SABMiller should soon begin to benefit from cheaper prices for key ingredients like barley as well favourable currency movements, the world's second biggest brewer said in its latest update.
Its half year results showed a 2% drop in profits to $2.18bn before exceptional items, mainly due to weakness in its major currencies compared to the dollar. In the UK its beer volumes were helped by 35% growth at Peroni Nastro Azzurro, but the company's overall lager sales were down 1%. However it added that despite the tough economic climate it had continued to increase its share in a number of markets. It said:
The benefits of falling commodity prices are not yet fully reflected in our costs, due to the long term nature of our raw material supply contracts and the relative strength of the US dollar in which many of these contracts are priced. Input costs .. will begin to ease towards the end of this year.
Analysts still believe it is on the acquisition trail. In a note raising its price target from £12.40 to £16.70, Citigroup pointed to Mexico's Femsa Cerveza as a possible target. Citi said:
A deal would make strategic sense for SABMiller, though we envisage a regional joint venture not outright acquisition. Potential 10% cost savings and a 10 times EV/EBITDA multiple suggest around 2%-4% earnings upside in year four, but no more unless the US, Brazil or integrated beer and soft drinks surprise on the upside, which we doubt.
On the figures themselves Bank of America/Merrill Lynch kept its underperform rating, saying:
We do not believe the market will upgrade EBITA materially for 2010, but earnings certainly have scope for upside depending on the guidance on full year interest and tax guidance. We believe upgrades could be between 3-5%. In line with the other brewers the top line missed, but margins were ahead of expectations, leading to likely upgrades. On our estimates SABMiller remains the most expensive brewer trading 15.8 times 2010 PE and the lowest free cash flow yield at below 4%. Based on our price objective of 1750p we have a underperform rating on SABMiller.
The market seems to disagree at the moment, since the company has now replace Reckitt Benckiser - lifted by acquisition talk - as the biggest riser in the FTSE 100, up 86p at £17.43.
