Chilean Beverage. Industry prospects and target price update

Transcription

1 Chilean Beverage COCA COLA ANDINA CCU EMBONOR March, 12th 213 Sector: Food & Beverage Analysts: Pedro Letelier T: Patricio Acuña patricio.acuna@corpgroup.cl T: M Stock Performance mar-12 jun-12 sep-12 dic-12 mar IPSA IPSA ANDINA-B CCU Industry prospects and target price update Resumen In this report we update price targets for ANDINA-B and CCU, analyzing beverages sector perspectives with each company drivers. Additionally we initiate coverage of Embonor-B. Target Price The chart below is a summary of our target prices, which have been calculated for the end of 213. Andina-B Embonor-B CCU Target price Dic Closing price Price return 1,6%,7% 4,6% Dividend Yield 2,9% 3,4% 2,4% Total return 4,5% 4,1% 7,% Recommendation Hold Hold Hold Risk Medium Medium Medium Industry prospects There have been two marked trends that have characterized the Beverage Industry in the past years: a strong concentration process and the industry s permanent effort to innovate with new products and formats as a response to the market s growing sophistication. Furthermore, the constant growth of the industry has occurred in tandem with the growth experimented by Latin America, which is expected to keep growing at a 4% rate for the 3 next years, showing a high growth potential for the industry development. The following is an analysis on the main trends identified within the Beverage Industry in Latin America follow. 9 8 mar-12 jun-12 sep-12 dic-12 mar-13 2 IPSA EMBONOR-B mar-12 jun-12 sep-12 dic-12 mar-13

2 Industry prospects Beer Industry: Market Share by country. ABInBev Market Share World 18,3% Quilmes AmBev Modelo* Market Share Market Share Market Share Argentina 74% Chile 14% Perú 6% Brasil 7% México 6%* * In approval stage Source: CorpResearch and Company Reports. SAB Miller Market Share World 9,7% Bavaria Market Share Colombia 99% Perú 93% Argentina 3% In the case of the beer industry, there has been a worldwide tendency towards consolidation. This is how the three largest companies in the world; ABInbev, SAB Miller and Heineken have come to own 37% of the beer volume worldwide. In order to achieve such a large size, these companies have followed a global positioning strategy through an inorganic growth. Latin America has not been left out of this process, since each company, ABInbev, SAB Miller and Heineken, has separately taken control over the region s most important breweries. ABInBev is by far the world s largest brewery with an 18.3% global market share. This is the result of the merger of Brazilian brewery AmBev and Belgian Interbrew in 24 (originating the name InBev) and the later merger of InBev with American Anheuser Busch in 28. In this way, ABInBev, through AmBev, controls about 7% of the Brazilian beer market. Additionally, AmBev took over Quilmes, the leading brewery in the Argentinean market, with a market share close to 74%. Moreover, Quilmes distributes beer in Chile through Cervecería Chile, with a market share close to 14%. In 212, ABInBev announced its merger with Mexican brewery Modelo, which possesses about 6% of the Mexican market and a strong presence in the American market. This has delayed the merger, since the US antitrust authorities, have requested certain conditions to be met before the merger can take place. SAB Miller is the world s second largest brewery, with a 9.7% global market share. It entered Latin American markets in 25 by merging with Colombian Bavaria, which is present in Colombia, Peru, Ecuador and Central America. This is how SAB Miller ended up controlling the entire Colombian market, with a market share close to 99%. The same situation occurred in the Peruvian market where they have come to control close to 93% of the market. Additionally, they entered the Argentinean market in 21 by acquiring Isenbeck with a 3% market share. Finally, Heineken, the world s third largest brewery, with an 8.7% global market share, has interests in Latin American through Chilean CCU, owning together with Chilean Luksic Group 61% of the company, gaining access to the Chilean and Argentinean beer market, with about 8% and 23% market share, respectively. Additionally in 21, Heineken merged with beer group FEMSA, the second largest brewery in Mexico after Modelo with a 4% market share and growing interests in Brazil, where it has an 8.5% market share. Source: CorpResearch and Company Reports. Heineken Market Share World 8,7% CCU Market Share Chile 8% Argentina 23% FEMSA Market Share México 4% Brasil 8,5% Source: CorpResearch and Company Reports. Beverages Sector Analysis Pedro Letelier V. March, 12th 213 2

3 Beer Industry: Per capita consumption by country (Liters) Brazil Peru Argentina Colombia Chile According to the foregoing information, the consolidation of the beer industry in Latin America has created large-sized competitors, which in turn has provoked changes in the industry conditions; raising barriers to entry, making it harder to enter new markets or increase market share, since larger international players have already taken control of the region s most attractive companies. In this scenario, the beer industry has scarce possibilities for inorganic growth in Latin America, since the most attractive markets, be it due to their size or per capita consumption, already have a clear dominant player. This is how the northwest coast of South America (Colombia) is absolutely dominated by SAB Miller through Babaría and all its brands, having absolute control over these markets, being its positioning in Colombia so strong (99% market share) that not even the world s number one ABInBev has tried to enter this market. The case in the southwest coast of South America (Peru and Chile) is, however, quite different since ABInBev through its affiliate Quilmes has entered both markets, being Chile the country where they have obtained better results, taking away market share from dominant CCU (linked to Heineken) by means of aggressive advertising campaigns and price actions, being able to attain 14% market share. In the case of South America s east coast, ABInBev has a dominant position, with 74% of the Argentinean market through its affiliate Quilmes and 7% of the Brazilian market through AmBev. In this scenario, Heineken, the world s third brewery, represents ABInBev s biggest threat, which, through Chilean CCU, has tried for years to take away Quilmes s market share in Argentina, achieving 23% market share by developing an ample product mix raging from Premium beer to cheaply priced beer. Furthermore, Heineken gave another blow to ABInBev, by merging with the beer division of Mexican giant FEMSA, which has 8.5% market share of the Brazilian beer market, which in turn, by merging with Heineken, potentiates its product mix to compete with AmBev. In this sense, inorganic growth opportunities are more focused on the acquisition of small bottling companies, in markets with low penetration levels and low per capita consumption, such as Uruguay and Paraguay with a consumption of 31 and 37 liters, respectively, low when compared to average consumption in the region. Other opportunities within developed markets such as Colombia, Peru, Chile, Argentina and Brazil, are the acquisition of bottling companies linked with the Premium artisanal sector, which allow low volume operations, but greater margins. This strategy, however, may derive in an inorganic growth characterized by acquisitions of operations to small and scattered all over South America, which will not ultimately increase the value of the company. Paraguay Uruguay Source: CorpResearch and Company Reports. Beverages Sector Analysis Pedro Letelier V. March, 12th 213 3

