Investment guide: Investing in SAB

South African Breweries (SAB) is one of the largest major investable alcohol companies listed on the Johannesburg Stock Exchange (JSE). This guide looks at investing in SAB Miller, as well as the alcohol industry as a whole.

In recent months, the price of SAB Miller shares on the JSE has been affected by the planned acquisition of the company by AB Inbev.

The effect of the acquisition on the share price

“Formal plans to acquire SAB Miller by AB InBev were announced on 11 November 2015 and the share price has seen immense growth since then. However, rumours of the planned acquisition were circulating the media long before plans were formally announced. These rumours and the possibility of a mega brewer were extremely positive for the share price of SAB as various synergies and opportunities may be unlocked due to the transaction,” revealed Kris Swart, from PSG Wealth Durbanville Stockbroking.

Michael van Andel, co-manager of the Absa Select Equity Fund, and previously the lead analyst on SAB, elaborated: “Last September, SAB Miller was trading in the low R600’s (referred to as the “unaffected price”). Immediately after the approach by AB Inbev, the share price went above R750. Eventually, the final offer price was raised to £44 (R968.22) per share in November of 2015, and the Rand share price again went up sharply. Because the Rand was very weak in December and January, the SAB share price in Rand terms traded above R980 by January of 2016.”

How does SAB compare to other alcohol companies listed on the JSE?

According to van Andel, besides the new listing of AB Inbev on the JSE, “the only other major investable alcohol company on the JSE is Distell.”

However, Swart pointed out that due to South Africa having a well-known wine sector, “it is only natural that we should have at least some traditional wine makers listed on the JSE.” Among these companies is Distell Group Ltd, however, it also includes the likes of Capevin Holdings Ltd.

“KWV Holdings Ltd, the other strong South African wine maker may also partly be invested in, though indirectly, through shares of Hoskens Consolidated Investments Ltd. (HCI), which has a stake in the company,” explained Swart.

With regards to the share price of these companies, van Andel noted that the Distell share price is much lower than that of SAB. He revealed that on 5 May 2016, Distell was trading at about R155 per share (prices fluctuate on a continuous basis).

“Trading at R899 per share with a price earnings (PE) ratio of 36.5, we feel that the company (SAB) is currently on the expensive side and further upside in the short term is limited. Distell and Capevin are currently sitting on historical PEs of 20.8 and 18.3 respectively, which looks a lot more attractive given that the JSE All Share Index currently has a PE of 21. However, some recognition must be given to the fact that a company with the size, prowess and long term track record of SAB should at least be trading to some form of a premium to others, but according to its own history the share price is now trading well above that of its historical average PE of 20.7, dating back to the 1990’s. The last five years the SAB’s average PE was roughly 27 x earnings,” stated Swart.

Investing in SAB

According to van Andel, investors who were invested in SAB prior to the AB Inbev bid last year have received excellent short term returns. Looking more to the long term, he pointed out that since the global financial crisis of 2008/2009 “SAB has also performed exceptionally well, with the share price quadrupling since May of 2009.”

To explain the type of return that you could have received if you were invested in SAB, Swart said:

“Over the last three years, if you for instance invested R10 000 in SAB Miller shares on 1 May 2013 at a price of R485.49 per share and held onto those shares until today (5 May 2016), in capital appreciation terms, you would now have R16 875 at a share price of R899 per share. That is a return of 85% over a three year period or approximately 28% annually. I would say that is a pretty good return. Given that the share price is underpinned by an average dividend yield over the same period of 1.52% it definitely sweetens things in a total return perspective.”

However, when looking at investments it is important to remember that past performance is no guarantee of future performance. In other words, simply because SAB or another company did well on the JSE in the past, it does not necessarily mean that if you invest in that company today you will enjoy the same return on your investment.

Swart added: “Most of the returns you as an investor would have seen, would have come primarily from growth in SAB’s share price and you would be benefiting nicely if you were the investor who stood firm in your SAB holdings in recent times. The compounding effect of returns on top of returns over a long period, or otherwise described as compound interest, should not be under estimated in the world that is equity investments. Even though SAB’s dividend is not the most attractive you can find on the JSE, with other sectors providing yields of between three and six percent, it has still been a steady income stream for those seeking dividends.”

Investing in the alcohol industry

Investing in this sector has traditionally been a defensive tactic as it flourishes in good economic conditions, and still provides modest returns in weaker conditions,” Swart revealed.

Van Andel added: “The major global alcoholic beverages companies have excellent fundamentals – high barriers to entry, high and generally stable operating margins, excellent brands, and good growth prospects, particularly in the emerging markets.  So overall, the industry characteristics are favourable, providing that investors pick the right companies, and pay reasonable entry prices.”

According to Swart, the alcohol industry has undergone a number of changes over the years. This includes the expansion of product lines to include various alcoholic and non-alcoholic beverages to appeal to a wider range of consumers.

“The alcohol sector thus provides any portfolio of stocks with the necessary diversification and defensive characteristics that are required. Uncertain economic times such as those currently experienced and the volatility brought to the stock markets, necessitates investments in industries with these types of characteristics,” stated Swart.

“When considering an investment in this sector, one should look at companies that have traditionally strong and premium brands, if possible. You need those brands that sell no matter what, and it is those brands that could make the difference in tough economic conditions. I don’t think there is a lot more room for fledgling companies to aggressively enter the market, and one should rather look at companies whose margins are relatively stable and whose market share is strong. Any fledgling companies that do come to the fold with growth potential, usually seem to get swallowed rather quickly by one of the more major players.

“Do not, however, forget the most important part of making an investment on the stock market. You need to buy at a price that is attractive given the long term prospects of the company and industry. With this said, buy into attractive valuations, but don’t necessarily completely avoid the more fairly valued big companies, as their resilience is what one also needs over the longer term,” added Swart.