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Anheuser-Busch Inbev Offers 'Best Of Both Worlds'; Morgan Stanley Resumes Coverage At Overweight

Anheuser-Busch Inbev Offers 'Best Of Both Worlds'; Morgan Stanley Resumes Coverage At Overweight
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Morgan Stanley has resumed coverage of Anheuser Busch Inbev SA (ADR) (NYSE: BUD) with an Overweight rating, saying the acquisition of SABMiller significantly boosts Anheuser-Busch volume and sales growth.

"We believe ABInBev offers the best combination of organic sales growth and self help across Global FMCG, which should command a valuation premium," analyst Olivier Nicolai wrote in a note.

Nicolai's bullish thesis is based on "1) rapid top-line growth and a well-diversified group post the deal; 2) cost and revenue synergies will support group EBIT; 3) the shares warrant a 15 percent premium to global FCMG, given the stronger earnings growth profile."

Post disposal of the low-growth assets from SAB (United States, China, Europe), the analyst expects Anheuser-Busch to grow organic sales by close to 6 percent a year and EBITDA by about 10 percent a year in FY17-20, putting the company's profitability and cash generation higher than peers.

In addition, the analyst said very high market share with strong pricing power across most of its markets provides more visibility on earnings.

Related Link: This Penalty's For You: Anheuser-Busch Ordered To Pay Up For Violating Whistleblower Protections

Meanwhile, Nicolai projects cost synergies of $2.5 billion. Anheuser-Busch has guided to at least $1.4 billion over four years from completion plus the $0.5 billion remaining cost savings previously announced by SABMiller.

Further, the analyst expects the company to generate an additional $500 million in EBIT from revenue synergies by 2020 and $1 billion by 2022, six years after completion of the deal.

In fact, Nicolai pointed out that revenue synergies would be the key medium-term upside driver as ABI rolls out its international brands Corona, Stella Artois and Budweiser into SAB markets — Colombia, Peru and South Africa, as well as the rest of Africa.

"In addition to a review of pricing strategy, we expect positive mix, as we saw in Brazil and China where ABI was successful in its strategy around Bud and Stella," Nicolai elaborated.

The analyst also forecast Anheuser-Busch to deliver strong free cash flow, with net debt/EBITDA estimated to fall from 4.5x in FY17 to below 3x in FY20, implying scope for M&A or higher returns to shareholders.

ADRs of Anheuser-Busch closed Tuesday's trading at $128.72.

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Latest Ratings for BUD

Sep 2017ArgusInitiates Coverage OnBuy
Jul 2017JefferiesMaintainsBuy
Mar 2017Bank of AmericaDowngradesBuyNeutral

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