4 Coca-Cola System: Per capita consumption by country (Liters) Mexico Chile Argentina At the Coca-Cola system level, Latin America is the main market in terms of sales volume, adding up to 29% of the world s total sales volume, which is also reflected in the volume of per capita consumption, which in Latin America averages 75 liters, greatly exceeding the world s average of 22 liters. In addition, at the bottling level of the Coca-Cola system, there are 3 Latin American companies ranked within the 1 largest worldwide, in terms of sales volume, being Mexican Coca-Cola FEMSA the world s number one, followed by Mexican Arca Continental ranked fourth worldwide. In this sense, Mexico has the highest per capita consumption in the region with 171 liters representing 44% of Latin America s total sales volume. Then, there is Chilean Coca-Cola Andina, ranking seventh worldwide. Chile is second in the region with a per capita consumption of 18 liters. 18% 13% 25% 44% Mexico Brazil South America Central America 16% 18% 22% 29% Latin America North America Pacific Eurasia & Africa Europe Source: The Coca-Cola company Brasil Peru Colombia Latam Coca-Cola FEMSA Volume ,2 MUC* México 1.72,3 MUC Centroamérica 151 MUC Brazil 494,2 MUC Argentina 217, MUC Colombia 255,8 MUC Venezuela 27,7 MUC *MUC: Million of Unit Case Source: CorpResearch and Company Report. Arca Continental Volume ,7 MUC* México 1.71,2 MUC Sudamérica 282,4 MUC (Argentina & Ecuador) Coca-Cola Andina Volume ,2 MUC* Chile 185,4 MUC Brasil 225 MUC Argentina 167 MUC Paraguay 18,8 MUC The Coca-Cola system operates by means of geographical franchises through which a bottling company is authorized to produce and distribute products licensed by the Coca-Cola Company in a given territory. In this sense, since most territories in Latin America are already franchised, one of the main mechanisms to achieve significant expansion in the scale of operations is through inorganic growth, in order to grow geographically by incorporating new franchised territories with the objective of attaining new distribution synergies in adjacent territories or take advantage of the greater bottling companies know-how to make territories that had not been properly exploited more profitable. In 211 and 212, we have witnessed two important processes in the region: the recent mergers of Mexican bottling companies Embotelladora Arca and Grupo Continental (Arca Continental) and Chilean bottling companies Embotelladora Andina and Embotelladora Coca- Cola Polar (Coca-Cola Andina). Beverages Sector Analysis Pedro Letelier V. March, 12th 213 4

5 Big players of Coca-Cola Latam Coca-Cola FEMSA Within this context, when analyzing the opportunities for inorganic growth in the region, namely, those franchises more susceptible to be acquired by one of the greater bottling companies of the Coca-Cola system, there is no doubt that the most attractive opportunity is in Brazil, a market in which Coca-Cola system franchises are very fragmented, with 13 local bottling companies, considering as well the large extension of the territory representing 25% of the total sales of the Coca-Cola system in Latin America. Brazil has a per capita consumption close to 54 liters, under the region s average of 75 liters, which is very attractive for larger bottling companies already present in Brazil, such as FEMSA (São Paulo, Campinas, Belo Horizonte, Santos, part of the State of Mato Grosso do Sul and par the State of Goiás) and Andina (Rio de Janeiro and Espíritu Santo). Peru, whose economic growth prospects make it a very attractive market, occupies the second place. In addition, none of the region s three largest bottling companies is present in this country, being the franchise in the hands of a local bottler (Lindley). Peru has a per capita consumption of 49 liters, lower than the regional average, which increases the opportunities of growth. Finally, there are opportunities in territories focalized in Chile (Embonor) and Argentina (Grupo Reginald Lee) that represent mature markets, since we are talking about the two countries with the highest per capita consumption in South America with 18 and 81 liters, respectively. Arca Continental In terms of organic growth, we must consider that the sales volume is highly correlated with the growth of each country s GDP, since this index is directly related with consumption. In the carbonated product category (soft drinks), whose growth is absolutely aligned with the growth of the GDP, we forecast a steady growth near 4%, in the case of non-carbonated categories including water, juice, and energy drinks; we estimate a two-digit growth close to, with a total estimate for the entire Coca-Cola system of approximately 6%. 3,% 25,% 24,% Coca-Cola ANDINA 2,% 15,% 1,% 5,%,% -5,% 15,% 14,% 15,% 12,% 12,% 9,% 6,% 6,2% 6,% 5,% 5,5% 6,% 6,% 5,% 4,5% 3,2% 4,% 4,1% 3,% 4,% 4,% 3,% 3,9% 4,% 4,% 29-1,5% e 214e 215e % Change still beverage volume % change sparkling beverage % change Coca-Cola System Latam % change GDP Latam Source: CorpResearch, IMF and Coca-Cola Company. Beverages Sector Analysis Pedro Letelier V. March, 12th 213 5

