Paolo Senatore, Chief Investment Officer at Ashburton Investments, looks at the prospects for SABMiller.

The need to quench a burgeoning city’s thirst during the Johannesburg gold rush in the late 1800s resulted in Charles Glass’s establishment of Castle Brewery producing the enduring Castle Lager. A few years later in 1895, South African Breweries (SAB) was established on the foundations laid by Charles Glass. The Johannesburg Stock Exchange (JSE) was the recipient of its first industrial counter when SAB listed in 1897. From their relatively humble beginnings the company now operates in more than 80 countries and sells 140,000 bottles of beer every minute… yes, every minute.

The acquisitions

The 1950s saw SAB acquire two of their South African competitors, namely Ohlsson’s Cape Breweries as well as Chandlers Union Breweries, enabling the organisation to garner over 90% of the South African beer market, a statistic still held today. This development signalled the start of an acquisitive drive that would put SAB on the global beer map.

The 1990s were witness to SAB’s growing emerging-market exposure into Africa, Central and Eastern Europe as well as China. SAB entered China in 1994 through their 49% stake in China Resource Snow Breweries, which at the time operated two breweries. By 2012 expansion to 90 breweries had taken place and Snow beer, produced by the joint venture between SABMiller and CR Snow, is currently the world’s single largest beer brand by volume.

By the end of the 1990s SAB had moved its primary listing from the JSE to London to enable it to gain access to increased capital to fund future acquisitions. Early in the new millennium SAB entered into a strategic partnership with Castel’s African beverage operations. Castel is a French family-run business, part of which produces beer and bottles Coca-Cola on the African continent.

Then in 2002 SAB acquired the US brewer, Miller Brewing Company, resulting in the name-change to SABMiller. The acquisition of Grupo Empresarial Bavaria SA in Colombia gave SABMiller access to Latin America’s fast-growing beer market, and today this region is the biggest contributor to profit.

In 2011 the last major acquisition by SABMiller took place when the company purchased Carlton United Breweries (the makers of Foster’s Lager) in Australia. This acquisition was met with some scepticism by investors, given the fairly mature alcohol market in Australia and a tough competing environment alongside wine and spirits. While SABMiller continues to experience negative volume growth in this region, this is offset through increased pricing. This 50-year acquisition drive has played a role in bringing about a much consolidated beer industry, resulting in SABMiller becoming the second-largest brewer in the world.

A global brewer with a local touch

SABMiller believes that beer with a local heritage is more likely to appeal to the taste of the inhabitants of that country. This is evident in the fact that out of the more than 200 beers it produces, only four – Peroni, Pilsner Urquell, Miller Genuine Draft and Grolsh – are sold intercontinentally. A good example of one of the beers that represents their “passionately local” catchphrase is Impala from Mozambique. Impala is the first commercially-based cassava beer. Seventy percent of the cassava root used in the brewing processes is sourced from smallhold farmers. Supporting local smallhold farmers further entrenches the brewer into the psyche of the populous.

This approach has proved successful in creating differing brands that appeal equally to a consumer in a shebeen in South Africa or one in a pizzeria in Italy.

Africa and China – the sweet spot for beer growth

A primary driver of beer volume growth in Africa is affordability. Interestingly, the market tends to use the hours worked as a proxy for affordability of mainstream beer. In the US and UK it takes 12 minutes of work to pay for one beer whereas across most African markets consumers need to work more than 2 hours to afford a beer, which clearly indicates that commercially produced beer is relatively expensive in Africa. This is depicted in the graph below, which illustrates that non-commercial (primarily home-produced alcohol) is still 52% of the total alcohol market across Africa.

In an effort to alleviate the cost of producing commercial beer in order to compete with the non-commercial market, SABMiller introduces local grains and returnable bottles. Deutsche Bank estimates that three quarters of a consumer’s lifetime beer consumption occurs between the ages of 20 and 40 years of age. There are currently over 215 million consumers in Sub-Saharan Africa between the ages of 20 and 34, and this number is expected to reach half a billion by 2050. With Africa (excluding SA) currently contributing 14% to SABMiller’s earnings, this population demographic should stand the company in good stead in years to come.

Unlike Africa, China’s single-child policy limits population growth as a driving factor in increasing beer volumes, however in China, given the very low margins on beer, SABMiller undertook to ‘premiumising’ this market. In essence, ‘premiumising’ is the process whereby consumers are enticed to trade up to a more expensive, higher-margin beer.

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The next 100 years?

Under new management, the company is starting to change focus from one of an acquisitive growth strategy to implementing more internally focused, cost-aware measures. In testament to this, the company announced a new cost-saving programme that targets a cumulative saving of US$500 million by 2018.

Furthermore, although not core to SABMiller’s business, their soft drinks segment is growing in volume and now constitutes 20% of total beverage volumes. While the soft drink business is a lower-margin business compared to beer, an urbanising emerging-market population should be supportive of volume growth in this segment and SABMiller’s geographic footprint is certainly complementary to an urbanising population.

An annualised 22% growth in share price over the last 10 years has created substantial shareholder wealth. The counter has historically traded at a price to earnings premium to its global peers due to its larger footprint in high-growth emerging markets. It currently trades on a 12-month rolling forward price to earnings multiple of 20.6 times. On this metric one may argue that the share price looks slightly demanding as market-share loss in Australia and weak European markets will hamper profitability in the short term. Over the longer term though, exposure to the growing emerging-market thirst, which currently constitutes 72% of earnings, should provide an underpin to the counter’s performance and maintain the premium rating relative to its peers.

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