Global beer giant SABMiller (LSE: SAB) — owner of Grolsch and Peroni — trades on a lofty valuation, and has also just lost its highly regarded chief financial officer.
Should UK investors stick with the FTSE 100 firm or look overseas to alternative heavyweight brewers Heineken (NASDAQOTH: HINKF.US), and Budweiser and Stella Artois group Anheuser Busch Inbev (NYSE: BUD.US)?
Last week, SABMiller announced that finance chief Jamie Wilson had “tendered his resignation for personal reasons” and “steps down from the Board with immediate effect”.
The news came as a shock to industry watchers, although, with hindsight, there was perhaps a whiff of something in the air three weeks ago when Wilson exercised an option to purchase company shares and immediately sold the lot for a net profit of £390,318. His previous practice on such occasions had been to sell only enough shares to cover tax liabilities and suchlike.
SABMiller chief executive Alan Clark said: “I am saddened by Jamie’s departure. He has been a huge support to me over many years, first in Europe and then over the past several years as CFO”. Indeed, Wilson has been a key figure in the success of the world’s number two beer group, which today trades on a rich valuation: 21.6 times forward 12-month earnings at a share price of £36.
The principal executive directors at Heineken and Anheuser Busch Inbev (AB Inbev) have been with their respective firms for 35-plus years, and carrying out their chief exec and finance boss roles for a decade or more.
Heineken, the world’s number three beer company, trades on a forward 12-month P/E of 19.7 at a current share price of €67.22 (in Amsterdam) and $38.63 (in New York, where two Heineken US “ADRs” represent one ordinary Heineken share).
World number one AB Inbev — whose turnover exceeds that of Heineken and SABMiller combined — trades on a P/E of 22.4 at a current share price of €107.95 (in Brussels) and $123.57 (in New York).
It’s clear, then, that while there’s some variation in the P/Es, all three companies are very highly rated (the long-term average P/E of the FTSE 100, for example, is just 14). To put the current ratings into further context, when I looked at the brewers back in October 2011, the P/Es were: SABMiller 15.3, AB Inbev 13.3 and Heineken 11.9.
So, we’ve seen a hefty re-rating of the whole sector, with SABMiller benefiting a little less than its rivals.
Why are the shares of these companies currently so in demand with investors? Well, the 10% or so annual earnings growth expected from them in the next couple of years looks very attractive at a time when a lot of industries are finding growth hard to come by. Also, it appears prices have been bid up on the potential for M&A activity in the sector.
Last September, SABMiller made a takeover approach for Heineken, which was rebuffed in no uncertain terms, with the controlling Heineken family making clear its intention to “preserve the heritage and identity of Heineken as an independent company”. Heineken’s stance rekindled what has long been mooted as the obvious megadeal in the sector: namely, for AB Inbev to swallow SABMiller.
Putting it all together, I’m not convinced UK investors have much to gain from deserting the FTSE 100 brewer for one of its overseas-listed rivals at this stage. All three companies are highly rated, and there appears little prospect of their share prices appreciating much beyond the rate of earnings growth, because their P/Es surely can’t go a great deal higher.
SABMiller looks the one company that could give its shareholders an exceptional return from here, purely on the basis of a takeover bid. Boardroom upheavals often provide a fertile environment for an approach, and the shock exit of SABMiller’s finance chief might just be a catalyst for AB Inbev to swoop.
I’m not going to be buying SABMiller shares on the hope of a bid, but if I were already a shareholder, I think would be happy to stick with my investment.