Big deal speculation supports SABMiller stock

15 November 2014 - 20:08 By Ann Crotty
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Image: Business Times

The SABMiller share price seemed to ignore the dull and below-expectations interim results released by the group this week and, after a brief hesitation, began to move back up to its 12-month high.

Given the unexciting outlook for the second half of the year, analysts said it could only be expectations of a major deal that were supporting the share's high rating.

Bernstein Research has described the results as a "solid" achievement, given the "tough headwinds" from Asia and Australia. The 3% increase in adjusted earnings was underpinned by reduced interest costs as the group used its strong cash flow and proceeds from the sale of Tsogo Sun to redeem high-interest bonds.

Phillip Gorham, a senior equity analyst at Morningstar, said the SABMiller share was now trading at a premium to his fair value estimate.

"However, we acknowledge that investor attention is likely to remain focused on industry consolidation in the near-term."

Referring to the long-speculated tie-up with Anheuser-Busch Inbev, Gorham noted: "SABMiller has a cost advantage in Africa, where its incumbency and developed distribution platform allow it to offer low-cost products to entry-level consumers."

In a weak-to-patchy performance, Latin America and soft drinks were the stars. The results confirm Latin America's dominance in SABMiller's profit profile. Although the region accounts for 20.9% of revenue, up from 19.8% a year ago, it contributes 32% to group earnings before interest, tax and amortisation (Ebita), up from 30.2%.

Soft drinks stole the show, with sales surging 9% in volume, enabling the group to post a pedestrian 2% volume rise despite unchanged lager sales.

Africa's reasonably strong showing was muted by the weakness in local currencies against the US dollar. On an organic, constant currency basis, revenue was up 10% but this was squeezed to only 3% when converted to dollars. Similarly, the 9% increase in Ebita in local currency terms was reduced to 3% in dollars.

The African figures now include South Africa in a move that Africa chief Mark Bowman said was designed to maximise synergies.

"Africa [outside South Africa] is a high-growth area but is under-resourced. We want to leverage off our South African competencies. When you're running the two regions separately there are limits to optimising the synergies."

South African lager volumes were up 1% in a weak consumer environment. The group says it gained market share and benefited from a "significantly improved" product mix. Soft drink volumes were up 9%.

In Australia the group was hit hard by push-back from local competitors and a sluggish economy. Dismal summer weather knocked demand in China but there were encouraging signs of consumers there moving to premium products.

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