6 Products diversification Another tendency that has characterized the development of the beverage industry is the high level of diversification reached, where larger companies in the sector, such as Mexican FEMSA, have a broad product mix that ranges from classic soft drinks to the production and distribution of milk, including Water, Juice, Beer, Liquor, Wine and Snacks as well. In this sense, there are two factors that have stimulated the development of the product mix. One of the industry s most important aspects, is the distribution chain developed for supplying products to the different points of sale, since many of the greater companies like FEMSA, Arca Continental, Coca-Andina and CCU have been able to build a solid distribution network within the territories they supply, and have taken advantage of said network to incorporate a greater amount of products in their mix, taking advantage of the economy of scale generated at production and logistics levels. Additionally, in Latin America, there is a growing tendency towards sophistication, product of the insipient middle class that has emerged in the region due to the economic boom associated to the good performance of commodities which has had an effect, especially, in the alcoholic drink segment, affecting the beer, wine and liquor market, which have had to refine their product offer, entering the premium product sector. There has also been a consumption trend towards healthier lifestyles, affecting the non-alcoholic drink segment, which has derived in the development of healthy drinks such as light drinks, water and juice. In this sense, the industry has made important innovations; offering a broader product portfolio. A growth increase is observed in emerging categories such as water, juice, drinks for sportspeople and tea-based drinks, along with the zero calories and non-sugar segment which continue to increase their market penetration. Growth potential for Latin America Latin America represents a solid consumption potential for the beverage industry. As the graph shows, according to the IMF, the GDP of the region s main economies will grow sharply during the next 5 years, being Brazil, Colombia and Peru, the countries with the highest growth potential, considering their low GDP per capita levels when compared to Argentina and Chile. 25. USD e 213e 214e 215e 216e 217e Source: CorpResearch and IMF Argentina Brazil Chile Colombia Peru Beverages Sector Analysis Pedro Letelier V. March, 12th 213 6

7 Beverage per capita consumption Latam. There is a lower per capita consumption when compared to developed countries, which means a great growth potential for the Beverage Industry, in all its product categories. Per capita liters Latin America Developed countries Chile Peru Colombia Argentina USA Australia Beer Sparkling Juices Water Wine Spirit Milk Sports Total Source: CorpResearch and Company Reports According to this vision, since the growing level of concentration of the industry limits the possibilities of inorganic growth, opportunities for organic grow exist in the development of the product mix, being the water and juice segment the one with the highest growth potential. Comparative beverage industry companies Latin America Bottlers Country Mkt Cap 1 Price 2 P/E EV/EBITDA Coca-Cola Andina CL ,1 13, CCU CL ,4 21,5 11,5 Embonor CL ,6 9,6 Concha y Toro CL ,1 12,6 Coca-Cola Femsa MX ,61 3,8 15,5 Arca Continental MX ,63 3,1 14,6 AmBev BR ,79 26,4 16,8 Modelo MX ,45 32,1 12,4 World Bottlers Anheuser-Busch InBev BE ,36 21,4 11,2 SABMiller UK ,4 16,4 Heineken NL ,66 11,2 12,1 Carlsberg DN , 8,9 The Coca-Cola Company US ,23 19,6 14, Coca-Cola Hellenic GA ,2 38,5 1, Coca-Cola Amatil AU ,25 25,2 12,6 Coca-Cola Icececk TI ,6 28,6 14,7 1 USD mn 2 Local currency Source: Bloomberg Beverages Sector Analysis Pedro Letelier V. March, 12th 213 7

8 Coca-Cola Andina Target price: CLP 3.25 Recommendation: hold Risk: medium March, 12th 213 Sector: Food & Beverage Analyst: Pedro Letelier T: Company Information Ticker: ANDINA-B CI Equity Closing Price (CLP/share): 3.198,8 12M Price range: M Daily vol (CLP mn): 1.29 Shares (mn): 947 Maket Cap (USD mn): M Stock Performance IPSA ANDINA-B 8 mar-12 jun-12 sep-12 dic-12 mar-13 Price Update Recommendation and Investment Thesis We have updated the objective price of Coca-Cola Andina, B series, at the end of 213, at a price of CLP 3,25 per share. Our valuation, given the current price of CLP 3,198.8 per share, includes a potential rise of 1.6% plus an expected dividend return of 2.9%, which adds up to a total return of 4.5%. This leads us to maintain our recommendation with a medium associated risk. The main reasons supporting our thesis are presented below. We expect a moderation in the sales volume growth rate, which as of 213 must be around 6%, which means a 32 bp when compared to the sales volume growth rate recorded in 212, which reached 9.2%. For our forecasts we applied a more conservative criterion, since we consider that a sales volume growth rate around 9% is not sustainable over time, considering that the sales volume in 212 was affected by specific events such as the high temperatures recorded during the first half of the year and the unexpected sales volume growth recorded in Brazil and Argentina. We forecast an EBITDA margin of 16.9% for Coca-Cola Andina due to the incorporation of the operations of Coca-Cola polar. In operational terms, the performance of Coca-Cola Polar is poorer than Andina s, since its operations take place in extensive yet not densely populated geographical zones, which generates pressure on distribution costs. In addition; the operation in Paraguay has experienced a sharp decrease in its margins, which counteracts the operational improvements of Andina s new investments. The startup of new investment generates an increase in the production capacity and improvements in operational efficiency. The new Andina plant located in Renca (Chile) is already 1% operational, which represents a 4% medium-term increase and will allow improving the operational performance affected by the simultaneous operation of two production plants in 212. In addition, the new liquid sugar plant in Argentina is already operational, which will allow reducing all costs associated to this important supply. Our perception is that the current price of the B series already contemplates a big part of the benefits associated with the synergies of the merger and startup of the new production plant in Chile. In this sense, we see a potential 1.6% upside in the price of shares, which could only change if a relevant acquisition within the Coca-Cola system was announced. Medium Associated Risk. The Political and Macroeconomic instability in Argentina conditions a scenario with less dynamic consumption, high inflation, strong depreciation of the Argentine Peso and one-sided restrictive policies by the authorities, which could have a negative impact on the value of the company. The effect of the currency exchange may have negative impacts on the company s income. The depreciation of the Brazilian, Argentinean and Paraguayan currencies against the US dollar has had a negative impact on the company s income, situation that could be aggravated in the short term. Beverages Sector Analysis Pedro Letelier V. March, 12th 213 8

