Morningstar - Q2 2021 - 55

Vast Scale
Anheuser-Busch InBev remains a high-quality franchise
around the globe.
BEST IDEAS: EQUITY

Philip Gorham

Anheuser-Busch InBev BUD

This article is adapted from a Morningstar equity research report dated
March 23, 2021.

Stats 03/31/2021

Management's strategy at Anheuser-Busch InBev BUD, the largest brewer
in the world, is to buy brands with a promising growth platform, expand
distribution, and ruthlessly squeeze costs from them. The payback period for
SABMiller, which AB InBev acquired in 2016, has taken much longer
than usual, however, despite management executing well on costs. Since the
deal, one road bump after another has caused EBITDA growth to slow,
including the popularity of craft beer in the United States, slowing demand
in South Africa, and the shutdown of outlets like bars and restaurants
during the coronavirus pandemic. At the end of 2020, net debt/EBITDA stood
at 5.5, and we expect AB InBev to put its merger and acquisition playbook
on hold for a year or two until it deleverages its balance sheet.

Morningstar Rating
QQQQQ

Sector
s Consumer Defensive

Industry
Beverage-Brewers

Price
$62.85

Fair Value Estimate
$90.00

Uncertainty
Medium

Economic Moat
Wide

Stewardship Rating
Exemplary

Market Cap
$124.76 Billion

Price/Fair Value 03/31/2021

$150

Fair Value Estimate Per Share

90.00

Still, previous acquisitions have created a monster with vast global scale
as well as regional density. AB InBev has one of the strongest cost advantages
in our consumer defensive coverage and is among the most efficient
operators. This scale, along with its monopolylike positions in Latin America
and Africa, gives AB InBev significant fixed-cost leverage and procurement
pricing power. This plays out in the firm's excess returns on invested
capital and best-in-class operating and cash cycles, asset turnover ratios,
and working capital management. AB InBev delays payments to trade
creditors more than 20% longer than its closest rival Heineken, and its free
cash flow conversion has been consistently higher than peers in recent years.
Driving AB InBev's profitability is its majority stake in Ambev, the Latin
American brewer that generates a nearly 40% EBIT margin in beer in Brazil.
AB InBev is well positioned to exploit secular growth in several of its markets.
In Latin America and Asia, which combined account for almost two thirds
of consolidated EBIT, consumers are trading up into premium global brands,
and AB InBev holds a strong portfolio with Budweiser, Corona, and Stella
Artois. Developed markets, on the other hand, are likely to remain fragmented
and competitive.

Our fair value estimate for AB InBev's ADRs is $90, which implies 2022
forward multiples of 24 times EPS, 14 times adjusted enterprise value/EBITDA,
and a free cash flow yield of 4%. It implies 20 times 2023 earnings, in
what we expect will be the first full year of normalized post-COVID-19 earnings.

62.85

Month-End Closing Price

100

50
0

04/2018

04/2019

04/2020

We expect the company to grow at an above-average rate due to volume
and mix drivers. After a sharp 10% decline in sales and 25% decline
in adjusted EBIT last year, we assume a rebound in sales growth of 8.3% in
2021, primarily due to a recovery in bars and restaurants. Beyond that,
we assume the secular industry growth rate returns, and our estimate of
medium-term revenue growth is 4%. This is slightly above our growth
estimate in some of the more commoditized categories such as food, but below
the best-in-class growth companies in spirits and cosmetics. We feel this
is appropriate given the strong premiumization trends in beer, which should
add a percentage point to the industry's secular growth rate. With the
SABMiller integration now complete, our fair value estimate implies limited
margin expansion in the future, barring further acquisitions. K
Philip Gorham, CFA, FRM, is director of equity research at Morningstar Asia.

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