Little room for manoeuvre
We expect little positive newsflow from the brewers on 1Q09. They are losing the
top-line battle, cost savings will be harder to come by and high debt levels will
dictate management priorities in the near term. We prefer to buy AB-InBev, as we
see it as best placed to ride out the storm, and Heineken, as expectations are low.
Key recommendations & forecasts
Reuters  Year end  Recom  Price   Target
price
  EPS
1fcst *
  PE
1fcst*

AB-InBev INTB.BR Dec-09 Buy €22.54 €26.50%  2.20 13.4
Carlsberg CARLb.CO Dec-09 Sell DKr252 DKr170%  22.60 11.2
Heineken HEIN.AS Dec-09 Buy €21.11 €27.00&  1.94 10.9
SAB Miller SAB.L Mar-09 Hold £10.74 £10.00&  1.23. 12.7
*Calendarised 2009F
Source: Company data, ABN AMRO forecasts
The brewers are losing the top-line battle
The major risk for the sector remains the depth and length of the consumer slowdown and
the significant top-line and margin pressure caused by falling volumes. Volume weakness
has accelerated and we expect the recent momentum from price rises to fade as we move
through 2009. Further price increases and mix benefits will be harder to achieve in an
increasingly deflationary environment. We note that beer has seen real price deflation in
Europe for over a decade.
Cost savings are harder to come by
Brewers have long used cost saving as a way of driving margin growth. The risk is that few
opportunities of significant scale remain. Falling raw material costs offer some relief in 2009
but the benefit may be delayed or offset by hedging and the dollarisation of costs. Recent
significant capex investment, mainly in emerging markets, will serve to exacerbate the hit to
profitability, though arguably it should also encourage a more speedy recovery.
High gearing levels should dictate near-term management priorities
The series of large acquisitions that took place in 2008 has led to significantly increased
gearing for three of the four main brewers. Only SABMiller sat out the acquisition spree and
now finds itself with substantially lower leverage than the peer group. Given the wider
economic climate, all of the brewers have indicated an increased focus on cash flow
generation in order to address their debt burdens. Squeezing working capital and capital
expenditure help remedy today’s issues but risk storing up problems for later.
AB-InBev and Heineken are our top picks
The European beverages sector has been flat on a three-month basis in absolute terms,
although beer has outperformed spirits. The brewers now trade on an average FY10F PE of
10.1x on our estimates. With the scale of absolute share price performance likely to be
determined by broader market movements and sector rotation, we have focused on selecting
stocks we expect to deliver sector-relative outperformance. Our key buys continue to be ABInBev
and Heineken, we have a hold rating on SABMiller and a sell rating on Carlsberg.
Contents
Slowdown leads to a structural squeeze 3
The key risk remains the extent of the slowdown and the resulting pressure on both
the top line and on margins. The beverages sector has underperformed the recent
market rally though beer has outperformed spirits and the spread between beer
stocks has narrowed.
Heavy pressure on top-line growth 5
With consumer demand weakening and the pricing environment increasingly
deflationary, the brewers are facing significant top-line pressure.
Relief on input cost; fewer options elsewhere 8
Brewers have long used cost saving as a way of driving margin growth. The risk is
that few opportunities of significant scale remain. Falling raw material costs offer
some relief in 2009 but the benefit may be delayed or offset by hedging and the
dollarisation of costs.
Balance sheet restructuring opportunities 10
High debt levels following acquisitions have weighed heavy on several of the
brewers. Deleveraging may involve asset disposals and present opportunities for
others in the sector to pick up assets. Refinancing risk has reduced though interest
costs are rising.
Company profiles
AB-InBev 11
Carlsberg 17
Heineken 23
SABMiller 29
2