- Objective of the Analysis
The objective of the financial analysis is to identify sound entities for long-term investment purposes.
For the purposes of this analysis I will have a look at the following:
- An overview of the operations
- Management
- Strategic drivers and key success factors
- Outlook
- Financial information
- Background
Anheuser-Busch InBev is beer brewer employing some 173 000 (2017 – 183 000) people in both South and North America, Europe, Asia and Africa.
- Management
The board of directors have an impressive array of qualifications and international experience.
- Strategic Drivers
AB InBev adopted a market maturity model. This involves:
- Predict the evolution of the market
- Anticipates the market from other mature markets
- Set specific policies based on the market’s cluster
- Optimize the portfolio of brands to address consumer occasions across the clusters
“Easy drinking”, “Affordability” and “Premiumization” “Flavoured Beer” and “Other beer styles” form part of the strategy.
- Risks
5.1. Management
The Group has a risk committee, but the particular risks and the handling thereof are not addressed in the annual report.
However, water scarcity and environmental change are mentioned.
5.2. Key Audit Matters
The external auditors identified the following matters:
Goodwill and intangible assets: impairment testing
Taxes – provision for uncertain tax positions
5.3. General Risk Factors
I am in particular concerned about the following:
Solvency position – the ability of the Group to meet its short-term obligations
High debt levels – in particular long-term debt levels
High levels of Goodwill and Intangible assets
Decline in volumes and in sales
Ability to generate cash
- Outlook
The annual report is not specific on the economic outlook for the Group.
In North America, the biggest market of the Group, Sales, Volumes and EBIT declined in a sound economic environment.
In South America the same phenomena were experienced. However, the economic climate is under pressure.
The same was the trend in Europe, Africa and the Middle East where the economic climate is not that rosy.
Asia, although a relatively small market saw some growth.
With this as background, one should not expect major improvements in the foreseeable future.
- Analysis of financial information
- Segmental information
AB InBev segments its business into North and South America, Asia, Europe, Middle East and Africa.
North America is the biggest in terms of sales, volumes, price per volume and EBIT.
The Asian market is small but do show some growth.
- Liquidity ratios
The liquidity ratios show signs of financial stress and are indicated that the company is under financial stress at it further deteriorates is 2018 is compared to 2017.
- Leverage ratios
Long-term debt levels are unacceptable high in relation to equity.
The debts levels are too high in general.
- Activity ratios
Stocks and debtors are well managed. The time it takes to settle suppliers are very long. This confirms the notion that the company is experiencing some cash flow problems.
The investment in Goodwill and Intangible assets are very high.
- Profitability ratios
The margins are sound with a Gross Profit margin of 63% (2018 – 62%) and a net margin of 10,4% (2017 – 16,3%.
- Cash flow
The operating cash flow in relation to total liabilities amounts to 9% (2017 – 9%), again indicating that the Group is burdened with high debt levels.
- General
Growth in volumes and in sales are down, while operating costs are also down.
- JSE Statistics
During the past year, the share price declined by 14%, the past three years by 36% and the past five years by 40%.
The consensus forecast by the financial analysts is a Buy.
The EPS is 2 916 cent and the P/E ratio is 39,75, while the dividend yield is 2,45%.
- Conclusion
During the 2016 financial year, Anheuser-Busch InBev took SAB Miller over and used debt to a large extend to financial the takeover. Growth in sales were sound for 2016 and 2017, but declined for 2018.
On the positive side, the margins are very high and this could attract competition. However, AB INdev is well established in the market.
On the negative side, the investment in goodwill and intangible assets are exceptionally high. The solvency ratios indicate financial stress, while the debt levels are very high.
As a result of the aforementioned, the ability to generate cash is under pressure.
The share price at a P/E of around 40 is extremely expensive in the South African context.
In view of the above, I do regard this share as expensive and with somewhat of a risk and will not include it in my portfolio for the foreseeable future.
Anton Ferreira
14 March 2019