Big Beer’s stumbles leave investors ice cold
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Aimee Donnellan
LONDON, Aug 14 (Reuters Breakingviews) -Investors are reluctant to toast big brewers’ rising profits. Despite their improving bottom lines, the valuations of Carlsberg CARLb.CO, Budweiser owner Anheuser-Busch InBev ABI.BR and Heineken HEIN.AS have declined. Overly optimistic statements and questionable deals are partly behind the scepticism. Unless CEOs can show top line growth and sensible acquisitions in emerging markets, shareholders will not raise a glass to their success.
Dolf van den Brink could be forgiven for pouring himself a stiff drink on July 29. That day, Heineken’s CEO delivered a 6% rise in sales and a near 13% increase in operating profit in the first half of the year, as well as offering improved guidance for the full year. But the shares fell nearly 8% and haven’t recovered since. After Tuesday’s results, Carlsberg boss Jacob Aarup-Andersen may also be wondering why the Danish brewer’s valuation has plummeted from over 24 times its expected profit in 2019 to just 14 times today. Carlsberg also lifted its guidance on full-year operating profit growth for 2024 to a range of 4% to 6% from 1% to 5% previously.
The problems are partly self-inflicted. Analysts were disappointed by Heineken’s results after van den Brink had talked up market share gains in Europe and price increases in June. But cooler weather affected Heineken’s performance, while an expected boost from the European football championship and the lead-up to the Olympics did not materialise.
At Carlsberg, shares have plunged 15% since June, when Aarup-Andersen announced a plan to buy J2O maker Britvic BVIC.L for $4 billion. Analysts reckon shareholders are concerned about an expansion into the UK rather than faster-growing emerging markets.
The problem is that sales are not growing fast enough. But some of the reasons for that, like Europe’s rainy weather, are beyond the CEOs’ control. One option for Carlsberg is to try to win market share in countries like India and central and eastern Europe where revenue growth nearly hit 9% in the six months ending June 30. That’s far stronger than the 1.3% growth in Western Europe. Similarly, much of Heineken’s revenue growth comes from countries like Vietnam, Brazil, India and Mexico.
Deals are another option. Carlsberg has the balance sheet to do them because net debt is just 1.5 times its EBITDA. Heineken could make the case for a small acquisition as it operates with net debt of around 2.4 times EBITDA. But if they shop in the wrong location, their valuations may remain as flat as old beer.
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CONTEXT NEWS
Danish brewer Carlsberg on Aug. 13 lifted its forecast for full-year operating profit growth despite reporting weaker-than-expected sales in a second quarter hit by bad weather.
The company said it now expected full-year organic operating profit growth of between 4% and 6%, up from its previous range of 1% to 5%.
Heineken shares slid almost 8% on July 29 after an expected sports-led boost for beer sales failed to materialise. The Dutch brewer also took an 874 million euro impairment charge on a Chinese investment.
The maker of Europe’s top-selling lager reported a 12.5% rise in operating profit for the first six months of the year, below the 13.2% growth forecast by analysts, according to a company-compiled consensus. Its first-half revenue and volumes also came in slightly below expectations.
Heineken now expects organic operating profit growth of between 4% and 8% in 2024. That’s an increase to the bottom end of its previous guidance of between low and high single-digit growth but still below the 8.2% growth analysts expect, according to forecasts compiled by LSEG.
Shares in Carlsberg were up 0.12% by 0731 GMT on Aug. 14.
Graphic: Big brewers’ valuations are under pressure https://reut.rs/46NgeDI
Editing by Francesco Guerrera and Oliver Taslic
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