9 Coca-Cola Andina Target price (CLP): 3.25 Recommendation: Hold Company description - Coca-Cola Andina born of the merger between Andina Bottling and Coca-Cola Polar since the fourth quarter of It is within the seven largest bottlers of Coca-Cola in the world, servicing franchised territories to produce and market Coca-Cola products in Argentina, Brazil, Chile and Paraguay. - Participate in the segments of soda, water, juice, sports drinks and tea based and Brazilian beer. Profit & Loss (CLP mn) e 214e 215e Operational Income Operational expenses (84.439) ( ) ( ) ( ) ( ) Operational expenses (%) 85,5% 86,8% 87,8% 87,2% 86,6% Operating Result Operating Margin % 14,5% 13,2% 12,2% 12,8% 13,4% EBITDA EBITDA Margin % 18,5% 17,7% 16,9% 17,4% 17,9% Net Financial Expenses (4.53) (8.445) (15.794) (19.46) (21.417) Non-Operating Result (1.72) (12.9) (2.312) (23.978) (25.935) Net Income Controller s Share Net Income (Controller s) % 1,% 99,3% 98,4% 98,4% 98,4% EPS (USD/share) 127, , , , , 947 Ownership structure Balance sheet (CLP mn) e 214e 215e ADRs Pension 7% Funds 7% Coca Cola Cash & Equivalents Other Current Assets PP&E Other Non-Current Assets Total Assets Financial Debt Total Liabilities Total Equity Minority Interest EBITDA breakdown (12M) Cash flow (CLP mn) e 214e 215e Brasil 35% Other 21% Paraguay 7% Controller 5% Chile 38% Argentina 2% Operating Result Adjusted Taxes (35.66) (38.541) (46.344) (54.262) (62.948) Depreciation & Amortization Capex ( ) ( ) (16.) (145.) (13.) Working Capital (436) (21.288) (3.399) (25.19) Free Cash Flow Equity Raised Dividends (7.96) (69.766) (82.63) (9.398) (9.398) Debt Issuance Peers P / E EV/EBITDA Ratios e 214e 215e FEMSA 34,7 14, Stock price (CLP) ARCA-CONTAL 3,1 14,6 P / E 17,8 32,5 28, 23,6 2, CCU 21,6 11,7 Liabilities / Equity,8,7,8,9,8 HELLENIC 38,5 11, EV / EBITDA 8,2 11,3 9,6 8,3 7,1 AMATIL 24,9 13,8 EBITDA / Financial expenses 25,1 18,6 13,7 13,1 13,8 AMBEV 26,2 17,3 Net financial debt / EBITDA,37 1,8 1,15 1,6 1,2 MODELO 32,21 12,1 ROA 13,1% 5,7% 6,7% 7,4% 8,4% β (vs IPSA):,77 ROE 23,% 1,% 12,% 13,7% 15,2% AVG WACC: 11,2% Dividend Yield 3,9% 3,2% 2,9% 3,% 3,% Source: CorpResearch, Bloomberg and Company Reports. Beverages Sector Analysis Pedro Letelier V. March, 12th 213 9

