'Sell' SABMiller shares as brewing competition hots up, recommends Investec

Investec has reiterated its 'sell' recommendation on SABMiller after interim results from the brewing giant missed the market's expectations, with the broker saying that its valuation "looks stretched".

Adjusted earnings rose 3% year-on-year to $1.98bn in the six months to September, but came in shy of Investec's forecasts due to sharply lower profitability in the Asia Pacific region, especially in Australia.

Operating profit margins declined by 30 basis points (bp) from last year to 23.7%, surprising the broker which had expected a 50bp improvement.

Higher profits in Latin American and the US was more than offset by severe margin compression in Asia Pacific and falls in Europe, explained analyst Anthony Geard.

In Asia Pacific specifically, Geard said that negative product mix - faster soft drink volume growth compared to lager - was to blame for falling margins, along with promotional discounting in Australia on the back of rising competition. He said that competition in Europe and China "seems also to be intensifying".

Geard said: "While we keep our below-consensus estimates intact courtesy of lower tax and interest rate guidance, the valuation still looks stretched to us in a low-growth world where competition is hotting up. In this regard, the arrival of a well-armed new entrant in SAB’s most profitable market, Colombia, looks threatening. We stay sellers."

SABMiller shares were down 1% at 3,518p by 13:08 on Friday.