3Q19: Higher Costs Still Hamper; Updating Our Estimates ABEV3 Ambev Reported Negative Results in 3Q19, As Expected

Equity Research October 25, 2019

Quarterly results and Price Update Ambev 3Q19: higher costs still hamper; updating our estimates ABEV3 Ambev reported negative results in 3Q19, as expected. On the one hand, we observed higher prices (+5% y/y) leading top line to an 8% growth y/y, totaling R$ 12 bn (4% Rating Market Perform above our forecast and 4% below consensus). On the other hand, costs continued to rise Target-Price - 2020E 21.00 due to FX impacts, higher commodities prices and inflationary pressure in Argentina that also negatively impacted SG&A, though partially compensated by the company’s Last Price - 10/24/2019 19.19 initiatives focused on efficiency gains. As a result, EBITDA came in line with our Upside 9% expectation R$ 4.4 bn (1% lower y/y and 9% below consensus), while margin dropped to

36.9% from 40.4% same period last year, and net income came in at R$ 2.4bn (-16% a/a). Trading data as of 10/24/2019 We highlight as positive sales volume in both NAB Brazil and LAS that came above our Market Cap R$ million 301,863 estimates by 14% and 3%, respectively. Beer volume in Brazil, in turn, fell by 3% y/y (below BB-BIe of -4%), underperforming the beer industry in Brazil that raised low single 1 Month Change % -0.8% digit, according to Nielsen. For the next quarter, we remain conservative regarding beer LTM Change % 23.3% volume increments in Brazil given the still weak scenario for consumption and the fiercely competitive environment. Moreover, costs at higher levels might continue to YTD Change % 24.8% pressure margins, in our view. Thus, in order to better reflect Ambev’s results in our TP, 52w Low R$ 14.49 we revisited our estimates and reduced EBITDA 20E by 4% from our previous estimates to R$ 24 bn, improving from 2021 on. 52w High R$ 20.77

All considered, we introduce our YE20 target price at R$ 21.0, with a marginal upside from our YE19 TP of R$ 20.0, but maintaining the rating at Market Perform. Added to the 140 ABEV3 IBOV low implied upside, ABEV3 has traded at 27.3x P/E multiple, above its 2-year average of 130 22.2x and main global pears. 120 110 Brazil. In Beer Brazil, the price hike implemented in the quarter (+4% y/y) offset the 3% 100 y/y drop in volume, which were negatively impacted by competitors’ discount strategy 90 and the tough macro environment in Brazil. As a result, revenue totaled R$ 5.3 bn, an increase of 1% y/y. However, greater costs from FX and higher commodities prices led 80 EBITDA to decrease by 2% y/y to R$ 2.1 bn, with margin at 40.3% (-140 bps y/y). NAB 70 Brazil, in turn, positively surprised in terms of top line with an increment of 7% y/y in both 60 volume and prices. Thus, revenue came in at R$ 6.3 bn, a significant increase of 14% y/y. On the other hand, costs higher than expected led EBITDA down by 44% y/y and margin shrunk from 51.8% in the 3Q18 to 25.4%. Valuation International units. CAC reported results slightly short of our expectations, but still 2020e positive. Volumes increased by 3% y/y while we expected a rise of 6% in the period. In this sense, we observed a more moderate growth when compared to the trend observed Firm Value R$ million 312,863 in the 1H19. Even though, revenue reached R$ 1.7 bn (+5% y/y) also due to prices hikes Net Cash R$ million 13,080 (+2% y/y). Additionally, the unit was benefited by improvements in SG&A driven by savings and lower variable compensation accruals. Thus, EBITDA margin climbed to Equity Value R$ million 325,943 41.5% from 37.1% in 3Q18. LAS positively surprised with volumes growing by 6% y/y vs Shares # million 15,727 BB-BIe of 3%. Prices came also well above our expectation, contributing thus to a Growth in Perpetuity (g) % 5.0 significant revenue grow of 53% y/y, totaling R$ 8 bn. However, COGS high above our expectation, given FX headwinds in Argentina, led EBITDA margin down to 38.2% vs. 44.7% same period last year. Canada continued in its downward trend observed in the Multiples last quarters in face of the challenging scenario for beer industry in the country. 2019e 2020e 2021e Therefore, lower volumes (-5% y/y) offset the increase of 3% y/y in prices and led revenue to R$ 2 bn (-3% y/y). Furthermore, higher costs related to commodities prices EV/EBITDA 13.5x 12.2x 10.9x and higher logistic expenses contributed negatively, which led EBITDA margin to drop to P/E 26.2x 22.5x 19.1x 28.4% from 32% last year. EPS R$ 0.73 0.86 1.01