10 Coca-Cola Andina: Seventh globally and third in Latin America. Participation by country in operational metrics proforma (Andina + Polar) 212 Volume 212 (MUC) Brazil 31,9% Paraguay 8,9% Argentina 28,3% Chile 3,9% Source: Corpresearch and Company Reports. Income 212 (CLP mn) Brazil 32,1% Paraguay 7,6% Argentina 28,1% Chile 32,2% Source: Corpresearch and Company Reports. As of October 1, 212 the merger between Embotelladora Andina and Embotelladoras Coca-Cola Polar was finalized, creating Coca-Cola Andina, which in pro forma terms, during 212 reached 76 MUC (million unit cases), ranking seventh worldwide within the Coca-Cola system. The incorporation of Coca-Cola Polar, allows Andina to enter the Paraguayan market, where the franchise includes 1% of the territory, a market with a low level of development, being able to use all its know-how on the business to help consolidate its operations. Additionally, this merger allows Andina to incorporate new territories in the countries where it already has operations. In the case of Argentina, Andina incorporates the south of the country (Provinces of Santa Cruz, Neuquén, Chubut, Tierra del Fuego, Río Negro, la Pampa and the west side of the Buenos Aires province). In Chile, it incorporates five regions covering a great part of the northern and austral zone of the country. Through this merger, Coca-Cola Andina strengthens its position in Latin America participating directly in Argentina, Brazil, Chile and Paraguay. Its franchises include important cities such as Santiago, Río de Janeiro, Córdoba and Asunción. Aside from increasing its presence in Latin America, this merger will allow Andina to take advantage of the synergies generated in those countries where it shares operations such as Chile and Argentina. According to an estimate of the company, synergies for USD 18 million are forecasted for 213 and USD 3 million from 214 onwards. 6% of these synergies are expected to come from Argentina, mainly from a logistical level, due to the proximity between the territories operated by Andina and Coca-Cola Polar, which will help make product distribution more efficient. In the case of Chile, since the territories operated by Andina and Coca-Cola Polar are too far apart, the synergies will mainly occur at a production cost level, since the company will have more negotiation power, which will help improve conditions for costs and supplies. For the purposes of our Model, synergies will start being generated in 213 and will continue to grow progressively starting to consolidate in the second year of joint operations (214). In this way, we will incorporate USD 15 million for 213 and USD 25 million from 214 onwards. EBITDA 212 (CLP mn) Paraguay 7,5% Brazil 34,6% Argentina 19,8% Chile 38,1% Source: Corpresearch and Company Reports. PROFORMA (ANDINA + POLAR) Volume MUC 615, 646,4 75,9 Income (CLP mn) EBITDA (CLP mn) EBITDA margin (% Income) 21,3% 17,8% 16,6% Controller Net Income (CLP mn) Beverages Sector Analysis Pedro Letelier V. March, 12th 213 1

11 Sales volume growth of around 6% in 213 and forward ,1% 9,2% 5,6% 6,8% 5,6% 211* 212* 213e 214e 215e Volume (MUC) Coca-Cola Andina * PROFORMA ANDINA + POLAR 3 Brazil ,3% 9,7% 7,2% % Growth volume 1,4% 6,3% 211* 212* 213e 214e 215e 4,% Volume (MUC) 9,4% 3,8% % Growth volume 4,4% 4,7% 211* 212* 213e 214e 215e Volume (MUC) Chile * PROFORMA (ANDINA + POLAR) 9,7% 9,9% % Growth volume 5,8% 5,7% 5,8% 211* 212* 213e 214e 215e Volume (MUC) Argentina * PROFORMA (ANDINA + POLAR) 9,1% Paraguay % Growth volume 5,% 4,9% 5,% 5,% 211* 212* 213e 214e 215e 12% 9% 6% 3% % 12% 9% 6% 3% % 12% 9% 6% 3% % 12% 9% 6% 3% % 12% 9% 6% 3% % The sales volume of Coca-Cola Andina during 212 reached a growth rate of 9.2%, in pro forma (considering the sum of sales volumes of Embotelladora Andina and Embotelladoras Coca-Cola Polar), due to the impact of specific events such as the high temperatures recorded during the first half of the year, which affected 4 countries the company has operations in. Additionally, during the second half of 212, the sales volume growth remained steady due to the operations in Brazil and Argentina, which contradicts the low growth rates of the GDP for both countries in 212. In the case of Brazil, (32% of the total volume), the sales volume grew 9.7%, influenced by a 14% adjustment in the minimum wage, together with a sharp increase in the sales force, which is in line with the company s strategy that focuses on increasing their market share, going for a strategy that allows them attain a good position in the market before the Football World Cup (214) and the Olympic Games (216), both events to take place in Brazil. In this way our projections for volume growth in 213 are more conservative, reaching a growth rate close to 7.2%, considering the new strategy of the company to exploit the returnable PET format in Brazil, which represents a less expensive alternative for the consumer, along with the incorporation of a new freight truck fleet in order to improve the distribution process. This situation should improve in 214 due to an effect associated with the Football World Cup, with an estimated growth rate close to 1%, which should stabilize at approximately 6% from 215 onwards, excepting 216 due to the Olympics. In the Chilean market (31% of the total volume) a 9.4% growth (pro forma) was reached during 212, affected by the high temperatures recorded during the year s first half. Nevertheless, a 1% drop in the volume of soft drinks has been observed from the third quarter of 212, because of shortages of some container formats due to the start up of the new Renca plant. Furthermore, during 212 s last quarter a 1.6% drop was recorded, which can be explained by an increase in competition, by means of new promotions and aggressive price actions, reaching the soft drink category a market share of 67.9%, falling 27 bp when compared with the previous year. This is why even though the growth prospect of the Chilean GDP is close to 5.6%, we expect the sales volume to grow at a rate close to 4% in 213, considering the impressive intensification of competition in the soft drink segment, which should stabilize at around 4.5% in 214. In Argentina (28% of the total volume), the sales volume (pro forma) experienced a 9.9% growth in 212 explained by the growth experimented by the sale of soft drinks in returnable containers and higher sales in supermarkets, which translated into a greater market share, going up to 6.5%, a 23 bp rise when compared to 211. Nevertheless, given the current economic situation in Argentina characterized by a scenario with less dynamic consumption, high inflation, strong depreciation of the Argentine Peso and onesided restrictive policies by the authorities, we expect the growth rate to stabilize at a level close to 5%, considering the potential shown by the development of new formats and sales channels. Finally, in the case of Paraguay (9% of the total volume), we estimate a moderate growth rate of 4.9% in 213, due to the entrance of Pepsi to the soft drink market at the end of 211, which provoked a 32 bp market share reduction in 212. Thus, we expect a growth in the overall sales volume (pro forma) of 5.6% in 213. This rate should go up to 6.8% in 214 because of the football world cup in Brazil, stabilizing close to 5.6% from 215 onwards. Volume (MUC) % Growth volume Source: CorpResearch and Company Reports. Beverages Sector Analysis Pedro Letelier V. March, 12th

