Miller Genuine Draft brewer SABMiller impresses with H1 profits

SABMiller impressed investors yesterday (17 November) with solid rises in sales and profits in its first-half, but some observers have since taken a more sobering view.

SABMiller's share price shot up by 5% after it reported that net sales rose by 4%, excluding currency gains, and earnings before interest, tax and amortisation (EBITA) increased by 13% for the six months to the end of September.

However, the performance was driven by cost savings, lower raw materials costs and higher beer prices. Global volume sales only increased by 1%, with declines in the US, Europe and also Latin America during the period.

By-and-large, analysts and media welcomed SABMiller's results as a much-needed confidence boost for the beer industry. The Financial Times said that SABMiller's outlook was markedly different to Carlsberg's "gloomier prognosis" last week.

Sanford Bernstein analyst Trevor Stirling said that SABMiller's results were "broadly in-line" with his expectations and he expects further growth. "Following yesterday's strong set of results, SABMiller closed the [share trading] gap with its peers in just one day," said Stirling. "We reiterate our positive stance on SABMiller," he added. Most observers agreed that SABMiller is fairly well hedged against any increases in the price of barley.

In the group's South African heartland, the firm achieved a 3% rise in volumes, suggesting it is holding off competition from Diageo and Heineken. The local Independent newspaper reported that the result was achieved via "a more aggressive strategy, primarily focused on marketing, which was launched by SAB 18 months ago".

The media in the UK, meanwhile, swooned over continued growth for SABMiller's high-end lager division in the country. "While the UK lager market shrank over the period, SABMiller's volumes grew by 25%, led by sales of its premium brand Italian beer Peroni Nastro Azzurro," chimed the Daily Telegraph.

However, a glance at SABMiller's geographic mix shows that the UK serves as a mere footnote in the brewer's profits. Latin America contributes around 30% of annual earnings, Central and Eastern Europe contributes around 16%, North America 15% and South Africa, the old homeland, around 21%, according to figures from Sanford Bernstein.

Just as for the UK, these figures also add some context to SABMiller's strong volume gains in Asia and Africa (excluding South Africa) during the half-year. These two regions account for 2% and 13% of earnings respectively. Meanwhile, SABMiller's volumes fell in three of its most profitable markets during the six months.

As the hours passed, some observers have begun to focus on this aspect of the performance. The Wall Street Journal's Renee Schultes said: "Despite remarkable growth from its Asian and African operations, its earnings are forecast to grow roughly in-line with the rest of the sector. Blame that on low Asian margins and disappointing sales in Eastern Europe." Schultes said that SABMiller's share price looked to be trading at the top of its range.

Several analysts agreed with SABMiller's own assertion, however, that volume sales, while still patchy, are improving. "The three months to September saw SABMiller deliver its best organic volume growth performance (+3%) for 11 quarters," said Evolution Securities in a note today.

Evolution said that the management was "oozing quiet confidence" during an investment lunch yesterday. "Our forecasts anticipate an acceleration in volume, sales and EBITA margin growth in H2 and into  fisal 2012," the analyst group said.

Interestingly, Evolution added that it believes SABMiller's plan to launch a global IT system across its operations could yield as much as double the US$300m in annual savings detailed in the company's official guidance. Full savings will not come through until fiscal 2014.  

SABMiller's story looks positive in the near-term, then. The company will, however, want to see the volume momentum firming up in the coming months. It also faces a significant challenge in Central & Eastern Europe.