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AB Inbev released their 2Q17 results today, reporting strong profits following the acquisition of rival beer giant SABMiller. Despite poor performance in Brazil and lacklustre results in the US, revenue grew by 5.0% with global volumes up 1.0%. Earnings before interest, taxes, depreciation and amortisation (EBITDA) rose 11.8% to US$5.35bn on an adjusted basis as strong cost cutting measures led to expansion of EBITDA margins.
Strong growth was recorded in South Africa. Revenue increased by 13.4% in 2Q17, which consisted of revenue per hectolitre growth of 2.4% and volume growth of 10.8%, while the first half of the year revenue grew 9.7%. The double-digit growth in volumes comes as quite a surprise given the weak economic climate prevailing in South Africa. According to the statement, the sound top line performance was “driven by a portfolio of brands with distinctive positioning and consistent through-the-line sales execution.”
The company noted that the launch of the premium market unit recorded promising growth, specifically in the Stella Artois and Corona brands. Corona has been gaining ground worldwide, with global growth of 16.6% and 26.2% growth excluding Mexico. According to Ricardo Tadeu, president of the new Africa zone in AB InBev, the world’s biggest brewer doesn’t have any plans to reduce its presence in any of the 31 African markets in which it now operates. They have also announced their plans to bring global beer brands such as Budweiser, Stella Artois and Corona to African markets and have also indicated their interest in brewing these brands in South Africa.
Furthermore, AB Inbev has started to invest heavily in increasing its capacity in Southern Africa, recently announcing that it was investing R2.8 billion in expansions at two of its breweries, Alrode in the south of Johannesburg and Rosslyn, outside of Pretoria. Each brewery is to receive a new 45,000 bottles per hour packaging line for returnable glass bottles, adding a total of four million hectolitres of capacity per year. The Alrode packaging line will be in production by August while Rosslyn’s will be online by October.
These developments do not bode well for Namibia Breweries who have a 25% stake in Heineken South Africa, the owner of the 4.5 million hectolitre Sedibeng brewery in Johannesburg. This brewery produces a range of premium beers including Heineken and Amstel. It also brews Windhoek and Tafel lager under licence. The increased competition, specifically in the premium market, may disrupt their plans to rapidly expand their South African market share. According to Namibia Breweries’ management, they and their associate currently hold roughly 50% of the premium beer market in South Africa, which in turn comprises around 16% of the total beer market which was estimated to be at 31.4 million hectolitres in 2014.
As mentioned our Namibia Breweries 1H17 results review, our target price is quite sensitive to the rate at which the Sedibeng brewery can increase production volume, which in turn depends on the demand created by increased market share. Details on the South African operation are limited at present, as financial information regarding the cost structures and future volumes is limited. We have thus assumed that full capacity will be reached over a five-year to six-year horizon. Given the high level of fixed cost associated with the brewery and the time it is expected to take to ramp up production, we expect to see losses in FY17 and FY18, breakeven levels of profit in FY19 and then increasing profitability thereafter. This is based heavily on management’s guidance. The South African operation will become a very large part of the business and could make up nearly half of NBS’s value once running at full capacity.
Namibia breweries’ 1H17 statements reflected strong volume growth in the last six months of 2016. Beer revenues grew by 13.9% which was driven largely by increased exports to South Africa. These volumes were largely boosted by Windhoek lager, which has gained a lot of popularity in recent years. However, it remains to be seen if the heightened exports to South Africa could be sustained in 2017 and if volumes produced in South Africa continue to grow as projected in the face of heightened competition from the AB Inbev premium brands. Namibia breweries are expected to release their FY17 results in September.