Description

This is probably the most undervalued "real company" in the world that I have come across in the past 12 months.

Brau-Union (Brau) is the leading brewer in Austria (56% market share and 60% of sales). The company also has a strong position in Hungary and Romania with roughly 20% & 35% market share in each respectively. Brands include Gosser, Kaiser, Puntigamer, Edelweiss, and Schwechater. There is very little growth in either Hungary or Austria due to already-high beer consumption. Going forward, as a way to generate growth other Eastern & Central European markets will gain in prominence for the company as Brau has a publicly stated goal of becoming the dominant Central & Eastern European (CEE) brewer. CEE has a highly developed beer-drinking culture with a fragmented collection of suppliers. Thus Brau will grow through aquisition, rather than through 'green-fielding'. Competitors include numerous local brands and a few foreign companies such as South African Breweries, Interbrew, and Heinicken.

Brau's beer business is not very exciting on stated numbers with EBIT margins of nearly 9% (on net sales), versus 20% for Budweiser and 14% for Interbrew. Pretax return-on-capital-employed (RoCE) is also subpar at 13% versus 28% for Bud. However, due to income-hiding accounting practices employed by most old-line German and Austrian firms, adjustments do need to be made to Brau's figures in order to make a more meaningful comparison. The most important of these is to consider that Brau depreciates on an average schedule of 11 years, versus an average of 18 years for Budweiser, Carlsberg, and Interbrew (I arrive at this number by dividing gross PPE by depreciation). On a schedule comparable with the industry's average, Brau's margin increases from from 9% to 15%--higher than both Carlsberg and Interbrew's, though lower than BUD's 20% margin. Similarly, adjusted RoCE increases to between 15% and 21%, depending on the treatment of depreciable fixed assets and provisions. Either compares favorably to the 10% RoCE for Carlsberg and Interbrew, and the top-end RoCE even compares favorably to Bud's 28% RoCE. Finally, I also compare Brau on the basis of operating cash flow margin (OCF/Sales) and find that Brau's 1999 margin (the last year available for all comparable companies) of 17% is higher than that of both European companies and comparable to that of BUD's 18% OCF margin. In a sentence: Brau is a highly profitable firm. On like financial terms, Brau is above-average when compared with the Europeans, though below that of BUD. The difference between Brau and Bud likely has to do with BUD's relatively lower cost of brand management given that it really has only one brand to promote.

Apart from the beer business, the company also operates a real-estate division, of which they own 75%. The division converts company-owned property and newly purchased property into income-producing assets. The estimated total value of such non-core property (both developed and undeveloped) is over 4bn shillings (euro 300mn); i.e. their stake is worth euro 225mn.

Management has not done anything stupid over the years. The stock itself has been more or less flat over the past decade, even as book value has grown at roughly 8-10% year. Based on the consistent growth in intrinsic value, this is not a value trap....though ownership obviously may require patience. And the company pays for your parience with a 4% dividend yield (see below).

The company is 65% owned by BBAG, an Austrian interest with property and non-alcoholic beverage businesses. BBAG trades also. At times, you receive Brau at a discount through the parent; i.e. a double discount. The remainder is free float. There are no other significant holders.

Valuation:
Price: 42 euro
Mkt Cap: 420mn euro
Net Cash: 133 mn euro
Other Investments: 13 mn euro
Non-core real estate: 225 mn euro
EV: 49mn euro.
Revenues: 782mn
EBITDA: 141mn
Dividend Yield: 4%

At .35x EV/EBITDA, the public market valuation is laughable. Even ignoring the non-core real-estate and simply adjusting for the excess depreciation, the company trades at 6x earnings (versus 12x stated earnings). Another way of looking at it is that one can purchase 56% of the Austrian market for 49mn euro, or roughly one week of BUD's free cash flow. Considering the above financial analysis, it can be argued (and I do argue it!) that Brau is every bit as solid of a company as Interbrew and not much inferior to Budweiser. At aquisition multiples afforded to decent brewers--10x EBITDA--one can arrive at an intrinsic equity value in the range of 150 to 200 per share, versus a current price of 42....That is not a misprint...Intrinsic value growth, including the dividend of 4%, should be in excess of 10-12%.

Risks
As a member of the EU, Austria poses no material political risk per se. Currency risk is also limited. The most probable company-specific risk is a take-under by the parent. Secondly, the company has execution risk as it expands into other CEE markets. Not only is there much more competition (in, say, Poland), but pricing differences require higher volumes for comparable sales, and as a result, it is possible that margins will fall concurrent with an increase in capital employed.

Finally, they have an English website: www.bbag.com.

Catalyst

Takeout by South African Breweries, who has expressed interest. Takeout by parent at a fair price. Otherwise...collect the dividend and wait.