Description

Intro –

Never before written up on VIC, Royal Unibrew is a leading, yet underfollowed regional brewer focused on the Nordic and Baltic regions.  While headwinds are present in RBREW’s beer markets, management has consistently delivered top-line and bottom-line growth, maintained market share, consummated and integrated several accretive M&A transactions, and returned capital to shareholders in the form of both dividends and share repurchases, all while generating an ROIC well above their cost of capital.  As a result, the stock has been a 100-bagger (not a typo) since the lows of the Great Recession and should rightfully be declared the unsung hero of the international brewing community. While admittedly not “cheap,” I believe Royal Unibrew will continue to generate attractive returns for long-term holders of the stock, as the conservatively-minded management continues to execute on accretive M&A opportunities, operational improvements, and capital return (the dividend has almost tripled since 2010 and management repurchases ~3% of the shares each year), all of which should more than offset any beer headwinds in their markets.

RBREW currently fetches what looks like a healthy multiple on an absolute basis (16.8x trailing EBITDA), but I believe this is sustainable going forward, as management continues to execute, the end markets are stable and attractive, and the company remains underfollowed by the international investment community.  Despite a market cap of over $4B, there are no ADRs and the stock does not trade over the counter. As a result, investors must purchase the stock on the Copenhagen stock exchange, which virtually prohibits the retail crowd from participating. Even IB only offers CFDs and requires advisers to jump through several hoops to get the trading permissions required for such an instrument.

History –

RBREW’s predecessors date back to the 19th century in Denmark.  Faxe Bryggeri and Jyske Bryggerier merged in 1989 to become Bryggerierne Faxe Jyske.  The combined company changed its name to The Danish Brewery Group in 1992 and was listed on the Copenhagen Stock Exchange a few years later.  Over the next several years, previous management teams made several acquisitions expanding into new regional markets. These include Latvian soft drink maker Cido Partikas, Latvian brewer Lacplesa Alus, and Polish brewer Brok-Strzelec.  In 2005, the company changed its name to Royal Unibrew A/S.

For the next several years the company plodded along, surviving the Great Recession by doing a rights issue at one point to strengthen the balance sheet, and executing on their playbook of operating efficiently, engaging in accretive bolt-on M&A, and returning capital to shareholders via dividends and share repurchases.  In 2013, RBREW announced the acquisition of Finland’s second-largest brewery group, Oy Hartwall Ab for DKK 3.3 billion. This represented management’s largest acquisition, to date, increasing volumes and revenue roughly 70%. Management paid for the acquisition with newly issued debt and equity, and the Hartwall family finally sold their RBREW shares earlier this year.  The new debt load required the company to put on hold the return of capital to shareholders with a commitment to resume it less than two years later off a higher earnings base.

The past few years have seen positive changes in the C-suite and continued operational execution, strategic bolt-on M&A, and consistent return of capital.

Business Overview –

Royal Unibrew is a leading beverage provider in a number of markets – primarily in Northern Europe, Italy, and in the international malt beverage markets.  The company produces and distributes a wide selection of beers, malt beverages, soft drinks, and cider. Beer brands include Royal Beer, Faxe, Ceres, Lapin Kulta, and several smaller craft brands.  Non-alcoholic beverages include juices, malt beverages, mineral water, and energy drinks. They also produce under license the Heineken brand and PepsiCo products in their markets.

Below is a break out of sales by product category and geography:

The above breakout gives effect to three acquisitions RBREW has announced in 2018 (discussed further below).  These acquisitions have reduced the company’s overall exposure to stagnant beer markets and increased its exposure to other faster growing categories.  Reported numbers do not reflect the entirety of this shift as the bulk of the revenue from these transactions only began hitting the income statement when the deals closed.

Recent M&A –

In 2018, management made three bolt-on acquisitions, one of which closed as recently as July and one of which is expected to close by year end.

Terme di Crodo –

Royal Unibrew has been the leader within the specialty beer segment in Italy for a number of years with Ceres Strong Ale.  The acquisition of Terme di Crodo, the leader within the non-alcoholic citrus beverages category reinforces RBREW’s already strong position in the country.  Terme di Crodo owns the LemonSoda, OranSoda, PelmoSoda, and Crodo Chinotto brands.

RBREW acquired Terme for 13x TTM EBITDA (600mm DKK) on a pre-synergy basis, and expects the acquisition to be accretive this year.  Although management has declined to quantify expected synergies, they have said they will be “substantial,” given Terme’s products largely target the same consumer groups and are distributed/marketed in the same way and through the same channels.  There is a particularly significant opportunity for the LemonSoda brand (the bulk of Terme’s revenue) to further penetrate the on-trade channel (currently at 55%), as it is already at >95% in the off-trade.

Bev.Con ApS & Geyer Frères –

In late June, RBREW announced the acquisition of Bev.Con ApS, a producer of RTD/cider/energy beverages under the brand names CULT Energy, SHAKER, and MOKAÏ.  The deal has not yet closed, but RBREW is paying 11x 2017 EBITDA (total deal value of 350mm DKK) for Bev.Con. Again, synergies are expected to be material and this deal further strengthens RBREW’s position in Denmark and Germany.

In July of this year, RBREW completed their largest recent acquisition, acquiring France-based Etablissements Geyer Fréres, which owns the Lorina craft lemonade, Purethé, and infreshhh brands.  The acquisition of Geyer Fréres is important because it brings with it enhanced access to the French soft drink market and further strengthens its export portfolio, marking RBREW’s first real foray into US markets, as Geyer Fréres has a significant presence in the US.  RBREW declined to disclose Geyer Fréres EBITDA but has said they currently operate with margins similar to RBREW, which would put the acquisition multiple at something like 10.5x.

In sum, a clear shift away from stagnant beer markets to higher growth beverage categories should improve the growth profile of RBREW as these three recent acquisitions are fully integrated and synergies from route-to-market efficiencies are captured.  The balance sheet remains strong with leverage at 1.7x giving effect to the recently announced transactions.

Valuation –

Reported numbers do not fully reflect recent acquisitions so some adjustments need to be made (figures in DKK (‘000):

Notes:

1) RBREW has some small JV investments in other companies but I ascribe no value to them and have removed them from the EV and P&L.

2) As a matter of policy, management does not add back one-time acquisitions costs to reported EBITDA, but I do so above.

While not screaming cheap at just under 17x EBITDA, this multiple is effectively backward-looking as it does not bake in any synergies or organic growth from their bolt-ons, both of which are virtually guaranteed.  Because they have been delivering on all three fronts (organic EBITDA growth, return of capital, and M&A, I believe they are in a position to stay at 17x for the long haul because those qualities make them better than their peers.  In this context, with SAM and STZ both at ~19x EBITDA, RBREW looks much more reasonable, particularly as it continues to acquire brands with more attractive growth profiles at low double-digit EBITDA multiples while RBREW trades at a mid-high teens multiple.  And though I don’t expect this imminently, RBREW is one of the few remaining regional brewer targets in a quickly consolidating industry. It is also worth noting that in a world of publicly traded brewers who are controlled by founding families (TAP, SAM, STZ, HEIA, CARLSB), RBREW stands apart as one of the only brewers without dual-class voting shares.

Finally, and I can’t stress this enough, they have an extraordinarily loyal Danish shareholder base that simply never sells.  As the company continues to engage in accretive M&A, grow its dividend, and repurchase shares, investors with a long time horizon are likely to make a very satisfactory return.

Catalyst

- integration of bolt-ons (synergy quantification / capture)

- further accretive M&A (bolt-on or transformational)

- improved operational efficiencies / earnings growth

- continued buybacks

- increased dividends/repurchases