* SAB substantially improves ABI’s growth outlook – We believe ABI+SAB will
sustain 10-11% EPS growth in the medium term (2017-19), underpinned by cost
synergies, and ~10% in the longer term, because of the strategic benefits of the
deal. This compares to about ~5% for ABI stand-alone, it is quite a bit better than
what we forecast for most blue chip staples (~8%) and is not fully reflected in
valuation in our opinion.
* 19% EPS deal accretion by 2020, on our estimates – We have updated our ABISAB
combination, assuming 3% coupon, $300m EBIT benefit from revenue
synergies (over 5 years), $1bn cash flow synergies, disposals of Snow and Efes
stakes (in addition to MillerCoors). We doubt there is much upside to the cost
savings target of $2bn ($1.4bn + SAB cost savings), which represents about 13% of
SAB FY16E subsidiary sales.
* Compelling long-term prospects – We expect very good earnings growth (~10%)
even after the cost savings have been delivered. On our estimates, by 2020: (1)
Africa and emerging Asia will represent close to 20% of group profit vs 3% today;
(2) ABI’s tax rate should have normalized at 25-27% (until then, the drag from tax
on EPS is ~1.5% p.a.); (3) ND/EBITDA should be back to ~2.5x, ready for another
deal or a large buy back. Moreover (4) there are significant mix opportunities for the
long term in most of ABI’s markets and SAB’s.
* The growth outlook isn’t fully reflected in valuation, in our view – On ~24x 12-
month forward PE, ABI trades at a 13% premium to global blue chip staples (Citi
est), but next year’s earnings don’t capture the benefits of the deal. Our new €129
target assumes the stock re-rates to a 20% premium to peers, in light of (1) ABI’s
stronger profit growth outlook and (2) mgt’s track record in consistently driving
shareholder value (confirmed by this deal). ABI share are up 762% since Jan-04,
outperforming the EuroStoxx every year except 2008 and 700% in total.
* What’s new in this report? – We address aspects of the deal yet to be clarified (1)
potential regulatory hurdles and disposals, (2) revenue synergies, (3) potential to
involve AmBev (unlikely, in our view), (4) bottler partnerships, (5) ABI’s dividend.