UK & South Africa: SABMiller stock lost 25% in few weeks

Just a few months ago, SABMiller was one of the world’s favourite stocks, and then on May 10, the Federal Reserve, the US central bank, said a few hawkish things about interest rates. That triggered a sell-off of stocks, particularly in emerging markets, where SABMiller maintains a number of key operations, not least in South Africa and Colombia, Moneyweb informed July 11.

Investors dumped SABMiller’s stock like hot bricks; the stock declined from 1 200 pence a share (an all time record) early in May to less than 950 pence, a loss of more than 25% in just a few weeks. But this is not a group that hesitates when the stock price declines; this is one of the world’s leading brewers with brewing or distribution agreements in over 60 countries, across five continents. The stock is quoted in pence, following its primary listing on the London Stock Exchange; it maintains a secondary listing in Johannesburg, the city of its roots.

SABMiller had become something of a darling of the international investing community, after it showed early signs of turning its Miller acquisition in the US, something cynics had long declared to be a lost cause. But the action never seems to stop at SABMiller; earlier this year, the group, which traces its roots back to South Africa, was given a kicker by its new $7,8bn Bavaria acquisition, based in Bogotá, Colombia.

Global equity markets have remained wobbly since May 10, but SABMiller’s professional fans are still very much intact. As recently as mid-May, JPMorgan Securities, one of the world’s top investment houses, said SABMiller had posted full-year 2006 results (to March 31) ahead of expectations. It had also reported a robust trading performance for the first quarter of the year.

JPMorgan set a 1180 pence per share target price for SABMiller, and echoed a number of other professional investment houses in continuing to rate SABMiller as a stock to “overweight”. The lights may be flickering for emerging markets, certainly for the meantime, but at SABMiller, it’s business as usual. Last week the group announced a $1,75bn debt refinancing, which will enable the group to meet debt reduction targets over the next few years. Group debt rose to as much as $7bn following the acquisition of Bavaria.

Last week also, “the second-largest US brewer, Miller Brewing”, said its parent company, SABMiller, bought the Sparks and Steel Reserve brands for $215m in cash, marking the group’s move into the caffeinated alcoholic beverage market. Sparks leads in the US caffeinated alcoholic malt beverage category, boasting a compound annual growth rate of 107% for 2003-2005.

Beyond the wobble in emerging markets, there has also been some concern over the intentions of Altria, which now holds, from the original sale of Miller, some 28% of SABMiller. This issue galvanised investors last week with the so-called Engle tobacco lawsuit, a multi-billion dollar class action, finally concluded in favour of Altria. This triggered speculation that Altria was now ready for breaking up in an orderly manner, but analyst believe that it will be months before any final decision is made on Altria’s SABMiller stake.

Given that it would also make sense for Altria to be patient to let the emerging markets concern to be sweated out of SABMiller’s stock price, there is unlikely to be an overhang of SABMiller stock in the market in the foreseeable future. If SABMiller’s stock price reverts to pre-May 10 trends, it could hold good rewards for investors. Earlier this year, CSFB, noting that emerging-market discretionary consumption growth could be as high as 10% a year on a trend basis, named key beneficiaries as SABMiller, Diageo, Unilever, Nestle, InBev and Nokia. Each of these enjoys more than 25% revenue from emerging-market consumers.

In the broader sense, SABMiller counts among its rivals InBev, Pernod Ricard, Anheuser-Busch (makers of Budweiser), Diageo, and Heineken. In the annual report released this week, the chairman and CEO promised “further progress” and “further successes” this financial year.

E-malt.com, the global information source for the brewing and malting industry professionals. The bi-weekly E-malt.com Newsletters feature latest industry news, statistics in graphs and tables, world barley and malt prices, and other relevant information. Click here to get full access to E-malt.com. If you are a Castle Malting client, you can get free access to E-malt.com website and publications. Contact us for more information at marketing@castlemalting.com .