Investor Report: JAN - APR 2018
Investor Report: JAN - APR 2018
Investor Report: JAN - APR 2018
IP-Participações 04
Alphabet 05
AB Inbev 07
Miscellaneous 15
Performance 17
IP-Participações Class 18
IP-PARTICIPAÇÕES
As discussed in previous reports, Fed’s decision to understand the rationale of other market participants,
unwind its balance sheet and remove market liquidity but our primary concern is never to anticipate macro
would have ramifications on general asset prices. In trends or the shocks themselves. Our primary concern
recent months, these impacts have become more is to be prepared. We want to anticipate which
evident. The fear that followed the rise in the 10-year companies can create value on their own merits, with
Treasury rate troubled many markets. On our part, we consistency, and who can take advantage of future
only have reasons to celebrate. adverse scenarios.
reasonably accurate estimates, already indicated We significantly reduced our investment in Amazon
attractive returns before the share price drop, after the more than 30% share price increase in
logically, future returns should increase as shares cost 2018. We choose to still participate in its impressive
substantially less. For exceptional companies, trading evolution, however, with a smaller position.
at decent prices, a 1% or 2% increase in interest rates –
In Brazil, our key investments — Itaú/Itaúsa, Energisa,
after a significant stock price decline– would not make
and B3 — were reduced after significant increases
additional purchases unattractive.
given the euphoric beginning of 2018. More recently,
As previously stated, markets are cyclical and following a period of greater complacency with the
subject to shocks every now and then. It is helpful to uncertainties in upcoming elections, risks have finally
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started to reflect on asset prices. While shares of In this report, we will comment on our investments in
state-owned, cyclical and lower-quality businesses Alphabet (Google) and Anheuser-Busch InBev.
soared following a decompression of the economy
ALPHABET
and the appreciation of certain commodities, some
Brazil and abroad, gives us the flexibility to increase In Search, by far its most significant segment, Google
IP-Participações
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IP-PARTICIPAÇÕES
compares hotel prices between various websites, allow us to increase our position at attractive prices.
including Expedia and Booking, and encourages We see no problem with investing heavily towards the
hotels to advertise directly on Google. The result has future. Quite the contrary — Alphabet is positioned to
been a gradual strengthening of hotels versus online lead and extract enormous value from AI technology,
travel agencies (OTAs), once again letting Google which is hardware intensive by nature.
Margins, on the other hand, continue to compress. is no longer just theoretical. In Phoenix, Arizona,
The reason for this is that the currently fastest Waymo is piloting a 100% self-driven transportation
growing businesses (YouTube, Hardware, and Cloud) service.1 By the end of 2018, it will be available to the
have structurally lower margins when compared city’s residents. Waymo’s cars have amassed 9 million
to Search. The fact that search is increasingly used kilometers in test-drives and are at the forefront of
on mobile devices, in which the company must pay the technological race to become truly functional
manufacturers (such as Apple) to maintain Google and secure. The goal of the company is to have fully
as their standard search engine, does not help. automated vehicles, not just on well-signaled roads
Nevertheless, its annual recurring gross profit has and other more straightforward situations, as do
grown in the 17-20% range. The net income has been the Tesla cars today. The argument is that people
evolving at similar levels when deducting recurring do not know how to operate with partial autonomy
expenses in proportion to revenues. safely. Tests indicate that users quickly become too
reliant on the automated system and get distracted.
Sundar Pichai (CEO) and Ruth Porat (CFO) continually A system that works 95% of the time but can surprise
remind investors that Alphabet’s objective is the driver in critical situations can be more dangerous
not to expand margins but to increase profits in than no autonomy at all. In recent cases, such as the
absolute terms. Thus, investors should expect strong cyclist being run over by a self-driven Uber car, and
investments to enable future growth, through research the fatal accident of a Tesla client when crashing into
and development, marketing or investments in fixed a wall, the driver’s distraction was critical and seems
assets (CAPEX). In the first quarter of 2018, CAPEX to confirm that full autonomy is the correct path.
reached US$7.3 billion, half to expand offices and Waymo is one of Alphabet’s Other Bets, does not
facilities, and the other half to increase the company’s generate significant revenues, and is not considered
computational capacity to manage processing- in our valuation calculations. Its development gives us
intensive services, such as artificial intelligence (AI). hope that the Other Bets may not be a waste of capital
1
https://www.youtube.com/watch?v=B8R148hFxPw
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The greatest risk to our investment lies in potential imposition. Therefore, we think this scenario can
regulation, especially antitrust. Last year, the ultimately be managed by the company.
