Ambev Q2: Many Positive Trends (NYSE:ABEV)

investment thesis

I recommend buying Both (NYSE:ABEV) actions. The company published its Q2 results, showing good growth trends and improved margins, especially in Brazil and CAC (Markets in Central America and the Caribbean), thanks to its strategy to focus on the premium segment.

Additionally, the company remains extremely thin compared to its global peers, even though it has one of the most profitable and profitable operations in the world.

Reviewing the results of Ambev

Ambev released its results on August 1st, and as we can see below, they were better than the market expected.

Next, I will do a detailed analysis of each segment of the result. It is important to point out that the company discloses its results in BRL, and I will convert them to dollars using the exchange rate of 1 dollar = 5.59 BRL, the exchange rate of the last day of the second trimester. Enjoy reading!

Revenue – Good numbers

The company reported a nice 6.1% increase in revenue year-over-year to BRL 20 billion ($3.58 billion).

And as I explained in my report at the start of coverage, the company splits its revenue into Brazil, CAC (Central American and Caribbean markets), LAS (Latin and South America) and Canada.

On the positive side, the Brazil (Beer) segment performed better than expected, driven by strong revenue growth of +7% YoY, driven by higher volumes (+3% YoY). The CAC division still saw volume growth of 3% over last year.

In my opinion, the good results in these segments are the result of successfully executing the core product growth strategy and investing efforts in premium and core plus products in beer and in diet, light and zero or health and wellness products in non – alcoholic segments.

On the downside, the LAS division saw volumes decline 14% YoY, with Argentina down 21% YoY in the quarter. In Canada, although it has a more mature industry, volumes were down 7% from the previous year.

In short, the CAC division surprised positively and continues to be the one with the greatest growth potential for Ambev, while Brazil saw less robust but interesting growth. Both geographies more than made up for the poor performance of LAS and Canada.

Costs and margins – good trends

With higher-than-expected consolidated volumes, mixed price trends and lower finance costs, we had an EBITDA of BRL 5.8 billion ($1 billion).

Reiterating the above paragraph, the company continues to present consistent results in the Brazil Beer, Non-Alcoholic in Brazil and CAC (Caribbean and Central America) business units.

Even with the weak performance of LAS and Canada, the Brazil and CAC segments together accounted for 75% of reported EBITDA in Q224, and this corroborates my positive view on the stock.

Profit – Higher than expected expenses and taxes

With finance charges and taxes slightly higher than expected, net income fell 7% year-on-year to BRL 2.4 billion ($429 million).

More taxes worry investors, especially due to the performance of international operations (LAS and Canada) and the impact from tax reform, but as the company delivers solid results, I think this risk will reduce and the profit line will be stronger.

The valuation is attractive

To value the company, we will use the EV/EBITDA multiple.

Adding the multiple of the 4 competitors and averaging them, we see that the sector average is 10x EBITDA, implying a potential 27% appreciation for Ambev stock, corroborating my buy recommendation on the stock.

Both Depending on the evaluation of the quant and the degrees of the factors

It appears to me that Quant Rating recommends holding the stock, and this is the result of revisions. However, I believe that with new results showing the resilience of the Brazilian and Caribbean (CAC) markets, the rating may be revised upwards and the recommendation may be changed.

The marks for profitability and valuation are in line with my analysis. But now let’s talk about a very important topic for all investors: thesis risks.

Potential risks to the optimistic thesis

In addition to the risks highlighted in the coverage initiation report, a major concern is the competitive environment. Per capita beer consumption continues to rise and competitors are scrambling to increase volumes, so overall preference for Ambev’s portfolio of brands doesn’t appear to be as much of a competitive advantage, making it difficult to raise prices.

In addition, the worsening of volume growth assumptions in the LAS and Canada units, in the face of a more challenging macroeconomic scenario, was combined with the expectation of tax increases due to tax reform. Thus, Ambev may need a consistent growth story to generate multiple expansion and appreciation in its stock.

conclusion

Ambev reported results above market expectations, with revenue and margin growth mainly in the Brazilian and Caribbean (CAC) markets, partially offset by weaker performance in Argentina and Canada.

The strategy of introducing premium beers and growing the alcohol-free portfolio has proven effective, and this is coupled with a highly attractive valuation compared to its peers.

Based on this analysis, I recommend buying Ambev shares. In my view, investors should stick with a company with cheap stock and good growth prospects in a resilient market.