2% compared to the same period last year, which is also an improvement compared to the first quarter of this year. Revenues per hectolitre of beer increased by 11% in the first half.

In Asia, Carlsberg has the greatest competitive advantage of any of the markets it operates in, according to Morningstar analyst Gorham. He points to Cambodia, where the beer brewer is the largest player with a market share of more than 25%. And his position in Malaysia, where Carlsberg is number two, is also interesting.

These are markets where beer consumption is still increasing – unlike, for example, Western Europe, where the market is already quite saturated. There is also quite a bit of profit to be made in Asia if you bet on so-called premiumization: putting brands higher in the market, so that you can ask a higher price for them and therefore make more profit.

Most attractive rating

How does Morningstar analyst Philip Gorham judge the current valuation of the three brewers, given their financial and market position? Who is undervalued and therefore worth buying? To start with the smallest player, Carlsberg: analyst Gorham is the only one of the three brewers to significantly increase his calculation of the Fair Value last month: from 910 Danish kroner (converted about €122.35) to 970 Danish kroner (about €130). 40).

But given the share price appreciation since last March, Carlsberg is not really undervalued yet. At most, the stock fluctuates slightly below the Fair Value that Morningstar now assigns to it.

The same applies to Heineken: analyst Gorham keeps it at a Fair Value of €90 and with a price fluctuating around €88, the share is at most a little undervalued.

Finally, AB InBev: given the Fair Value of €80 that Gorham assigns to it and the price that has fluctuated between €47 and €49 in recent times, this is clearly a stock that is undervalued on the stock market. And that makes AB InBev the only one of these three publicly traded beer sellers with considerable upside potential, according to analyst Gorham’s calculations.

The article is in Dutch

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