Highlights Dividend Yield 2.0% 4.0% 4.7% R$ Million 3Q19 3Q18 y/y 2Q19 q/q Source: Bloomberg and BB Investimentos Net Revenue 11,958 11,064 8.1% 12,145 -1.5%

Gross Profit 6,728 6,695 0.5% 7,184 -6.3% Luciana Carvalho Gross Margin (%) 56.3% 60.5% -4.2 p.p. 59.2% -2.9 p.p. [email protected]

EBTIDA 4,411 4,474 -1.4% 4,691 -6.0% EBITDA Margin (%) 36.9% 40.4% -3.6 p.p. 38.6% -1.7 p.p.

Net Income 2,442 2,901 -15.8% 2,712.1 -10.0%

Net Margin (%) 20.4% 26.2% -5.8 p.p. 22.3% -1.9 p.p.

Source: Ambev and BB Investimentos

1 / 9 Ambev

Actual versus Estimated

Income Statement R$ Million 3Q19a 3Q19e a/e 3Q18a y/y

Net Revenue 11,958 11,519 4% 11,064 8%

Gross Profit 6,728 6,566 2.5% 6,693 1%

Net Income 2,442 3,049 -20% 2,892 -16%

EBITDA 4,411 4,418 0% 4,451 -1%

Margins % 3Q19a 3Q19e a/e 3Q18a y/y

Gross Margin 56.3% 57.0% -0.7 p.p. 60.5% -4.2 p.p.

EBITDA Margin 36.9% 38.4% -1.5 p.p. 40.2% -3.3 p.p.

Net Margin 20.4% 26.5% -6.1 p.p. 26.1% -5.7 p.p.

Source: Ambev and BB Investimentos

Ambev – Performance (reported)

Per Unit

Volume (‘000 hl) 3Q19a 3Q18a y/y 2Q19a q/q

Brazil 23,746 23,853 -0.4% 24,160 -1.7%

CAC 3,445 3,351 2.8% 3,449 -0.1%

LAS 7,892 7,444 6.0% 6,450 22.4%

Canada 2,703 2,847 -5.1% 2,807 -3.7%

Total 37,786 37,495 0.8% 36,865 2.5%

Net Revenue (R$ Million)

Brazil 6,341 6,161 2.9% 6,276 1.0%

CAC 1,657 1,572 5.4% 1,686 -1.7%

LAS 1,971 1,290 52.8% 2,140 -7.9%

Canada 1,989 2,041 -2.5% 2,043 -2.7%

Total 11,958 11,064 8.1% 12,145 -1.5%

EBITDA (R$ Million)

Brazil 2,405 2,661 -9.6% 2,393 0.5%

CAC 688 584 17.8% 811 -15.2%

LAS 753 576 30.6% 841 -10.6%

Canada 565 652 -13.3% 646 -12.5%

Total 4,411 4,474 -1.4% 4,691 -6.0%

EBITDA Margin (%)

Brazil 37.9% 43.2% -5.3 p.p. 38.1% -0.2 p.p.

CAC 41.5% 37.1% 4.4 p.p. 48.1% -6.6 p.p.

