United Breweries Limited (UBL)’s net sales in Q3’09 grew substantially by 24% y-o-y to Rs3.7 billion.
The EBITDA margin advanced 200 bps y-o-y to 9.4% in the quarter, from 7.4% for the same period in FY08, on the back of a 243-bps y-o-y fall in the advertisement and sales promotion costs (as a percentage of sales).
UBL has a highly leveraged capital structure with a debt-to-EBITDA ratio of around 4x, largely attributed to its expansion activities and acquisitions in the recent times. The Company has raised Rs4.25 billion through a rights issue; however, we expect this money to largely meet the CAPEX requirements for FY09 and FY10.
Subsequently, we expect UBL’s financial leverage to remain at least 3x for FY09E. As a result, it will continue to bear a substantial interest burden, which will drag its net margins.
We expect the EBITDA margin to improve by ~80 bps in FY10 to 11.3% as raw material prices have fallen recently. Moreover, the Company should benefit from economies of scale and better realizations on the back of strong brand equity.
At the CMP, the stock trades at a forward P/E of 40.7x and 28.2x for the revised FY09E and FY10E earnings, respectively.
Based on our DCF valuation, assuming a 14.2% WACC and a 5% terminal growth rate, we have arrived at a fair value estimate of Rs70, suggesting a downside of ~10% over the CMP of Rs77.85. We maintain a SELL rating on the stock.