The oldest brewer in Brazil reported its first quarter fiscal 2017 early this month. The $88 billion brewer reported 2.8% sales decline to 11.2 billion Brazilian real and a poor 20.5% profit decline 2.2 billion real, representing 19.6% margin vs. 23.9% back in first quarter fiscal 2016.
Despite declining profits, Ambev SA ADR (ABEV, Financial) shares went up 2.21% post earnings release.
Total returns
Ambev SA ADR has returned double the S&P 500 index so far this year with 15.7% total gains vs. 7.2%. In the past five years, however, the brewer returned just 1.04% gains vs. the index’s 15.4%.
Valuations
Ambev SA ADR carry a premium compared to its peers. According to GuruFocus data, the company had trailing P/E ratio 25.8 times vs. industry median 22.9 times, P/B ratio 6.5 times vs. 2.15 times, and P/S ratio 6.8 times vs. 2 times.
The brewer also had a trailing dividend yield of 1.94% with a 47% payout ratio.
Average 2017 sales and earnings per share indicated forward multiples of 6 times and 24.6 times.
Ambev SA
According to filings, Ambev SA or Ambev is the successor of Brahma and Antarctica, two of the oldest brewers in Brazil. Antarctica was founded in 1885. Brahma was founded in 1888 as Villiger & Cia.
However, the legal entity that has become Ambev SA, the current NYSEĂ‚Â and BM & FBOVE SPAĂ‚Â-listed company, was incorporated on July 8, 2005 as a nonĂ‚Âreporting Brazilian corporation under the Brazilian Corporation Law and is the successor of Old Ambev.
Ambev is the largest brewer in Latin America in terms of sales volumes and one of the largest beer producers in the world, according to company estimates. The brewer currently produces, distributes and sells beer, carbonated soft drinks and other nonĂ‚Âalcoholic and nonĂ‚Âcarbonated products in 18 countries across the Americas.
Ambev is also one of the largest PepsiCo independent bottlers in the world, where its contract is set to expire in December 2017 but expected to be renewed for another 10 years.
In fiscal 2016, Ambev generated 63.4% of its sales in North Latin America (Brazil, Central America and the Caribbean), 22.4% in South Latin America and 14.2% in Canada.
Ambev conducts its operations through three business segments: Latin America North, Latin America South and Canada.
Latin America North
Latin America North includes Ambev’s operations in Brazil and Central America and the Caribbean operations that currently include its operations in the Dominican Republic, Saint Vincent, Antigua, Dominica, Cuba, Guatemala (which also serves El Salvador, Honduras and Nicaragua) Barbados and, after Dec. 31, Panama.
In fiscal year 2016 (1), sales in Latin America North declined by 2.5% to R$28.9 billion—63% of total unadjusted Ambev sales, and had a profit margin of 30.4% (most profitable of the three segments).
Latin America South
Latin America South includes operations in Argentina, Bolivia, Paraguay, Uruguay, Chile and, prior to Dec. 31, Colombia, Ecuador and Peru.
In 2016 (1), sales in the segment fell by 9.3% to R$10.2 billion—22% of total unadjusted sales, and delivered a 24.4% profit margin vs. 19.3% in 2015.
Canada
The Canada segment is represented by Labatt’s operations, which includes domestic sales in Canada and some exports to the U.S. market.
In 2016 (1), sales in Canada grew 11.2% to R$6.5 billion—14% of total unadjusted sales, and delivered a 27.6% profit margin vs. 28.7% in 2015.
Overall, Ambev had three-year sales growth of 9.4%, profit growth of 9.6% and profit margin average of 28.6%.
Cash, debt and book value
As of March, Ambev had R$7.23 billion in cash and cash equivalents, and R$5.13 billion in debt with debt-equity ratio of 0.11 times vs. 0.12 times back in December 2016.
Forty-four percent of Ambev’s R$80.7 billion assets were goodwill and intangible assets while it had a book value of R$48.7 billion compared to R$46.7 billion in December.
Cash flow
In the first quarter, Ambev recorded R$2 billion in cash flow from operations compared to R$2.2 billion in cash outflows in the same period last year. As observed, the brewer logged higher cash flow from its receivables, inventories, payables and far lower income taxes paid compared to last year therefore aiding the company generate positive cash flow.
Capital expenditures, including purchase of intangible assets, were R$560 million leaving Ambev with R$1.43 billion free cashflow in the quarter compared to R$2.92 billion outflows same period last year. Of the free cash flow, 82.8% was allocated to share buybacks and dividends in the first quarter. On average, Ambev allocated 99.8% of its free cash flow in dividends and buybacks in the recent three fiscal years.
In addition, Ambev allocated R$677 million in debt repayments, net any borrowings.
Conclusion
Ambev exhibited reduced business growth in the first quarter. In addition, the Brazilian brewer would have represented a modestly attractive balance sheet—minimal debt and growing book value—if not for heavy amount of blue sky elements—goodwill and intangibles—mixed in its assets.
Nonetheless, the company has been very generous to its shareholders, spending all of its free cash flow in dividends and share buybacks in recent years.
Meanwhile, seven analysts have an average price target of $6.2 per Ambev ADR share—9.5% upside from today’s share price of $5.66. Using three-year sales growth and P/S multiple averages followed by a 30% margin would indicate a value of R$218.8 billion or 25% downside from Ambev’s current market capitalization in the Brazil stock exchange.
In summary, Ambev would be a hold with $6 per share value.
Notes
(1) Me: I would really like to summarize Ambev’s first quarter per segment results, but figures, brief explanations, and my simple math skills cannot determine how the brewer reported its segment information for the recent quarter.
Read Ambev’s quarterly report on this link
For example, adding net sales figures per segment LAS, CAC and Canada for first-quarter 2017 did not sum up to the consolidated figure provided and reported by Ambev. Where would the remaining billions of sales should be derived from then?
Disclosure: I do not have shares in Ambev SA (ADR).
