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Morningstar | United Breweries' Top Line Accelerates in 2Q With Double-Digit Volume Growth; Shares Fairly Valued

We aren't anticipating material changes to our $25 fair value estimate for United Breweries, outside of exchange rate adjustments, after reviewing the firm's second-quarter results. We're also holding steady on our longer-term outlook, which calls for 6% revenue growth and mid-teens operating margin on average over our forecast. Year to date, net sales growth approximated 6% (in line with our outlook) and EBITDA margin (excluding the effect of a one-time cash payment received from Anheuser-Busch InBev) expanded 190 basis points to 20%, a touch above our high-teens estimate. This deal with AB InBev allowed United Breweries to terminate its license of the Budweiser trademark in Argentina in exchange for a cash payment and the ownership of five brands. As we had discussed in September 2017 (when the deal was announced), we view the exchange of licensed brands for proprietary brands favorably, as we maintain this structure will allow United Breweries greater control over the brand intangible assets that underpin our narrow moat rating.

This transaction also fueled substantial volume gains (up 29%) in the firm's International segment during the quarter. However, the Argentine Peso depreciated substantially relative to the Chilean Peso over this time frame (management estimates a 59% decline), which led segment net sales per hectoliter to fall nearly 14%. However, we contend management's focus on extracting costs from its operations, coupled with added scale as volumes in the region continue to grow at a double-digit pace, will help insulate the firm's bottom line from these currency headwinds. In this context, International segment Marketing, Sales, Distribution, and Administrative expenses (MSD&A) leveraged 980 basis points to 50% of sales.

Sales in United Breweries' core Chilean market (above 60% of revenue this quarter) grew more than 8% during the quarter, outpacing our midsingle digit annual expectation, thanks to a healthier consumer environment and marketing investments. However, an uptick in promotional activity combined with unfavorable product mix effects compressed pricing by 80 basis points. Longer term, we expect net sales per hectoliter to post 3%-4% annual improvement (in line with the above 4% average over the past three years) as it benefits from premiumization within its beer portfolio and leverages its leading position as the largest Chilean brewer to maintain pricing above inflation.