2023-07-14 08:28:33 ET
Summary
- CCU has been facing challenges after a series of margin contractions last year due to its inability to pass on input cost inflation to consumers.
- It embarked on its HerCCUles strategy which has shown visible results as its EBITDA margin has continued to improve.
- CCU remains a play on resilient and improving volumes along with margin recovery due to lower packaging costs and better pricing.
- Despite a 34% uptick in the share price, we remain positive on CCU as it still trades at 7.5x EV/ EBITDA. Initiate at Buy with $20 target price.
Investment Thesis
Compania Cervecerias Unidas (CCU) is one of the largest diversified beverage player in Latin America with presence across beer, wine, mineral water and soft drinks segment. It is Chile's largest brewer by volume and #2 brewer in Argentina as well as Pepsi's sole bottler and #2 wine producer in Chile. It suffered significant volume and margin pressures last year as it was unable to pass on the cost inflation to the consumers and that significantly impacted its profitability. However, it is on course of margin recovery along with resilient volumes as we head into the back half of the year. We believe the momentum remains strong and the stock remains a Buy at 7.5x EV/ EBITDA.
Earnings and Momentum
CCU reported solid Q1 results ahead of the consensus estimates with consolidated revenue growing about 5% YoY on the back of pricing improvements partially offset by decline in volumes across the board. Despite volumes declining 1% and 8% YoY in Chile and International business respectively, strong cost absorption and better pricing helped CCU to deliver sales growth of over 6% and 5% respectively. The volume numbers demonstrates resilience as it comes on the back of tough comps where in Q1 2022 volumes in Chile and IB grew 8% YoY. Wine continued to be a laggard with volumes down 18% YoY due to decline in exports and inventory adjustments and it is expected to be performing weaker going forward. Resilient sales along with lower packaging costs helped them to boost up its EBITDA margins by a record 250 bps sequentially and surprising the Street demonstrating the fruits of the HerCCUles Strategy 2013 that the company had embarked upon recently.
Continued and Strong EBITDA Margin Improvement
Going forward, we expect volume recovery to be strong in Q2 supported by strong beer volumes in Chile along with continued recovery in the soft drink volumes. Mix of premium beer continues to trend near 40% after several years of disruption and above the pre-pandemic levels which remains a positive. We expect EBITDA margin to improve in Q2 and Q3 significantly as it faces favourable comps in Chile (EBITDA margin in Q2 2022 declined 729 bps due to weakness in Chile) along with stronger pricing impact, lower packaging costs partially offset by weakness in wines and sticky commodity costs specially sugar.
Valuation
CCU currently trades at just 7.5x EV/ EBITDA, a third of a discount to its peers. We believe given the volume resilience, improving pricing mix and lower packaging costs would bode well for the company moving forward in 2023 and 2024. We initiate it at Buy with a target price of $20 (at 9x EV/ EBITDA to factor in its exposure in emerging economies)
As per Seeking Alpha Quant Rating, CCU is a strong buy driven by earnings momentum and revisions along with growth trajectory.
Risks to Rating
Risks to Rating includes
1) Any change in macroeconomic environment that could lead to trade down or significantly impact consumer spending due to recessionary pressures / inflationary headwinds
2) Higher commodity prices particularly sugar prices that could have a significant impact on the gross margins. Sugar Futures have significantly increased in last 6 months and are currently at 11-year high, although have pared some of its gains, but still remains significantly higher and can continue to remain at elevated levels due to extreme weather and lower production.
Sugar Futures YTD
3) Any change in political environment in Chile which had witnessed a series of protests in last couple of years
4) Fx movement could significantly impair the earnings as it operates in highly sensitive emerging economies such as Argentina who has seen wild movements in its currency
USD to Argentina PESO Fx Movement
Conclusion
We believe CCU is on course to have a resilient sales momentum and margin recovery after a series of margin pressures as a result of the volatile economic environment in last year. Volume recovery along with lower packaging costs and cost absorption would lead them to sustain its EBITDA margin. Despite rising 48% in last one year, we believe at 7.5x EV/ EBITDA the stock is still cheap and could be a buy on dips opportunity as we head strongly into the second half of 2023 and on to 2024.
For further details see:
Compania Cervecerias Unidas: A Buy Despite 34% YTD Returns