12 Operational performance ,3% Coca-Cola Andina 17,8% 16,6% 16,9% 17,4% 17,9% 21* 211* 212* 213e 214e 215e EBITDA (CLP mn) EBITDA margin 25% 2% 1% * PROFORMA (ANDINA + POLAR 14. Brazil 25% 21,1% ,9% 17,9% 18,% 17,7% 18,8% 2% * 211* 212* 213e 214e 215e EBITDA (CLP mn) Chile EBITDA margin 23,5% 21,3% 19,6% 21,% 21,9% 22,6% 21* 211* 212* 213e 214e 215e EBITDA (CLP mn) * PROFORMA (ANDINA + POLAR) Argentina EBITDA margin 11,7% 12,6% 11,7% 12,% 12,6% 12,7% 21* 211* 212* 213e 214e 215e EBITDA (CLP mn) * PROFORMA (ANDINA + POLAR) Paraguay 32,1% 23,9% EBITDA margin 18,5% 2,% 2,5% 16,4% 21* 211* 212* 213e 214e 215e EBITDA (CLP mn) Source: CorpResearch and Company Reports. EBITDA margin 5% % 1% 5% % 3% 25% 2% 1% 5% % 2% 1% 5% % 4% 35% 3% 25% 2% 1% 5% % During the past two years, we have observed a progressive fall of the company s EBITDA margin (andina + polar pro forma), going from 21.4% in 21 down to 17.8% in 211 and 16.6% in 212, which has provoked a standstill of the company s EBITDA, remaining steady at about CLP 23, million (pro forma). In the Chilean operation (38% of total EBITDA), the EBITDA margin (Andina + Polar pro forma) went down from 21.3% to 19.6% in 212. This has been caused mainly by salary raises product of the full employment situation, which have had a strong impact in the company s costs, both at production and distribution levels, since in 211 and most of 212, Andina operated with two plants simultaneously, generating a strong pressure on costs. Additionally, higher fuel costs caused distribution costs to rise, due to tariff increases. We foretell the company will be able to recuperate their EBITDA margin in Chile during 213, since the Renca Plant is now 1% operational and the Carlos Valdovinos plant, which will now be a new distribution center, has finally been shut down. In this way, there is a two-way profit at production and logistics level, estimating an EBITDA margin close to 21% in 213, which should gradually recover at historical levels as the company consolidates the synergies associated with the mergers. In the Brazilian case (35% of total EBITDA), the company is focused on a policy characterized by market share increases, which has translated into sacrifying margins. For this, the company has performed structural changes, emphasizing the sale force, with more salary costs due to larger sales commissions. In addition, the distribution chain has been reinforced with the acquisition of a new truck fleet, which also means higher costs. Finally, we must consider that the weakness of Brazilian Real against the US dollar has generated some degree of erosion in the gross margin due to an increase in the costs of raw materials denominated in US dollars. Thus, the EBITDA margin is expected to remain at a level close to 18% in 213, due to Andina s continuous effort to increase their market share in view of the upcoming sport events taking place in 214 and 216. In Argentina, the EBITDA margin experienced a 1 bp fall in 212, since the 9.9% volume increase recorded in 212 was due to an aggressive commercial campaign, focused on introducing new container formats and developing new sales channels, which required an increase in the work force at production, distribution and sales levels, which in addition to the wage raises due to the high inflation present in the country provoked a fall in the EBITDA margin. However, we expect a recovery of the margin in 213, due to the recent startup of a liquid sugar production plant, which will generate savings, considering that in Argentina, sugar is a closed market, where the company cannot make use of international market prices. In addition, as previously stated, 6% of the synergies associated with the merger will occur in Argentina, so we expect improvements in the margins as soon as the company starts consolidating said synergies. Finally, the operation in Paraguay has experienced an impressive EBITDA margin reduction, going from about 3% in 21 to 23.9% in 211 and 16.4% in 212, affected basically by a sharp rise in raw material costs, particularly sugar, since it is a closed market where the company has no access to the prices set by the international market of sugar. Overall, we expect a slight recovery of the EBITDA margin (pro forma) in 213 going up to 16.9%, also considering that the costs of the merger were already executed in 212. Likewise, we expect a slight recovery of the EBITDA margin, which should add up to CLP 25, million in 213. Nevertheless, it is important to note that when considering non pro-forma figures, namely, solely Andina up to 3Q212 and incorporating Polar in 4Q212, which is the way it is reported for regulatory purposes, since the pro forma format is only for management purposes, the operational performance of the company appears deteriorated, since in operational terms, the performance of Coca-Cola Polar is poorer than Andina s, since it operates in extensive geographical zones with a low population density, which generates strong pressure over distribution costs, plus the Paraguayan operation has experienced a sharp decrease in their margins. Beverages Sector Analysis Pedro Letelier V. March, 12th

