Brazil: Beer prices hike seen as positive by analysts
This week’s news of high prices at Ambev from October onwards was seen as positive by analysts, even more so as more information was revealed about this readjustment, local media reported.
The rise in the prices of Ambev products, which owns the Brahma, Skol and Corona brands, should vary between 5% and 10%, depending on the product and the region. According to the Brazilian Association of Bars and Restaurants (Abrasel), the increase in prices in São Paulo should be greater, around 10%, while the expectation of readjustment in other states is between 6% and 8%.
According to Credit Suisse, the news is positive, supporting the industry’s pricing power to mitigate headwinds for 2022. “Prices vary between channels, brands, packages and regions, noting Ambev’s more flexible approach to its launch,” reinforce the analysts.
Analysts at BBI pointed out that while the company said in its 2021 second quarter earnings conference call that it was considering an October price increase, consensus estimates would not be fully reflecting this price increase.
Levante Ideias de Investimentos also points out that Ambev has been suffering from the high prices of its main inputs, with the company’s cost of goods sold (COGS) per hectolitre in Brazil jumping 18% in the quarter, being heavily affected by the devaluation of the real and an increase in the price of agricultural commodities, which are imported by the company. The increase in the price of aluminum affects the manufacture of cans and fuels, making freight more expensive. Thus, the elevation is positive for the company.
While Ambev raises prices, Heineken, according to information from Valor, does not provide for increases in values in the last quarter of 2021.
But he pointed out that the “reviews in the price list are related to the natural dynamics of the Brazilian market and the needs to mainly offset the impacts of the dollar’s appreciation on the costs of raw materials and logistical costs, which are closely linked to the price of fuel.”
The BBI pointed out that the comment that Heineken will not increase Brazilian beer prices in the fourth quarter could seem marginally negative for Ambev’s shares in a context of rising prices by the Brazilian.
This scenario could even result in some loss of market share for Ambev that is not considered in the bank’s base case. Analysts are projecting that Ambev’s Brazilian beer volumes are stable in the fourth quarter of 2021 compared to the previous year.
“However, this risk is mitigated by our understanding that Heineken will have capacity constraints that will likely last until 2023 (when it plans to open a new plant) and also taking into account the fact that the fourth and first quarters are those where demand is seasonally stronger,” they point out.
This is the period when Heineken’s bottlenecks can be even more severe, thus limiting its ability to “snap up” additional market share.
“Thus, we are not changing our optimistic view of Ambev, which is based on our opinion that: i) the market is still not pricing for the share the likely cost relief in the coming years with the fall in agricultural and 2 ) an attractive price-to-earnings ratio of 18 times for 2022, below the historical and becoming more attractive with the expectation of a recovery in the margin,” they assess.
BBI continues with an outperform recommendation for the stock, with a target price of R$21, or a potential increase of 35.5% compared to the closing on September 29.
It should be noted that, in the second quarter results, more skeptical analysts highlighted the company’s cost reduction challenge, in addition to fears about the competition, while others, such as BBI, pointed to the prospect of lower costs.
Analysts have been divided on Ambev’s assessment. Of the 15 homes that cover the stock, according to Refinitiv data, 4 recommend a purchase, 7 recommend maintenance and 4 recommend a sale. The average target price is R$17.27, or an increase of about 11.5% compared to the previous day’s closing.
01 October, 2021
