Headwinds in Africa for SABMiller

Shares of SABMiller declined (down around 2% at time of writing) following the company’s fourth quarter trading update.

The brewer reported a 2% increase in revenue in the fourth quarter – revenue growth for full year came in at 3%.  

Total beverage volumes increased by 2% for the full year, with lager volumes up 1% and soft drink volumes increasing 5%.

On a regional basis, revenue from the Peroni maker’s European and North American businesses were flat, while both Latin America and Africa saw growth of 5% and Asia Pacific grew 4%.

In addition to the update, SABMiller announced that it’s currently reviewing strategic options for its 39.6% stake (worth around £1bn) in South Africa-based Tsogo Sun, operator of hotels and casinos.

Regarding the results, the company did indeed manage to report some overall growth, but near-term challenges meant that it was below expectations.

SABMiller’s emerging markets challenges

SABMiller’s exposure to emerging markets, which has helped offset sluggish growth in Europe and North America, have long since helped drive good growth at the company.

Recent conditions in emerging markets, however, have introduced headwinds: the company has, on a number of occasions, warned about the negative impact on its full-year results due to adverse foreign currency movement.

That’s aside from a slowdown in Africa. For instance, challenging economic conditions in South Africa were partly to blame for flat soft drinks volumes for the year in the region.

Meanwhile, the weak economy in Zimbabwe saw lager volumes there drop 18% in the fourth quarter. Not to mention political tensions in Mozambique – this was attributed to the 2% decline in lager volumes there.

These concerns are likely to linger for the time being, despite the company’s solid long-term prospects.

That has the potential to affect its valuation. Currently, SABMiller enjoys a premium over its peers, sporting a valuation of some 22x expected 2014 earnings.

That’s ahead of competitors, the likes of Anheuser-Busch InBev (AB InBev), which trades at 20x expected 2014 earnings and Diageo at 19x.

Of course, recurring speculation regarding a potential takeover of SABMiller by larger rival AB InBev has offered support to SABMiller’s valuation but current concerns will likely weigh on it in the near term.