We raise our target price for Budweiser Asia by 20% to HKD15.57
Despite a revival in beer volumes in the industry, Budweiser Asia will struggle to return to pre-pandemic revenue and operating earnings. Therefore, while we raise our target price to HKD15.57 due to the revival, we reiterate our Sell recommendation.
We raise our earnings and revenue forecasts
We expect beer volumes to expand by 15% as the lockdown lifts in the key Asian markets, and we therefore raise our earnings and revenue forecasts for FY21 and FY22 by 22% and 10%, respectively.
1Q21 earnings expansion may not be steep enough
Budweiser’s 2H 20 showed a volume drop of 1.3% yoy. In turn, revenue fell 0.4% yoy. Despite the reopening of many parts of China, sales volumes fell 1.3% yoy in 2H 20.
Covid-19 is a blow to Budweiser’s plans for premiumisation
We expect Budweiser Asia’s FY21 earnings to be below the pre-pandemic level. A key strategy for Budweiser Asia of premiumisation is unlikely, as volumes are weak and the changing social habits caused by the pandemic do not help. At present, most consumption of beer is at home, as opposed to on-premise, and this trend is unfavourable for premiumisation.
Budweiser Asia’s contractions look set to be far higher than the contractions experienced by CR Beer and Tsingtao. For instance, Budweiser Asia's Hanmac beer (a premium brand) is likely to be weak.
US$2.5bn writedown in South Africa for 2020 by Budweiser Asia’s parent underlines the risks
South Africa has banned alcohol sales due to the pandemic and AB InBev says that there is a 30% likelihood of the worst-case scenario of a prolonged ban. There could be similar writedowns in parts of Asia, should similar restrictions be imposed. Budweiser Asia has a high ratio of goodwill and intangibles to assets, which makes the company particularly vulnerable to an economic slowdown.
Budweiser is a Roll-Up masquerading as a growth company
Budweiser Asia is looking to replicate AB InBev’s roll-up strategy at a time of disintegrating core earnings growth. There are similarities to Valeant Pharmaceuticals – a roll-up company that collapsed in 2017. 56% of Budweiser Asia’s assets are goodwill and intangibles, indicating the series of acquisitions that it has undertaken.
Low free cash flow yield and ROIC
Budweiser Asia has low free cash flow (FCF) yield and returns on invested capital (ROIC) in comparison with other Asian liquor players. At 10%, Budweiser’s ROIC is not only below that of listed beer players, but also that of spirits producers. Its FCF yield is just 2%, which is the lowest in its global peer group.
Our DCF-based valuation implies 31% downside
On a comparative basis, Budweiser Asia is overvalued on PE and at par on EV/EBITDA bases. We expect the company's share price to fall as the frailties of its roll-up-based strategy are exposed. Sell.