Global hop marketA local alternative to mass beer suggested by independent brewers has been successful and is now altering the global market. Beer is becoming more diversified, so transnational companies have to accept the new game rules and to switch focus to young and fast growing markets. All these processes increased the demand for aroma and bitter hop as well as their acreage expansion on two continents. However now there appeared a downward trend of alcohol consumption in the world, so even special sorts can soon turn to be sufficient. In this connection the dynamic American hop market is already facing some problems. EU hop producers have become more cautious, they are not racing to exceed the demand and look forward with more confidence, judging by the contract terms.
Hop Market in RussiaGermany still dominates the Russian market, yet over the recent two years one has been able observe a continuous success of Czech hop suppliers. Their expansion and growing popularity of hops from the United States became the drivers of supplies growth in 2016 despite the preceding modest harvest crop in the EU, as well as the factor of relative stability in 2017. In this connection, in 2017, the ratio of the varieties continued to shift towards the aroma ones, and the supplies of Magnum hop and other alpha varieties were reduced. However, the import of bitter hop pellets is partially replaced by extracts, especially from the major beer manufacturers. Total volumes of alpha acid supplies, according to our estimation, decreased by approximately 5% and returned to the level of 2015. Barth Haas Group continues dominating the hop products market; HVG also increased its weight. At the same time, Morris Hanbury significantly reduced the supplies in 2017.
10+1 trends of Russian beer market 2015-2017Despite of the moderately negative prognoses for 2017, the beer market can be stabilized soon. Yet the years of the negative dynamics have resulted in marketing being limited just to “optimization” and the art of balancing between price and volumes. Bigger supermarkets share means stronger trade marketing. These processes are connected to the majority of the described trends. At the same time, the federal brands inflation leads to searching for new tastes, sales channels and contact formats that expand the product range and diversify the beer market, but do not imply a substantial volume increase. Let us enumerate and further discuss the ten trends of the beer market we can see in 2015-2017 as well as the major event of 2017.
Beer market of Ukraine 2017In the first half of 2017, the Ukrainian beer market goes on decreasing slowly. Yet, the companies manage to compensate their lost volumes by raising prices and improving the sales structures. This results in the mid price market segment reduction while the sales of premium brands are rising. These processes are connected to position strengthening of companies Carlsberg Group and Oasis and the market share reduction of Obolon. Most of the novelties by the market leaders belong to craft or hard lemon categories.
Beer market of Russia 2016: PET goes to draftThe beer market of Russia was warmed up by the hot summer, but the preparation for large volume PET prohibition has already impacted it negatively. The year was successful for Efes, MBC and regional producers; Carlsberg’s positions were virtually stable but AB InBev and Heineken lost a part of market share having focused on the sales profitability. The dynamics of big brands was determined by how much the companies were willing to keep the prices down or by their promotional activity. In this context the economy segment of the beer market and sales of inexpensive draft beer were increasing. The premium segment started shrinking due to license brands migrating to the mainstream segment.
A Cross-Border Battle: Singapore and Malaysia’s Giant Alcohol Companies
When times are good, people celebrate and drink. When times are normal, people socialize and drink. When times are bad, people weep and drink. No matter what, people will drink.
Of course that was meant to be a joke. But, there is actually some truth in it. Investors in some of the largest alcoholic beverages companies in Singapore and Malaysia would have done very well over the past decade.
In Singapore’s stock market, the largest maker and distributor of alcoholic beverages is Thai Beverage Public Company Limited (SGX: Y92), with a market capitalisation of S$17 billion. Having been listed since May 2006, Thai Beverage has generated a return of 281% (with dividends reinvested) since its initial public offering.
In Malaysia, we have the RM4.2 billion (S$1.4 billion) Guinness Anchor Berhad (KLSE:3255.KL). Over the same period, the company has seen its shares achieve a return of 361% (in ringgit terms) after accounting for reinvested dividends.
So, these returns work out to compound annual growth rates of 14.7% for Thai Beverage and 17% for Guinness Anchor.
With such impressive track records, which of the two might actually be a better investment now? It’s not an easy question to answer, but a look at certain aspects of their business fundamentals can give us clues.
Thai Beverage is one of the largest alcoholic beverages companies in Thailand – it certainly is the largest listed firm in that line of business in Singapore as mentioned earlier. The company counts Chang Beer as one of the many alcoholic beverages in its product portfolio. Thai Beverage’s business mainly resides in Thailand at the moment, but it has a target to increase exports as a percentage of total revenue to 50% by 2020.
Meanwhile, Guinness Anchor is the largest brewery in Malaysia in terms of its marketshare – the company controls close to 60% of the market. Guinness Anchor distributes beer and stout brands like Heineken, Guinness, Tiger, and Anchor. The company is also, like Thai Beverage, mainly a domestic story.
Revenue and profit
In 2014, Thai Beverage had earned revenue of THB162 billion (S$6.4 billion) and net income of THB21.7 billion (S$0.85 billion). This compares with Guinness Anchor’s revenue of RM1.75 billion (S$0.58 billion) and profit of RM214 million (S$71 million) in its fiscal year ended 30 June 2015 (FY2015).
As you can tell, the size of Thai Beverage’s business is at least 10 times larger than that of Guinness Anchor. This makes the Thailand-based company the clear winner when it comes to size.
But in terms of profitability, Guinness Anchor is way out of Thai Beverage’s league.
Guinness Anchor had achieved a return on equity of 58% in FY2015 with the important financial metric coming in at above 35% since FY2011.
It’s worth pointing out that Guinness Anchor had achieved its remarkable returns on equity while employing minimal leverage; to that point, the company’s net to debt to equity ratio from FY2011 to FY2015 had reached a high of only 21%. Over the same period, the Malaysian alcoholic beverages outfit had also averaged an impressive gross margin of 34%.
Let’s now turn to Thai Beverage. While the company’s financials are not lousy by any means, they are clearly inferior to that of Guinness Anchor’s. So, from 2010 to 2014, the highest return on equity that Thai Beverage had generated was 38.8% (that was in 2012); on average over those five years, its return on equity had been ‘just’ 23.8%.
Moreover, Thai Beverage had been using way more debt than Guinness. In the five years from 2010 to 2014, Thai Beverage’s lowest net debt to equity ratio was 16% with the highest coming in at 116%. The company’s average gross margin in that period was also ‘only’ 27.5%.
So, Guinness Anchor is quite clearly the more profitable business of the two.
This is an area where both companies look similar. At its current share price of S$0.685, Thai Beverage is trading at 16 times its trailing earnings. Meanwhile, Guinness Anchor has a price-to-earnings ratio of 18 at its share price of RM14.08 at the moment.
In summary, Thai Beverage has the advantage of size while Guinness Anchor is clearly the one with the stronger profitability. Both companies have similar valuations. While what I’ve shared is useful as a starting point for further study, do note that the information shouldn’t be taken as the final word on the investing merits of the two companies.
17 Feb. 2016