Coming only weeks after SABMiller’s withdrawal from the bidding for Femsa Cerveza, of Mexico, the brewer’s third-quarter trading update yesterday felt a tad underwhelming. The slight sense of hangover was not helped by flat volumes, compared with market expectations of a 1 per cent increase.
While the group’s failure to swallow the Sol and Dos Equis brands is disappointing, particularly at a time when Latin America has been the top-performing region for SABMiller, investors should be relieved that Graham Mackay, its chief executive, was unwilling to overpay for Femsa. The Mexican business may have been worth $7.6 billion (£4.6 billion) to Heineken, but not to him.
His discipline is all the more commendable given that a Femsa deal had been seen by some as a suitable final hurrah before Mr Mackay, who listed SABMiller in London a decade ago, heads into retirement. Although a landmark final deal may now be beyond him — unless Carlsberg’s Russian woes force the controlling Carlsberg Foundation to consider a merger — he does not appear to be in any hurry to step down.
Insiders reckon that he will first elevate Alan Clark, the head of SABMiller Europe, to chief operating officer with a view to him taking the top job in two or three years’ time — if he performs to plan.
But to judge by yesterday’s numbers, Mr Mackay still has plenty to do. While SABMiller’s Latin American and African businesses did well, Europe and Asia disappointed. Its American joint venture also struggled as Miller Lite suffered from the decline of the restaurant sector.
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Yet the biggest challenge is in South Africa, where volumes fell by 4 per cent amid a rising tide of unemployment and, more seriously, a loss of market share to Heineken’s Amstel brand. Its attempt to push its Peroni Nastro Azzurro and Grolsch export brands through its South African distribution network failed after an over-aggressive initial drive and the move has been scaled back.
The bald numbers hide one or two mitigating factors. For example, in China the growth rate halved because of heavy snow and rain, without which volumes for the group would have almost met pre-update forecasts. In the United States, its joint venture is winning market share from the giant Anheuser-Busch InBev combine. The other positive is the predicted fall in commodity prices for packaging in the coming year, while its success in pushing up prices in some key markets should also boost the bottom line. At the same time, its strong balance sheet gives it the scope to look at smaller Latin American targets — and anything bigger that might come up.
The shares, off 41p at £17.80, are trading on about 18 times full-year earnings. Not cheap, perhaps, but far from stretched, given stronger forecast earnings growth than any of its peers. Hold.
Chemring
Ken Scobie’s 13 years as chairman of Chemring, the maker of military flares and munitions, are ending with a bang, not a whimper. In his last full year in charge, revenues broke through £500 million, underlying profits exceeded £100 million and the company’s stock market value passed the £1 billion mark.
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It rose further yesterday as Chemring accompanied record annual results — sales, profits and dividends all grew by two fifths — with its second American bolt-on acquisition in four months. It is paying $79 million (£50 million) for Allied Defense, a maker of ammunition for air-transportable light armoured vehicles. The deal, which will boost Chemring’s earnings in the first year of ownership, matches Allied’s manufacture of metal parts with Chemring’s expertise in explosives and fuses, and expands the company’s presence in fast-growing, non-Nato defence markets, such as Asia and the Middle East.
The concern is how Chemring, one of the stock market’s ten best performers of the Noughties, will fare in an era of uncertain frontline military commitments and tighter defence budgets. The company contends that President Obama’s commitment to send 250 additional helicopters to Afghanistan should underpin its counter-measures division, as will initial stocking of chaff for the Eurofighter Typhoon. It also believes that its niche activities in pyrotechnics (illumination rounds for night operations) and ordnance disposal (the supply of vehicle-mounted radar to detect roadside bombs) should protect it from the worst cutbacks. Only spending on munitions, its smallest division, is expected to suffer.
But Chemring’s broader investment case remains: a still-small presence in its fastest-growing markets and the ability to supplement growth from product innovation through acquisition. At £29.66, or 12 times earnings, hold.
IQE
Forget the arcana of epitaxial wafers and compound semiconductors. The Cardiff-based IQE is best considered the biggest independent supplier of essential raw materials to a rapidly growing market. Its core business is providing the polished gallium arsenide surfaces on which wireless microchips are etched — and, given surging demand for smartphones, which carry four times as many chips as a standard mobile handset, its second-half sales have felt the effect: up 45 per cent on the previous six months. The longer-term draw is IQE’s foothold in two emerging technologies: light-emitting diodes, the low-power long-life alternative to conventional light bulbs, and “concentrated” solar cells for power generation. For now, IQE’s debt burden continues to fall — to £15 million — while restructuring during the downturn has left profits geared to improvements in sales. At 19p, or 19 times earnings, buy.