The Android issue is more delicate. Alphabet is being ABI’s business model is attractive in numerous
investigated for non-competitive practices, such as ways. The beer business is reasonably predictable,
requiring from manufacturers the pre-installation of generates strong cash flows, has the potential for
the Google Play Store, Search, Maps, and YouTube organic growth and has a small risk of suffering
on all smartphones. The company has sought to from technology shocks (especially in developing
resolve the issue with the European Commission, countries). In addition, ABI has a massive market
but we would not be surprised if there were other dominance (generating around 30% of global beer
substantial fines along with specific conditions for volumes and almost 50% of the industry’s profits),
the commercialization of Android products. One and a talented, well-aligned management team with
possibility may be to prevent Google from enforcing an envious execution track record.
acquisition costs for Search traffic. Such scenarios Over the last five years, ABI’s share price appreciated
must be considered. However, we believe the services only 20%, while the S&P 500 climbed 84%2. The
offered by Search, Maps, YouTube and the Play Store main drag was the 9% drop in earnings per share
are leaders on their own merits and not by mere between 2012 and 2017, due to: (i) the lack of organic
2
Closing price on 04/30/2018 (adjusted by dividends).
IP-Participações
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volume growth, primarily a result of the economic could cause significant operational deleverage and
recession in Brazil, (ii) the devaluation of emerging jeopardize the company’s ability to maintain its
market currencies, generating a negative cumulative dividends and/or manage its debt. The Budweiser
impact of approximately US$6.6 billion on EBITDA, and Bud Light brands, which account for roughly
(iii) the increase in debt from 1.9x net debt/EBITDA 60% of volumes, have been suffering from worsening
to 4.7x in the period due to the SAB Miller (SAB) competition. The volumes of these brands have
acquisition, and (iv) the shareholder dilution from this dropped 5.8% and 6.5%, respectively, during the first
same acquisition. four months of 2018 4. On the other hand, the Super
Premium category, which accounts for approximately
In 2018, ABI’s market capitalization fell by about 10%,
15% of volumes and has high margins (i.e., Michelob
from US$210 billion to US$189 billion3, following the
Ultra), grows at double-digit rates, helping to offset
increase in long-term Treasury yields, a general decline
the declines of the more popular brands. We believe
in the prices of global consumer goods companies,
that, over the next few years, the change in mix will
and a few company-specific concerns.
result in smaller reductions in revenues than expected.
have questioned the ability of the culture employed the United States represented 38% of total EBITDA,
by 3G Capital’s partners to encourage innovation and while in 2017 this number fell to 26%.
The decline in US beer volumes, which peaked in 2008, between the cash flows denominated in multiple
also causes concern. Since this is the most profitable currencies and the mostly (90%) Euro and US dollar-
and cash-generating region for ABI, a rupture denominated debt. Albeit these risks, a few points are
3
Closing price on 04/30/2018.
4
Source: Nielsen. Data as of 04/21/2018.
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comforting: (i) 93% of debt is fixed with an average cost production to more premium brands to keep revenues
of 3.7% per year, (ii) over 60% of outstanding debt will stable. On the other hand, the beer market still grows
begin to be amortized only in 5 years, long enough in regions such as Colombia, Mexico, China and Africa
for the company to grow its business and improve its due to populational growth, increased disposable
net debt/EBITDA ratio, and (iii) the company’s cash income, increased beer consumption per capita
flow is higher than its net income due to its negative and market share gains from informal beverages.
working capital. The acquisition of SAB brought not only access to
following reasons:
The chart below illustrates the evolution of beer
Firstly, ABI is currently more geographically diverse consumption per capita, by country, between 2004
and has greater exposure to growing economies. The and 2014 and ABI’s current approximate market share
beer market in mature regions, such as the United in each region. The combination of a growing market
States and Western Europe, is no longer growing. In with dominant market share is killer. In 2018, a little
these markets, beer has been losing market share to over 70% of ABI’s volume will come from nascent or
spirits and wine, and breweries have directed their developing markets.
IP-Participações
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IP-PARTICIPAÇÕES
90%
120
80%
Per capita consumption of beer (in litres)
100
70%
80
60%
Market share
60 50%
40%
40
30%
20
20%
0 10%
India
Ghana
Uganda
Zambia
Mozambique
Tanzania
China
Peru
Argentina
Ecuador
Chile
South Korea
Dominican Republic
Colombia
Brazil
Russia
Panama
Mexico
South Africa
Canada
Australia
United States
United kingdom
Germany
PER CAPITA CONSUMPTION IN 2004 PER CAPITA CONSUMPTION IN 2014 MARKET SHARE
Source: World Health Organization. Only the population above 15 years is considered. Data for South Korea, Peru, Tanzania, Mozambique, and Zambia are from 2013. Data for
Uganda and Ghana are from 2011. Market share data are Jefferies estimates for 2016.
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Secondly, management’s commitment to generate avoiding being behind the curve, as was the case with
organic growth is greater than in the past. By the craft beer phenomenon in the United States.
