Questor share tip: Hold SABMiller now it has greater focus

SABMiller
£33.55-42.5p
Questor says HOLD

SABMiller’s [LON:SAB] sale of its stake in South African hotel and casino chain Tsogo Sun looks like a sensible move. The world’s second-biggest brewer can use the $1.09bn (£624m) from the deal to drive growth and investor returns in more attractive markets.

The 39.6pc Tsogo Sun stake has been on the chopping block for some time, and was a legacy from the days when brewers often had interests in hotels and casinos. The obvious comparison is UK-based Diageo, which itself was once part of the sprawling Grand Metropolitan conglomerate that had interests in food, hotels, casinos and brewing.

The move by SABMiller, following the completion of a strategic view, is a natural progression rather than a forced sale or exit from the South African market. The company wants to focus purely on drinks.

The loss of Tsogo Sun will result in only a minor adjustment as it formed a very small part of the overall group. Tsogo Sun generated revenue of $370m and operating profits of $123m in the 12 months ended March 2014. That is less than 2pc of the total SABMiller’s revenue of $26.7bn and operating profits of $6.45bn.

The sale comes at a good time for SABMiller. Revenue and profits at its gaming and casino operation declined by about 8pc in the past year, yet the price fetched for the Tsogo Sun stake was still fair at about 10 times operating profits.

SABMiller needs the cash to focus on growth elsewhere. Group sales have slowed over the past two years due to competition in emerging markets and a weak European environment.

Drilling down into the detail, growth in the amount of beer sold is slowing, while it has proved difficult to pass on price increases during the previous two years, analysis from broker Investec shows.

The brewer’s fastest growing markets are Latin America and Africa. Analysis shows that while profit growth has been largely stagnant in South Africa during the past five years, the best opportunity has been in Latin America and the rest of Africa, where profits have increased in the past four years.

Europe remains a tough place to be, as growing populations and the rise of the middle class in countries such as Brazil and Nigeria make these areas more attractive. The world’s three biggest brewers have seen profit margins in Europe steadily fall over the past four years.

SABMiller suffered a 4pc drop in European lager sales last year. In Poland and the Czech Republic, an economic slowdown and poor weather have sparked a slump in sales. Meanwhile, in more mature markets such as the UK established big-brand lagers are facing increased competition from a craft beer revival.

SABMiller is fighting back by launching a pilot scheme to import unpasteurised tank beer from the Czech Republic to the UK within 24 hours. However, this increase in innovation is hitting operating profits, which slumped 10pc last year across Europe.

SABMiller’s markets in the US, Africa and Latin America all increased profitability last year. Combined, these three markets make up the lion’s share, about two-thirds, of group profits.

Questor thinks the sale of the Tsogo stake is a good decision. However, the shares are trading on 22 times forecast earnings per share and still looking a bit expensive given forecast earnings growth of about 10pc.

This is a quality share for the long term, and the strategy should be supported by yesterday’s announcement, but it is a hold at these prices.