Beer M&A; weather considerations in beer and soft drinks
* 3Q outlook
In this report, we preview the upcoming calendar 3Q15 beverages results. On 8 September, we revised our estimates; updating for recent forex and macroeconomic volatility (Revisiting FX). We expect mixed 3Q reporting across the space with key themes: Beer M&A, mixed weather impact, emerging market (EM) macroeconomic and currency volatility, and improving momentum in spirits. In US soft drinks, strong pricing continues and KO remains our key Buy (USD 53 TP), given a strong self-help story.* Spirits slow earnings recovery, pressure for corporate activity at Diageo
In spirits, Diageo (Buy, 2,000p TP) has already confirmed robust underlying trading in the first two months of the fiscal year, we still see pressure for the company to create value by spinning off either beer or Reserve Brands, although we now think a merger deal with SAB is unlikely. For Pernod (Buy, EUR 110 TP), we do not regard 1Q a key positive catalyst but we still see medium-term upside potential, in both spirits recovery and the opportunity for Cuban Rum in the US.
* Beer – largely M&A-driven
With the end-game in beer consolidation becoming visible (see our note: Bringing a Brahma to the brai), M&A is the key focus of the beer sector. We expect mixed 3Q reporting; Constellation (Neutral, USD 130 TP) will likely report strong beer shipments vs soft comps, while we see improving momentum into 3Q at Heineken (Neutral, EUR 72 TP) given easy comps in Europe and favourable weather. ABI (Neutral, EUR 103 TP), SAB (Buy, 4,000p TP) and Carlsberg (Neutral, DKK 525 TP) will likely be negatively affected by EM macroeconomic and forex volatility. Given poor weather in GB, we have cut our F16E EBIT for C&C Group to EUR 109m (vs consensus of EUR 114m). For TAP (Neutral, USD 82 TP), the opportunity to buy out the 58% stake in MillerCoors from SAB remains in focus; however, we believe benefits are largely in the share price.
* Soft drinks – weather variations
Britvic (Buy, 830p TP) is due to report its F15 results on 25 November. Although GB trading in fiscal 4Q will likely be held back by unfavourable weather, the company is cycling easy comps in 4Q and we see limited risk to F15 EBIT guidance of GBP 164 to GBP 173m (NE: GBP 169m). Although we remain cautious on Coca-Cola Hellenic (Reduce, 1,250p TP), we expect the company to report a strong 3Q helped by good weather in central Europe and soft comparatives. KO remains our key Buy (USD 53 TP), given a strong self-help story; we maintain our Reduce rating on PEP (USD 81 TP).