Investeringskommentar, Philip Gorham, 11/08/2015
Over the past five years, two transformative acquisitions have given Heineken volume scale almost on par with the number-two global brewer, SABMiller. In 2014, Heineken sold 181.3 million hectolitres of beer on a consolidated basis, short of the 242 million hl sold by SABMiller but above the 124.8 million hl sold by AmBev and the 134.5 million hl sold by Carlsberg in the same period.
In theory, the firm should be generating margins and returns on capital at least as large as AmBev, and close to those of SABMiller. This assumption is particularly valid, given that Heineken's portfolio is skewed to the premium segment through its namesake international premium segment beer brand, while competitors including Anheuser-Busch InBev, SABMiller, and Carlsberg operate primarily in the mainstream segment. The opposite is true, however, and in 2014, Heineken's adjusted EBIT margin of just under 15% was significantly below that of AB InBev (33%), SABMiller (30%), and AmBev (42%).
Ultimately, we doubt that Heineken can ever reach the levels of profitability of its two larger competitors. Still, we do believe it is on a very long-term path to expand margins to the mid-20s. AmBev (and by association ABInbev) and SABMiller have cost advantages in some core markets that Heineken is unlikely to replicate on an organic basis. In Latin America, AmBev generates EBIT margins in Brazil that approach 50%, and the same region is the most profitable for SABMiller, with EBIT margins in the mid-20s. In both cases, the companies possess near-monopoly positions in multiple markets, generating a cost advantage through local scale. Heineken, on the other hand, does not enjoy such dominant positions, and we think its more competitive markets will prevent margins from ever reaching best-in-class levels, particularly if consolidation elsewhere in the industry leaves Heineken facing some even larger competitors. Nevertheless, Heineken's ownership of a strong IPS brand should allow it to take advantage of a long-term global trend to premiumisation across the world, and we prefer its competitive positioning to that of Carlsberg for investors with a multiyear investment horizon.
Bulls Say
- Heineken is the only truly global premium brand. It is the second-best-selling import beer
brand in the U.S. and among the top 10 beer brands in the world.
- Heineken is well positioned to benefit from the global premiumisation trend. The global consumer trade-up should allow Heineken to grow at a faster clip than the beer industry.
- Heineken is the global leader in cider, a category that is growing at a rate 2.5 times faster than beer.
Bears Say
- Heineken's biggest market, Western Europe, is in secular decline and the pricing environment is flat to slightly deflationary.
- Heineken is not as profitable as its larger competitors. Its underlying operating margins trail those of AB InBev and SABMiller.
- Despite its recent acquisition of Asia Pacific Breweries, Heineken is widely underindexed in the growing Asian market.
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