Comment - SABMiller Shows Signs of Life

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SABMiller has injected some much-needed confidence into the global beer industry, but demand for its beers remains patchy amid economic uncertainty in key markets.

Analysts have lauded SABMiller for bucking the trend of disappointment in the recent spate of result for big brewers. Operating profits rose in double-digits for the six months to the end of September and the Peroni brewer's share price duly rose by nearly 5% today (18 November).

Is this an emerging markets story? It's true that SABMiller relies on so-called developing markets more than its rivals. But, it is important to note that SABMiller's half-year gains have been primarily led by cost savings, lower raw materials costs and beer price increases - in North America as much as anywhere else - while global beer volumes crept up by just 1%.

In short, the group's half-year results demonstrate that you don't always have to sell more beer to make money.


This model will not work over the longer term, however.
While lower costs and pricing will likely continue to buoy the brewer in the second-half, consumer demand for its beer remains decidedly patchy around the world, as the group conceded today. It is planning to raise advertising spend behind its beer brands, yet it remains to be seen how quickly consumer demand will recover.

Central & Eastern Europe, which is the brewer's third most important region in terms of annual profits, is of particular concern. This region dragged SABMiller's Europe-wide beer sales down by 5% in volume for the half-year, which puts into context the gains for Peroni Nastro Azzurro in the UK, strong as they were. SABMiller's earnings before interest, tax and amortisation (EBITA) fell by 7% in Europe, making it the only one of the group's regional divisions to report a drop in earnings.

SABMiller's CEO, Graham Mackay, did not exude confidence on the Eastern Europe business during today's results call with journalists. He hinted that there are not many more costs that SABMiller can take out of the division, having already "dramatically cut costs" in the region. The brewer has put its faith in marketing and promotion spend, but Mackay said that it is seeing consumers "reverse" out of beer and back into local spirits, which tend to be cheaper per drink.

Over in Latin America, which accounts for 30% of group profits, Mackay said that its beer operations were set back by around two years in its premier market, Colombia, due to a tax hike earlier in the year. Volume sales in Latin America were saved by Peru, however.

Despite the pressure on volumes, there are several reasons why they will probably improve moving into calendar 2011. From next year, both Colombia and Russia will begin to cycle tax rises, while the US will benefit from easier comparisons. Added to this, beer sales in Asia and Africa remain strong. So, expected improvements in volumes should complement planned price increases.

In weighing up SABMiller's potential over the next 12 to 18 months, the elephant in the room is acquisitions. A big deal could change the game and SABMiller has the resources at its disposal. Mackay told just-drinks today that the brewer is looking at opportunities but will not overspend.

If Anheuser-Busch InBev can be likened to the Real Madrid of brewing, then SABMiller is a Manchester United. Generally, it has preferred organic growth and investment in youth. However, after watching the birth of Anheuser-Busch InBev and Heineken's swoop for FEMSA Cerveza, surely SABMiller would hope to buy soon?

After all, it doesn't have Manchester United's debt.

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