Can Budweiser APAC Weather a Recession?


Beer giant Budweiser Brewing Company APAC Ltd (SEHK: 1876) could have hardly gone to the public market at a worse time.

Since its IPO last September, amid Hong Kong’s unrest, the company’s share price initially climbed for a while. However, then it embarked on a slow and prolonged fall.

At the start of 2020, the company has taken a big hit from Covid-19. In Hong Kong, for instance, the government extended its draconian social distancing measures to the city’s pubs and bars. Ever since 3 April, they have been ordered to close down.

With many uncertainties lying ahead, the chance of a near-term recovery for Budweiser APAC is slim.

Its 2020 revenue could shrink further. Revenue loss from the Chinese market during the start of the Covid-19 outbreak is estimated to be around US$285 million.

Budweiser APAC did declare in its annual report that by the end of February, more than half of its breweries have reopened. Yet, the real worry is whether consumers can quickly pick up the fall in demand.

At this point, an initial look at the broader sector could provide us with a better understanding of where Budweiser APAC stands in the broader market.

More importantly, can it weather the headwinds and expect a rapid recovery when the crisis comes to a close?

What is a consumer staple stock?

Consumer staples are goods essential in day-to-day life, such as food, beverages, tobacco, and other household and personal products.

They are considered to be less sensitive to economic cycles. In layman’s terms, it means these are goods that serve more basic needs. Therefore demand for them would not change as significantly as some other more luxury goods during economic downturns.

For instance, data from the US market has shown since the beginning of 2020, the consumer staples sector has recorded much stronger performance (a 9.6% loss year-to-date versus the S&P500’s 17.7% fall).

Yet the beverages segment was among the worst-performing among consumer staple stocks, falling below the sector’s average with an 11.40% loss year-to-date.

The data could potentially provide a general reference point for the sector’s relative resilience in times of crisis. It also proves largely true when comparing Budweiser APAC’s performance against the Hang Seng Index benchmark in March.

I would go on to argue that, when combined with the company’s performance in the past year, the industry-wide resilience could potentially lead to a strong comeback of Budweiser APAC’s stock in the medium to long term.

The odds of a strong comeback

Being the second-largest industry giant in Asia’s beer market, with the greatest number of drinking-age adults, Budweiser APAC has a 13.5% market share.

In addition, it also owns brands such as Stella Artois and Corona, as well as many local brands in Asia-Pacific markets.

Budweiser APAC market share

Source: CNBC

With a company of the size of Budweiser APAC, its cost of capital will be lower. Just consider the company’s non-current assets in 2019 (US$ 13.2 billion). That’s more than six times the size of its current assets.

It means that with minimum cost of capital, the company will generate more value than it spends. In fact, the US$614 million capital expenditures in 2019 were mainly funded through cash from operating activities.

In difficult times such as the current crisis, this translates to bigger cash buffers and the ability to afford more investments and buyouts even when others struggle to maintain liquidity. Besides, there is hardly anything more convincing to investors than a healthy balance sheet.

The firm also operates on an EBITDA margin much higher than the industry average. By the end of 2019, its normalised EBITDA grew by 11.0% and normalised EBITDA margin expanded by 271 basis points to 32.4%.

This compared to an annual EBITDA margin average of only 19.68% in the alcoholic beverage industry. The high profitability of the business gives the company an edge over its competitors.

That’s one good reason for investors to be optimistic about its future performance.

Foolish conclusion

There have been hopes that Chinese consumers will lead the global trend of spending as the “Golden Week” May holiday.

Although the country has been through a lot battling the virus, it will not take long before the consumers drive up the economic engines.

It seems like Budweiser APAC is promised a head start to reignite the business and lead the industry’s way into the path to recovery.