SAB was known as a “market maker” while ABI was a Conversations with former SAB employees indicated
“market taker.” Given the elevated market shares in its that ABI’s more risk-taking culture could accelerate the
central regions, (>90% in Colombia, Peru, Ecuador and brand portfolio strategy: “SAB was quite a risk-averse
South Africa), SAB developed a growth model known business, so there were many cases where we were too
as the category expansion framework. This framework afraid to trial things, whereas ABI is very open to trialing
organizes expansion strategies for a portfolio of things. From that perspective, I think that could be a nice
brands, considering the specific characteristics of change in culture that could actually drive growth.”
EBITDA EBITDA
Balance between:
Cash Flow Cash Flow
Revenue Growth
Operating Costs Total Revenue Growth
and Cash Generaton
Market Share Market Share
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IP-PARTICIPAÇÕES
ABI also created three stock option programs to boost penetration of premium brands in the portfolio over
organic growth5: time and, lastly, new acquisitions – albeit with much
for 65 executives. 4.7 million options with their ABI versus Ambev
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purpose was in 2008 and 2009 when approximately
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100 ABI executives received 33 million options with
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their value subject to the company’s ability to reduce
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its debt levels to 2.5x net debt/EBITDA by the end of
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2013. The company ended 2013 at 2.3x.
aug/14
aug/15
aug/16
aug/17
aug/13
may/14
may/15
may/16
may/17
may/13
feb/14
feb/15
feb/16
feb/17
feb/18
nov/13
nov/14
nov/15
nov/16
nov/17
Multiple other factors will further help sustain growth AMBEV ABI
in the medium-term, such as the remaining synergies Source: Bloomberg (Best PE Ratio – Blended 12m FY)
5
In addition to these three plans, there is another a stock option plan granted for the integration with SAB.
6
Target revenue is US$100 billion and can be achieved through acquisitions.
7
In 2017, the global brands represented circa 17% of volumes and almost 20% of revenues. In 2017, their revenues grew 9.8% (vs 5% of the total portfolio). Over half
of volumes and revenues originate outside their native markets. In 2017, the global brands grew 16.8% outside of their native markets, accelerating from 2016. The
native markets for Budweiser, Stella Artois, and Corona are United States, Belgium, and Mexico, respectively.
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Ambev’s shares currently price in high expectations more exciting valuation level, of about 17x P/E, while
for volume recovery and margin improvements. having similar EBITDA growth prospects.
Considering such recovery in 2018, Ambev still trades
at around 26x P/E, a significant premium not only to The difference in valuation between the two
ABI but to other global consumer goods companies. companies and their main geographical contributions
This implies that ABI, excluding Ambev, trades at a to EBITDA are illustrated below:
8
ABI holds 61.9% of Ambev’s capital. Market capitalizations as of 04/30/2018. Considers an average FX rate of R$3.45.
9
Values calculated as ABI minus 100% of Ambev. Market capitalization considers ABI minus 61.9% of Ambev.
IP-Participações
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IP-PARTICIPAÇÕES
EBITDA 2018 - ABI EBITDA 2018 - AMBEV EBITDA 2018 - ABI (EX-AMBEV)
-1% -1%
12% 10% 17%
26% 22%
32%
15%
21%
6%
21%
19% 68% 29%
Asia Pacific
Source: ABI. Smaller countries may not have been specifically mentioned.
The excessive optimism on Ambev’s operations operational excellence and ongoing improvements),
creates an opportunity to invest in the rest of ABI’s and profits at 8% per year, given the debt deleverage.
businesses at more interesting prices. Furthermore, Along the way, we shall receive dividends of around
as the Brazilian beer market is already reasonably 4% of the company’s current market value. We
mature, it is difficult to foresee long-term volume may even see potential acquisitions fostered by
growth above other developing markets within the ‘dream big’ culture. Overall, this is a good value
competent people.
4 6 8 + 4 Equation
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MISCELLANEOUS
“I haven’t the faintest idea how Elon Musk will turn out, but he has a
considerable chance of success and considerable chance of failure. He
seems to like it that way.”
— Charlie Munger
“At Waymo, we are not just building a better car, we are building a
better driver. And that driver can be used in all kinds of applications, like
ride hailing, logistics, personal cars and connecting people to public
transportation. We see our technology as an enabler for all of these
different industries. And we intend to partner with lots of different
companies to make this self-driving future a reality for everyone.”
— John Krafcik
Miscellaneous
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“The second best business to invest in is the one that generates lots of
cash flow. The best is the one that has an exceptional ability to spend
that cash flow well.”
— VC Investor
“U.S. cigarette consumption has dropped 44% since 1981. Altria stock is
up 71,000% since 1981. Investing is hard.”
— Morgan Housel
Brian Chesky (CEO of Airbnb) to Jeff Bezos: “Jeff, what’s the best
advice Warren Buffett ever gave you?”
Bezos: “[I asked Warren,] your investment thesis is so simple… you’re
the second richest guy in the world, and it’s so simple. Why doesn’t
everyone just copy you?”
Buffett: “Because nobody wants to get rich slow.”
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