13 The company s investment plan for 213, for USD 37 million, is focused on improving productivity and increasing the stock of bottles and cases in order to continue with the strategy to penetrate with the returnable PET format in Brazil and Argentina. In this way, USD 1 million will be invested in Brazil, USD 95 million in Chile, USD 95 million in Argentina, USD 25 million in Paraguay and USD 55 in the affiliates Vital Jugos and Vital Aguas, which were consolidated by the merger. Valuation Country WACC Chile 8,8% Argentina 17,3% Brasil 9,6% Paraguay 13,8% Sinergias 11,2% Average WACC 11,2% We used the sum-of-parts valuation method. We separately estimated sales volumes, prices and costs for each business operation of the company, considering Chile, Brazil, Argentina and Paraguay, calculating the cash flows associated with each operation, projected in local currency up to 224, which were deducted considering a rate in accordance with each operation. Regarding perpetual growth rates, we estimate a 1% growth for the operations from 224 onwards. In addition, we separately valued the synergies expected from the merger, considering that synergies will start being generated in 213 and will continue to grow progressively, consolidating during the second year of joint operation (214). In this way, we incorporated USD 15 million for 213 and USD 25 million from 214 onwards applying a slight adjustment of over the synergies informed by the company. In this way, we have established an objective price of CLP 3,25 for each Coca-Cola Andina, B series share. Our valuation, given the current price of CLP 3,198.8 per share, includes a potential rise of 1.6% plus an expected dividend return of 2.9%, which adds up to a total return of 4.5%. This leads us to maintain our recommendation of Medium associated risk. Valuation Andina-B DCF Chile CLP mn DCF Argentina CLP mn DCF Brasil CLP mn DCF Paraguay CLP mn Synergies CLP mn Enterprise value Net financial debt CLP mn Equity value Number of shares (mn) 946,6 Share price CLP 3.25 Beverages Sector Analysis Pedro Letelier V. March, 12th

14 CCU Target price: CLP 8. Recommendation: hold Risk: medium March, 12th 213 Sector: Food & Beverage Analyst: Pedro Letelier T: Company Information Ticker: CCU CI Equity Closing price (CLP/share): M Price range: M Daily vol (CLP mn): Shares (mn): 319 Maket Cap (USD mn): M Stock Performance IPSA CCU 8 mar-12 jun-12 sep-12 dic-12 mar-13 Price Update Recommendation and Investment Thesis (CCU) We have updated the objective price of CCU at the end of 213, at a price of CLP 8, per share. Our valuation, given the current price of CLP 7,648 per share, includes a potential rise of 4.6% plus an expected dividend return of 2.4%, which adds up to a total return of 7,%. This leads us to maintain our recommendation of Medium associated risk. The main reasons supporting our thesis are presented below. We expect a sales volume growth of approximately 8.5% in 213, affected by the incorporation of Manantial (Chile) and the Uruguay operations. Nevertheless, we expect it to go back to average growth rates of about 6% from 214 onwards. We forecast an operating margin of 17.2% and an EBITDA margin of 22.1%. These margins represent a slight improvement when compared to 212 levels, but are still below average levels. Economical and market conditions have significantly eroded the margins the company operates with, generating a fall in the operational and EBITDA margins of 3 bp and 29 bp, respectively, in 212. Our perception is that, during 213, CCU will continue to face challenging conditions principally associated to pressures on distribution and sales costs linked to salary raises and a more competitive environment in the Chilean and Argentinean beer industry. Investment Plan focused on operational improvements and organic growth. An investment plan of approximately USD 7 million is projected in order to support the company s organic growth, focused on increasing production plant efficiency in order to improve operating margins and increase production capacity in those categories with a high growth potential. Limited opportunities for inorganic growth in the region. One of the main trends, in the world as well as in Latin America, is the high level of concentration reached by the beverage industry. In this sense, the possibility of acquiring assets with relevant market shares is scarce. Thus, opportunities for inorganic growth are limited to acquisitions of small operations scattered over South America, which will not add significant value to the company. Medium Associated Risk. The Political and Macroeconomic instability in Argentina conditions a scenario with less dynamic consumption, high inflation, strong depreciation of the Argentine Peso and one-sided restrictive policies by the authorities, which could have a negative impact on the value of the company. No license renewal. The company has license contracts with Heineken, Brouwerijen, Anheuser-Bush, PepsiCo, Paulaner, Guinness, Nestlé and Pernot Ricar among others, which authorize CCU to produce or distribute their products. The termination of said license agreement or the inability to renew them may have a negative impact on the company s operations. Beverages Sector Analysis Pedro Letelier V. March, 12th

15 CCU Target price (CLP): 8. Recommendation: Hold Company description - It is a diversified beverage company operating principally in Chile and Argentina. - Its main products are the beers and sodas that include a wide range of brands, licenses and imported. - It is the largest brewer in Chile and the second in Argentina, and is the second largest producer of Non Alcoholic beverages in Chile. - Additionally, in Chile produce mineral water and juices, wines and is the largest producer of pisco. Profit & Loss (CLP mn) e 214e 215e Sales Gross margin Gross margin (%) 53,8% 54,2% 54,2% 54,4% 54,5% Operating Result Operating Margin % 19,9% 16,8% 17,2% 17,5% 17,6% EBITDA EBITDA Margin % 24,8% 21,9% 22,1% 22,2% 22,2% Net Financial Expenses (7.324) (9.362) (1.579) (12.54) (13.692) Non-Operating Result (12.82) (2.78) (18.684) (2.646) (21.797) Net Income Controller s Share Net Income (Controller s) % 91,1% 92,3% 92,3% 92,3% 92,3% EPS (USD/share) 385, , , , , Ownership structure Balance sheet (CLP mn) e 214e 215e ADRs 12,1% Float 21,8% IRSA 4,4% Inversiones y Rentas 61,7% Cash & Equivalents Other Current Assets PP&E Other Non-Current Assets Total Assets Financial Debt Total Liabilities Total Equity Minority Interest EBITDA breakdown (12M) Cash flow (CLP mn) e 214e 215e Licores Operating Result Vinos 4,4% Adjusted Taxes (42.42) (39.861) (44.877) (51.997) (57.672) 7,9% Cervezas Chile Depreciation & Amortization ,9% Capex (77.847) ( ) (14.) (1.) (1.) Working Capital (31.927) (25.381) (9.428) (27.83) (23.165) No alcoholicas 25,% Free Cash Flow Argentina 15,8% Equity Raised Dividends (62.793) (66.117) (57.216) (68.478) (78.33) Debt Issuance Peers P / E EV/EBITDA Ratios e 214e 215e MODELO 32,2 12,1 Stock price (CLP) FEMSA 34,7 14, P / E 17,6 21, 18,2 15,7 14,1 AMBEV 26,2 17,3 Liabilities / Equity 1,1 1,,9,9,8 ARCA-CONTAL 3,1 14,6 EV / EBITDA 8,7 9,5 8,5 7,5 6,8 ANDINA 28,1 15,2 EBITDA / Financial expenses 16,7 13,8 14,5 15,4 16, SAB Miller 18,4 18,6 Net financial debt / EBITDA,34,69,74,63,54 Anheuser-Busch 21,4 12,3 ROA 9,5% 8,6% 8,6% 9,2% 9,6% β (vs IPSA):,79 ROE 21,6% 18,7% 18,1% 18,8% 18,8% AVERAGE WACC 1,8% Dividend Yield 2,9% 3,1% 2,4% 2,8% 3,2% Source: CorpResearch, Bloomberg and Company Reports. Beverages Sector Analysis Pedro Letelier V. March, 12th

