This brewer’s shares are too frothy for my value-orientated palate. On the back of credit market volatility and a flight from riskier assets, investors have sought the safety of traditional “low beta” stocks – a trend that has made the stock an “expensive defensive”.
Turkey of the week: SAB Miller (SAB), rated a BUY by ING
SAB is the world’s second-largest brewer. Its international brands include Peroni and Miller Genuine Draft; its top local brands include Castle, Aguila and Snow. Around 90% of profits come from beer sales, with the remainder derived from its bottling, hotels and casino operations.
So why do I think the shares are overvalued? Although like-for-like sales grew an impressive 10% in 2006, this was partly down to the football world cup and a hot summer in western Europe. Neither of these factors occurred in 2007, so I would expect a deceleration in SAB’s growth over the July-Sept quarter when it reports on 15 October.
Secondly, the cost of SAB’s key raw materials are soaring in line with higher commodity prices. In May, SAB estimated this would shave between $150m to $200m from operating profits (earnings before interest and tax, or EBIT) this year, a margin squeeze of 1.3%. The impact of poor harvests, expansion of biofuels and consolidation of suppliers has resulted in steep price rises on cans (up 10%), bottles (6%-8%), malt (32%), barley (38%) and hops (100%). With this painful headwind, SAB is unlikely to be able to raise its already juicy 17% EBIT margins this year. In the longer term they may even shrink; 17% looks vulnerable for such a mature product in a highly competitive industry.
Thirdly, SAB is hugely exposed to the geopolitical travails of the South African economy, where it generates a third of its profits. SAB’s dominant brands enjoy a colossal 98% market share. This local monopoly could become easy prey for future lawmakers. For example, the government has recently introduced the controversial “black empowerment” programme, where domestic companies have to gift 10% of their shares to black investors. So far this measure has been resisted by international groups, but it is clearly a concern.
Finally, in its more mature European and North American markets, that together contribute 45% of revenues, there is a long-term trend for consumers to drink more wine and spirits at the expense of beer. Governments are also introducing tighter legislation to control binge drinking, which may also hit beer consumption.
So with the stock trading on a punchy 20.5 times p/e multiple and only paying a 2% yield, I would advise shareholders to take profits. To me there is far more downside than upside at these gassy levels, and I would instead value the stock at around 1,000p, or 40% less than today.
Recommendation: TAKE PROFITS at 1,382p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments