Description

QUILMES (LQU) : Don´t Cry for me Argentina


Quilmes is the largest brewer in Argentina with almnost 70% market share, besides that it bottlers Pepsi and other soft drinks. The company has also operations in Chile, Uruguay (56% market share), Bolivia and Paraguay (in both countries it has an almost monopoly). Heineken has a stake of 15% since 1984.

The company generates 30% of its EBITDA outside Argentina, which is enough to service the debt with a good margin of safety. The indebtness is around US$ 300 million, debt service is around US$ 30 million/year.

Valuation

Blend of Replacement Value + Franchise Value for Bolivia & Paraguay

Total Beer Capacity (Millions of hectolitres) 19,28
(-) Installed Capacity Bolivia+Paraguay (5,04)
(=) Capacity Valued at Replacement Cost 14,24
Replacement Cost per HL in US$ 47,00
Value of Installed Capacity Less Bolivia+Paraguay 669,18 (A)

Franchise Value for Bolivia & Paraguay (2002 Estimates)

US$ Million Ebitda Multiple Franchise Value
Bolivia 34,00 7 238,00
Paraguay 30,00 6 180,00
Sum 418,00 (B)

ENTERPRISE VALUE (A+B) 1.087,18
(-) Net Debt (307,2)
EQUITY VALUE 780,0

Nr. of Shares (million) 52,5

Value per Share without Softdrinks 14,86

Market Price (March 11, 2002) 12,52

Discount (Margin of Safety) 16%

Up Side 19%

Replacement Value Soft Drinks 10,42 ´@US$ 12 125,1

Equity Value with Soft Drinks (US$ millions) 905,1

Value per Share with Soft Drinks 17,24

Up Side with Soft Drinks 38%

Obs: Replacement value for soft drinks is US$ 12.00/hecotolitre and for beer is US$ 47.00.

Value of Distibution:

The estimatives above do not contemplate the value of the beer/soft drink distribution, and this has a lot of value because is the biggest barrier to entry in any market. An exemple is Molson, that bought from AMBEV (ticker ABV) the Bavaria and Pilsen brands in Brazil. The local Anti-Trust authorities forced AMBEV to distribute the beer on behalf of Molson.

Historical Comparisons:

After the Tequila crisis in 1994 , Femsa was traded at least replacement value. The same applies to Brahma (AMBEV´s former name) after the Collor Plan in 1990 (Brazil).


LATAM Brewers Battlefield:

There are a lot of corporate activity in the region, and below I will provide a glimpse about that.

Anheuser-Busch: It has an stake of 20% of CCU (Chile), and also would like to re-entry in Brazil.

Heineken: Owns 14% of Kaiser , the 2nd largest brewer in Brazil. It has a stake of 15% in Quilmes, and is getting a piece of CCU (Chile) through a merger with the German group Schorghuber. In addition to that, Heineken would like to buy a controlling stake in Kaiser which is owned by Coca-Cola and the local bottlers. An important acquisition made by Heineken is the Bravo Brewery in Russia, which they paid US$ 100.00/hectolitre. Remember that few years ago Russia was in serious trouble like Argentina.

Molson: It has a brewry operation in Brazil , that has 7% market share, and also is chasing Kaiser.

South African Breweries (SAB): Recently ( November 2001) they bought Cerveceria Hondureña , which cost US$ 537 million or almost an EV/EBITDA of 7.6x, if included the synergies due to a merge with San Salvador Brewery.

Investment Positives

- Quilmes is a survivor. The company is operating for more than hundred years. They survived military dictorship, coup d’état, urban guerrilla, Peron & Evita, hyperinflation etc.

- Asset Quality. The company has a market share of 70% in Argentina, and wonderful operations in Bolivia and Paraguay. Last year they finished to revamp the plants.

- Dolar denominated costs are low, is around 30% (aluminum, pet, glass).

- Management is competent, they delivered an impressive 3Q01 results despite the Argentinean recession.

- Low leverage, the company can repaid their debt with the cash generated offshore and has low capex for the next 2 – 3 years.

- Low valuation based on replacement value, and has a good franchise value (distribution and brand recognition).

- High corporate activity in the region.

- There is no racial or religious conflict in Argentina like Indonesia.

Investment Negatives

- Argentina’s political and macro-economic situation. All turmoil in the country is about: Who will foot the bill? This will be solved, but I don’t know how, however it will. Remember Mexico and Russia, it takes time.

- Shrinking disposable income. The crisis will reduce beer and soft drink comsumption, so near term outlook is not good.

- Requires patience and fortitude. The news flow is very negative, but this is a situation that we can apply a principle developed by Sir John Templeton: “The Principle of the Maximum Pessimism” . The best moment to buy is when the gloom is deepest. It will also require a long term view.

- Low liquidity. This is not a problem for individual investor but for institutions.

Catalyst

1) Low valuation. Quality assets selling below replacement costs.

2) If the Bemberg family decides to sell, they will have many offers, such as: Heineken, Ambev, CCU, Molson, SAB etc.