16 Growth rates of sales volume of around 6% in 214 and forward. Projected sales volume (HL) ,2% 6,4% 7,9% 8,5% 5,6% 5,7% e 214e 215e Volume (HL) CCU Source: CorpResearch and Company Reports ,8% 6,1% 16,5% 13,1% % Growth Volume 1,% 9,% e 214e 215e Volume (HL) Non Alcoholic % Growth Volume Source: CorpResearch and Company Reports ,5% 4,6% 1,% 1,2% 3,% 3,% e 214e 215e Volume (HL) Beer Chile % Growth Volume Source: CorpResearch and Company Reports. 12% 9% 6% 3% % 25% 2% 1% LINK Excel.Sheet.8 "\\\\scl12\\estudios_acciones\\vino s, Bebidas y Alimentos\\CCU\\Act_PO_Feb213\\ CCU.xls" "Graficos![CCU.xls]Graficos 9 Gráfico" \a \p ,6% 5,8% CCU Argentina -1,6% 15,2% 1,2% 3,% e 214e 215e 5% % 8% 6% 4% 2% % 25% 2% 1% 5% % -5% In 212, CCU s total sales value grew at 7.9% y/y, mainly influenced by the nonalcoholic drink segment (Chile) representing 41% of the total volume, which provoked a 16.5% y/y growth due to the excellent performance recorded during the first half of 212, reaching a growth rate of 18.3% y/y, partially explained by the high temperatures recorded, which stayed high in the country during most of the autumnal season, which positively affected non-alcoholic beverage consumption, summed up to the strong development experienced by non-traditional categories such as water, isotonic drinks, energy drinks and tea-based drinks, with annual growth rates close to 2%. Considering the foregoing information and that consumption has been affected by specific phenomena, we have reduced our growth projections for the non-alcoholic drink segment, expecting a growth of 13.1% for 213, which also includes the consolidation of Manantial, a business acquired at the end of 212 through affiliate Aguas CCU Nestlé, adding a new business category, namely, purified water home delivery. For 214 and 215, we expect the growth rate for the volume of non-alcoholic drinks sector to reach 9%, which is aligned with this segment s average performance, considering that 6% of the volume is made up by carbonated drinks, characterized for being mature market. In the case of the beer segment in Chile (27% of the total volume), there was only a 1% y/y increase in 212, same as non-alcoholic drinks. Beer consumption was benefited by the high temperatures recorded during the first half of the year in Chile, reaching growth rates of 5.7% y/y. In 4Q212, there was, however, a 6.3% y/y drop, explained by the high competitive level reached by the Chilean beer industry, where Cervecerías Chile, controlled by world s number one ABInBev, has increased its efforts to gain a larger market share, which is now approximately 14%. In addition, there is an impact associated with the new Transit Regulations (212) reducing the legal limit of blood alcohol content when driving. Thus, our projections for this segment consider a 1.2% y/y increase in sales volume for 213, expecting the sales volume to go back to normal growth rates in 214 and 215 at levels of 3% y/y, given all the marketing efforts carried out by CCU in 213. In the case of the Argentina operations (23% of the total volume), the situation in the beer market has become truly complex. During the first half of 212, CCU accumulated a fall in sales volume of 5.3% y/y, which was partially counteracted during the second half of 212, totaling a drop of 1.6% y/y during 212. To face this situation CCU Argentina has started incorporating new products such as cider. In addition, CCU entered the Uruguayan market in 212 by acquiring two brands: a mineral water brand (Nativa) and a soft drink brand (Nix), totaling a 1.7% market share in the water and soft drink market in Uruguay, with a sales volume of approximately 54 thousand HL per year. This operation will be consolidated through CCU Argentina, therefore our growth projections for the 213 sales volume adds up to. In the case of the Wine and Liquor segments, representing less than 1% of the total volume, we expect an increase of 4% and 8% respectively, starting in 213. We expect the sales volume to reach a growth of 8.5% in 213. This growth will be affected by the incorporation of new operations such as Manantial (Chile) and the Uruguay operation. Nevertheless, we expect growth rates to go back to normal average growth rates within the 5%-6% range starting in 214. Beverages Sector Analysis Pedro Letelier V. March, 12th