Our €71 target price is set using discounted cash flow analysis. We use a three-stage DCF. We assume a 4.2% risk-free rate, 4.0% equity risk premium, WACC of 7.1%, and an improving ROIC trajectory over the next 20 years, driven by both top-line and margin growth, before fading returns back to the cost of capital over the following 20-year period.

Compared with most industries, brewing is relatively predictable; nonetheless, brewers’ profits tend to be more volatile than tobacco or branded food companies. For ABI, in particular, we highlight the following risks to achieving our target price:

Emerging Markets: About two-thirds of profit comes from EMs, where macro and FX can be very volatile. Across its EMs, c.40% of COGS are denominated in hard currency. When EM currencies depreciate, this puts pressure on margins, unless ABI is able to take pricing; ABI is relatively highly leveraged (net debt/EBITDA >3x). The vast majority of its debt is in hard currencies, while the majority of its cash flow is in EM currencies. Depreciating EMs increase its balance sheet gearing.   

Increasing competitiveness in key markets: ABI has been losing share, mainly to craft, in the US in recent years, and there is potential for increasing competitive pressures in Brazil.  

Input costs: Changes in malting barley, glass, and aluminium prices, as well as oil price.

If the impact of these factors is greater or less than we anticipate, the stock would likely have difficulty in reaching our target price.