OREANDA-NEWS. September 22, 2011. Renaissance Capital, the leading emerging markets (EM) investment bank, has initiated research coverage of SABMiller (www.sabmiller.com), one of the world’s largest brewers, with a HOLD rating and USD 38 target price (TP). SABMiller has more than 200 beer brands and some 70,000 employees in over 75 countries and is also one of the world’s largest bottlers of Coca-Cola products. The Group has achieved organic volume growth of 4.1% pa over the past decade, well ahead of market growth of 2.8%, which we attribute to its EM portfolio.

Beer is the fastest growing segment in the alcohol market, having grown at a CAGR of 2.8% over the past decade. Nevertheless its growth is 20% lower than global GDP growth of 3.5% over the same period. Renaissance Capital believes Asia and Africa offer the best growth opportunities for the industry, driven by economic growth and low per capita consumption (PCC) levels. SABMiller has established a solid portfolio of businesses but there are areas where there is room for improvement. Despite strong top-line growth, operating profit before amortisation (EBITA) margins have not really progressed over the past 10 years. Business mix, adverse economic conditions and volatility in input costs have tempered margin growth. An increasingly competitive landscape in SA and lack of top-line growth in the US are concerns that need to be addressed. However, Renaissance Capital is confident SABMiller’s business plans in Latin America, Africa and Asia could deliver superior future returns and we believe larger developed market (DM) exposure could be beneficial for SABMiller. For instance, a successful bid for Foster’s could provide more balance to its existing portfolio. The brewer compares reasonably well against its peers on operating margins and equity returns, but FCF returns are at the low end of the scale, which we attribute to its heavily EM-skewed portfolio.

Renaissance Capital expects SABMiller to post volume growth of 3.6% in FY12, marking an acceleration as Latin America and European volumes recover. Price gains of 2.6% and FX of 2.9% should result in revenue of USD 30.9bn (+9%). We expect EBITA of USD 5.6bn (+11%) with adjusted EPS rising 15% to USD 2.18 and we value SABMiller on a DCF approach, delivering a value of USD 35 (GBP22/ZAR260). Our TP is USD 38 (GBP24/ZAR284), implying upside potential of 10%, while the rolling forward P/E is 15.4x, which is in line with the historic average of 15.2x. SABMiller is however trading at a premium to the peer group’s 12.5x. P/BV analysis indicates the brewer is trading at a 2.4x P/BV, which is at a premium to its historic average of 2.2x.