Anheuser-Busch InBev

Extract from Portfolio Manager Commentaries – June 2023

Anheuser-Busch Inbev (ABI) is the leading global brewer. A disappointing recent performer, it is nonetheless fundamentally attractive as a brewer: beer is a great business, with returns rewarding scale. The global industry is heading for oligopoly, with ABI and Heineken the protagonists in most markets. Competition is rational. ABI has seen some poor years and its earnings base is very depressed. This is a combination of the heavy debt burden following the SAB take-over in 2016, some own goals with execution, and then a litany of macro woes: first covid, then currency blow-outs and then spikes in commodity input costs. The core of the investment case hinges on margin normalization, as these costs abate and as front-line pricing gradually catches up with them. We are also finally getting to the end of the period of over-indebtedness. ABI has long been criticised for not being consumer-centric enough, placing at risk its long-term compounding potential. There has been some heartening evidence that internal behaviour has been changing for the better; and since mid-2021 this was borne out by better revenue traction. Most unfortunately, in early 2023 the company experienced a marketing mishap in the United States, its single most important market. This event, and management's ham-fisted handling of the crisis, has seen a large, and likely permanent, value loss in the US business, partly because investors now question whether the cultural transition can be believed. Even at group level the loss is not insignificant, being of the order of 10% of the company value. The stock contracted much more than that. We believe that a significant margin of safety remains and that the earnings cycle is currently at its nadir. As cyclical cost pressures recede and the many powerful non-US businesses of the group continue to deliver credible growth, we should see simultaneous delivery of earnings and an expansion of the currently tarnished rating. This makes ABI a compelling investment, if a higher heart-beat one than it was before.