LAS 38.2% 44.7% -6.5 p.p. 39.3% -1.1 p.p.

Canada 28.4% 32.0% -3.5 p.p. 31.6% -3.2 p.p.

Total 36.9% 40.4% -3.6 p.p. 38.6% -1.7 p.p.

Source: Ambev and BB Investimentos

2 / 9 Ambev

Valuation

The beer industry in Brazil faces a challenging scenario given the still weak consumption, which depends on further improvements on macroeconomic drivers, such as (i) unemployment rate, (ii) disposable income (iii) credit and (iv) consumer confidence. We have noticed important efforts made by Ambev to offset the negative impact of the aforementioned environment and higher costs related to FX, commodities and inflation in Argentina. Hence, we highlight as positive: (i) encouraging results in the premium segment that has grown double-digit, according to the company, (ii) improvements in affordability in regional brands such as Magnifica in Maranhão, Legitima in Ceará and Nossa in Pernambuco, all of them in Brazil, and (iii) investments in packaging to achieve a major number of channels and clients.

Although we appreciate the company's efforts to offset the negative impact of the macro scenario in Brazil and LAS, we maintain our rating at Market Perform, until these initiatives are translated into some margin recovery, which we expect to happen more intensely from 2021 on.

Risks

We highlight some points that could influence the company’s performance ahead and lead to possible upward earnings revisions: (i) faster than expected economic upturn in Brazil and Argentina, benefiting sales volume; (ii) company’s initiatives focused on its premium segment, affordability and packaging, leading to higher volume sold and recovery in market share; (iii) a relief in commodities prices and efficiency gains greater than expected, benefiting margins; and (iv) synergies coming from future M&A transactions.

The downside risks involve: (i) headwinds from tax increases that would raise prices and possibly impact market share; (ii) a further economic deterioration in both Brazil and Argentina, negatively affecting sales volume and costs; (iv) a more severe competitive environment harming company’s pricing strategy; and (v) changes in tax benefits and rules related to interest on capital.

Financials 2019e 2020e 2018a R$ Million Old New Δ % Old New Δ % Net revenues 50,233 52,220 52,911 1.32% 55,477 55,734 0.46%

EBIT 17,077 18,079 17,013 -5.90% 19,874 18,949 -4.65%

EBITDA 21,099 22,368 21,492 -3.92% 24,565 23,664 -3.67%

Total debt 2,423 2,297 2,267 -1.32% 2,178 2,121 -2.64%

Net debt (9,041) (10,059) (12,429) 23.56% (12,106) (13,080) 8.05%

Gross Margin (%) 61.6% 63.0% 58.4% -4.7 p.p. 64.1% 61.1% -2.9 p.p.

EBITDA Margin (%) 42.0% 42.8% 40.6% -2.2 p.p. 44.3% 42.5% -1.8 p.p.

Net Margin (%) 21.9% 23.2% 20.9% -2.3 p.p. 24.8% 23.1% -1.6 p.p.

ROE (%) 19.2% 24.7% 17.7% -7. p.p. 27.6% 20.4% -7.2 p.p.

EPS (BRL) 0.72 0.81 0.73 -9.6% 0.92 0.86 -6.8%

Net debt (cash) / EBITDA -0.4x -0.4x -0.6x -0.1x -0.5x -0.6x -0.1x

Estimates Valuation Assumptions Firm Value (R$ million) 312,863

PV of FCFF 138,154 Beta 1.1

PV of Terminal Value 174,709 WACC 11.1%

Shares (# million) 15,727 D/(D+E) 4%

Net Cash 13,080 Risk Free 3.2%

Equity Value 325,943 Market Premium 4.6%

Target Price for ABEV3 (BRL) 21.0 Perpetuity Growth 5.0%

Source: Ambev and BB Investimentos estimates

3 / 9 Ambev

Financials R$ Million 2017a 2018a 2019e 2020e 2021e

Net Revenue 47,897 50,233 52,911 55,734 59,986

EBIT 16,533 17,077 17,013 18,949 21,496

EBITDA 20,148 21,099 21,492 23,664 26,542

Gross Debt 2,555 2,423 2,267 2,121 1,984

Net Debt (Cash) (7,800) (9,041) (12,429) (13,080) (14,528)

