Saturday, April 10, 2021

Ash Park on Tequila and Tobacco

In the last quarter we initiated a position in Becle, owner of the 260-year-old Jose Cuervo franchise as well as others including 1800 Tequila and Centenario, the undisputed leader in the tequila category with a share of around 30%, more than double its closest peer. Although it is listed in Mexico –and is thus notionally an ‘emerging market’ stock –it makes 75% of its profit in the US. With margins that are currently depressed by temporarily high input costs (as is the case for other tequila producers, including Campari), a long runway for growth and a pristine balance sheet, we believe the company will compound very attractive rates of earnings growth for the foreseeable future.

At the end of January Altria announced a $2bn share repurchase programme, to be completed by the end of June 2022, equivalent to around 2.5% of the company’s market cap at the time of the announcement.

With its investor event in February PMI said that, if the year is progressing as expected, it will start a three-year repurchase programme of $5-7bn in the second half of 2021 –equivalent to 3-4% of current market cap, or 1-1.3% on an annualised basis.

BAT’s full-year figures in mid-February introduced a new gearing target of 2-3x net debt / EBITDA, to our minds an improvement on the previous goal of getting leverage down to 1-5-2.5x. The CFO said “we believe this is the right level of gearing for the group given our strong cash generation, and this will give us more flexibility in terms of capital allocation by the end of 2021”, which suggests there is a decent chance that repurchases start in 2022. [...]

Over the next five years, assuming that net debt / EBITDA targets are met and maintained, we estimate that the four stocks we own could buy back around $42bn of their equity (14% of their combined market cap). Though they might be starting a little later, BAT and Imperial have the potential to repurchase the most stock over that period, perhaps around 20%: they benefit from their lower dividend payout ratios (54% for Imperial and 65% for BAT, compared to 92% for PMI and 78% for Altria) and their lower valuations (2021 calendarised P/Es of just 6.1x for Imperial and 8.3x for BAT, versus 11.1x for Altria and 14.7x for PMI).

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