Founded in 1919 and listed on the Casablanca Stock Exchange since 1943, Société des Brasseries du Maroc (SBM) is a brewer with a market share of more than 95% in Morocco. The company’s activities include beer production (86% of consolidated revenues), mineral water production and import, wine production and Nicolas franchise retail network. SBM operates several industrial plants with a total production capacity in excess of 150m litres of beer and 12m litres of wine, as well as a mineral water production utility (Ain Ifrane) with a capacity of 100m litres per annum. The company’s main shareholder is Castel Group, which has a 68.3% stake (owned through a company called MDI). The free float represents around 20% of SBM’s capital.
SBM holds a strong portfolio of leading brands including Special Flag, Stork, Casablanca and Heineken (produced under a licence agreement with Heineken NV). SBM has a fleet of around 70 trucks for beer and wine distribution and more than 50 trucks for mineral water activity. In 2014 direct distribution represented 33% of total sales, resellers (wholesalers) 46% and modern distribution (hyper and supermarkets) 21%.
After several years of high sales growth as well as improving margins in the past decade SBM has been impacted since 2010 by negative external factors related to the coincidence of the holy months of Ramadan and Chaâbane (the Islamic month preceding the month of Ramadan) with the summer period (peak season of sales), two increases in excise tax on beer in January 2010 (60%) and May 2012 (12.5%), and the closure of alcohol shelves by Marjane (number one hypermarket chain in Morocco) and Acima (number two supermarket chain in Morocco and sister company of Marjane) between 2013 and 2015. The combination of these factors has led to a drop in beer volumes from more than 100m in 2009 to 78m litres by the end of 2015, and deterioration of the company’s profitability with an earnings before interest, taxes, depreciation and amortisation (EBITDA) margin of 24% in 2014 (lowest over the 2010-15 period) compared to 31% in 2009.
Over the coming years, and as shown by 2015 achievements where the company appears to have already absorbed these external shocks with a slight recovery in beer volumes and a significant improvement in margins, SBM should benefit from overcoming all the exogenous factors to continue on a normal path of growth that should gradually lead it to reach the 100m-litre threshold in a 10-year horizon (this is based on 2.5% average annual growth rate).
Furthermore, based on our estimates, sales growth is expected to result into strong earnings growth of 21% in 2016, 7% in 2017 and 6% in 2016. This earnings growth will be driven by higher economies of scale with the expected recovery in sales, by an increase in gross margin as a result of the backward sloping curve on the price of barley internationally and of a depreciation of the euro against the dirham, and by management’s cost-saving efforts embraced since the end 2014. Beyond this SBM’s fundamentals are expected to progressively reach their pre-2010 levels over the coming years. SBM is clearly mispriced by the market as the stock is trading at 2015 and 2016 enterprise value/ EBITDA of 6.9x and 6.5x, indicating a strong upside potential of 57% (target price of Dh2591, €237.56).
Lastly, SBM is financially sound with a net positive cash position of Dh528m (€48.41m), which should ensure the company’s capacity to sustain a payout ratio close to 100% and make the scenario of an exceptional distribution of dividends (like the one made in 2008 with a total payout of 233%) highly plausible within three- to five-year horizon.