United Breweries Limited (UBL)’s Q4’09 net sales grew by 20.9% y-o-y, above our expectation, to Rs4.6 billion primarily on the back of improved market share.
Besides this, EBITDA margin has improved by 526 bps y-o-y to 18.6% in Q4’09. The improvement was largely due to fall in the employee cost and advertisement cost as percentage of sales.
UBL has a high leverage in its balance sheet with a debt-to-EBITDA ratio of around 4x, largely attributed to its expansion activities and acquisitions in the recent times.
The Company raised Rs4.25 billion through a rights issue; however, this money will largely meet the CAPEX requirements for FY09 and FY10 and is unlikely to be deployed for debt repayments.
Outlook and valuation
We have revised our TP based on DCF valuation to Rs78 from Rs70 due to the better-than-expected market share and margin performance by the company.
But the stock appears expensive at Current Market Price (CMP) considering UBL’s low ROE of 12% with a current P/E of 54x when compared to FMCG companies, which command ROE of 60-65% and trade at relatively lower P/E of 20-22x.
Moreover, UBL’s Free Cash Flow per share is likely to remain low at Rs. 1.8 in FY10 on account of heavy capex plans, which represents a tiny FCF yield of 1.5%.
Hence, we maintain our SELL rating on the stock.