Although fourth-quarter earnings were in line with analysts’ forecasts, we are raising our fair value estimate for SABMiller (SAB) to £44 from £42 to account for the depreciation of the pound sterling against the U.S. dollar in recent weeks.
The depreciation of sterling since Brexit could force ABI to raise its cash offer for SABMiller
SABMiller's first-quarter trading update revealed fairly tepid organic growth, weighed down by weak volumes in North America, but as the company enters the homestretch of its acquisition by AB InBev, the benefits to ABI from the deal were clear in the performance of SAB's emerging markets.
We are maintaining our wide moat rating for SABMiller, which is based upon its cost advantage in Africa.
We forecast 4% revenue growth over our five-year forecast period, dragged down by unfavourable foreign-exchange movements in 2016. Organically, we assume top-line growth of around 6%, fairly high for the industry and roughly in line with AmBev, its primary competitor in Latin America, but below the 10% average growth rate over the past five years in the region.
We believe there is a possibility that the depreciation of the value of sterling since Britain's vote to leave the European Union could force ABI to raise its cash offer for SABMiller.
The assets AB InBev will retain performed quite well in SAB's first quarter, with 5% growth in Latin America and 6% in Africa. Although this represented a slowdown in Africa from the 11% growth posted in the fourth quarter of the last fiscal year, we had anticipated this, given the pullback from South Sudan and geopolitical troubles in Angola, as well as the general economic slowdown in some markets.
Emerging Markets Fuel Growth Despite Slowdown
Materially, however, all of the growth was driven by price/mix, and only in Latin America did beverage volume grow, by a modest 1% year over year. We think this is due to cyclical pressures linked to the emerging-market slowdown, and we believe Africa, in particular, offers a long-term growth runway that will help to reignite AB InBev's sluggish top-line growth. The contrast between mature developed markets and emerging markets was clear in SABMiller's results, with North America down 3%.
The acquisition moved a step closer yesterday with the approval from the U.S. regulator. At this stage, antitrust approval must still be confirmed from China, although we do not expect this to be a barrier given the proposed sale of CR Snow, and asset sales in Eastern Europe. We now expect the deal to close in the fourth quarter of this year.
Over the past several years, SABMiller has been one of the most compelling emerging-markets stories in our consumer defensive coverage universe. It remains a strong business, with a wide moat based on its cost advantage in Africa and an impressive growth profile from its broad emerging-markets presence.
