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SABMiller keeps climbing despite weaker results

The market still can’t get enough.

CAPE TOWN – Global brewering giant SABMiller announced weaker than expected interim results on Thursday, with revenue growing by just 2% and organic constant currency operating profit rising by 3% from the comparable period last year.

Group adjusted earnings per share came in at 123.6 US cents per share, up from 120.4 US cents per share last year. In constant currency the figure looks marginally better at 126.0 US cents per share.

The lower than expected earnings number led the chief investment officer at Cannon Asset Managers, Adrian Saville, to tweet:

“When growth falters ‘priced for perfection’ becomes horribly expensive. SABMiller on 23x p/e multiple ekes out +3% earnings.”

The market didn’t appear to share his sentiment, however, as SABMiller’s share price climbed 1.17% on the day. It is now around 19% up for the year and more than 100% higher over the last 36 months.

An interesting feature of SABMiller’s results was that while lager volumes were down 1% across its geographies, total beverage volumes were 1% higher.

“This decline in lager volumes was compensated for by surprisingly strong 9% organic growth in soft drinks driven by its African, Latin American and European businesses,” says Dino Voulakis, a portfolio manager at Nedbank Private Wealth. “Pricing growth also continues to be driven by the well-honed premiumisation strategies and pricing initiatives the group is known for, with resultant net producer revenue growth per hectolitre up 3% in constant currency terms.”

SABMiller will however be concerned with the 1% drop in net producer revenue and 17% decline in earnings before interest, tax and amortisation (EBITA) from its Asia Pacific region. The group said that cold and wet weather in China’s central provinces had been a major contributor to the drop in sales in that market. In Australia, pressure on consumer spending and competitive pricing is making for a very challenging environment there.

The group once again leant heavily on its emerging market operations in Latin America and Africa, which contributed 31.9% and 25.2% to total earnings respectively. EBITA grew by 7% in Latin America and and 3% in Africa, despite the effects of negative currency movements.

EBITA margins increased by 70 basis points in Latin America and 10 basis points in Africa. SABMiller cited efficiencies as a major contributor.

This is becoming an increasingly important theme as growth opportunities become scarcer in a highly consolidated global market. Chief Executive Alan Clark, said in a note that the group is “making good initial progress on our plan to realise US$500 million from operational efficiencies and cost savings”.

SABMiller has enjoyed an incredible last decade, with EBITA growth averaging over 9% per annum in constant currency since 2004. However, analysts are worried that the potential to sustain this growth is diminishing.

“At a group level, we are concerned that SABMiller will struggle to deliver the strong organic growth rates of yore, as emerging market growth tempers and certain large markets like Australia, Europe and the US are likely to be a drag medium term,” says Dirk van Vlaanderen, Investment Analyst at Kagiso Asset Management. “A recent announcement that a sizeable Colombian soft drinks player is planning to enter the Colombian beer market and challenge SAB’s near monopoly status in beer where it has a 99% market share, means the company’s most profitable market could also be under threat.”

Currently Colombia contributes around 17% of the company’s EBITA.

Where SABMiller did excel was in its cash generation. Free cash flow for the six months under review improved by 66% from $894 million in 2013 to $1.485 billion this year.

SABMiller increased its interim dividend from 25 US cents to 26 US cents.

In August SABMiller completed the sale of its effective 39.6% interest in JSE-listed gaming and hotel group Tsogo Sun. The transaction realised a post-tax profit of $232 million, which was treated as an exceptional item in its results.

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