Gross Margin (%) 62.3% 61.6% 58.4% 61.1% 63.1%

EBITDA Margin (%) 42.1% 42.0% 40.6% 42.5% 44.2%

Net Margin (%) 15.3% 21.9% 20.9% 23.1% 25.2%

Dividend Yield 2.9% 2.9% 2.0% 4.0% 4.7%

ROE (%) 15.3% 19.2% 17.7% 20.4% 23.7%

Debt Indicators 2017a 2018a 2019e 2020e 2021e

D/D+E 5% 4% 3% 3% 3%

Net Debt / EBITDA (0.4) (0.4) (0.6) (0.6) (0.5)

Gross Debt / EBITDA 0.1 0.1 0.1 0.1 0.1

Income Statement R$ Million 2017a 2018a 2019e 2020e 2021e

Net Revenue 47,897 50,233 52,911 55,734 59,986

(-) COGS (18,042) (19,270) (22,030) (21,662) (22,155)

Gross Profit 29,855 30,963 30,881 34,072 37,831

(-) SG&A (14,539) (14,834) (14,752) (16,080) (17,374)

(+/-) Other operating income / (expenses) 1,217 947 884 957 1,039

EBIT 16,533 17,077 17,013 18,949 21,496

(+) Financial Results (3,493) (3,823) (3,275) (2,327) (1,990)

(+/-) Other (112) (85) (85) (95) (107)

EBT 12,928 13,168 13,653 16,527 19,398

(-) Taxes (5,079) (1,790) (2,110) (3,043) (3,571)

Net Income 7,849 11,379 11,543 13,484 15,827

(-) Minority Interest (517) (354) (487) (589) (692)

Adj. Net Income 7,332 11,025 11,056 12,895 15,135

Multiples 2017a 2018a 2019e 2020e 2021e

EV / EBITDA 14.4x 13.7x 13.5x 12.2x 10.9x

EPS (R$) 0.50 0.72 0.73 0.86 1.01

P / E 38.6x 26.6x 26.2x 22.5x 19.1x

P / BV 6.3 5.3 4.8 4.8 4.7

Source: Ambev and BB Investimentos

4 / 9 Ambev

Balance Sheet R$ Million 2017a 2018a 2019e 2020e 2021e

Assets 86,852 94,126 96,636 97,985 100,155

Current assets 24,718 25,330 28,084 28,897 30,977

Cash and cash equivalents 10,355 11,464 14,696 15,201 16,512

Accounts receivable 4,945 4,879 4,115 4,374 4,791

Inventories 4,319 5,402 6,181 6,077 6,200

Recoverable Taxes 2,770 1,285 735 774 833

Others 2,329 2,300 2,358 2,471 2,642

Non-current assets 6,997 8,326 8,652 8,999 9,336

Investment 55,137 60,471 59,899 60,089 59,841

Liabilities + shareholders' equity 86,852 94,126 96,636 97,985 100,155

Current liabilities 28,688 24,828 21,943 22,246 23,267

Suppliers 11,854 14,050 12,484 12,335 12,677

Loans and Financing 1,323 1,561 1,460 1,366 1,278

Payroll and related taxes 1,047 852 1,000 1,053 1,134

Taxes payable 5,494 5,340 3,821 4,025 4,332

Others 8,971 3,026 3,178 3,466 3,845

Non-current liabilities 10,181 11,750 12,122 12,523 12,916

LT debt 1,232 862 807 755 706

Others LT 8,949 10,888 11,316 11,768 12,210

Shareholders' equity 47,983 57,547 62,571 63,216 63,972

Cash Flow R$ Million 2017a 2018a 2019e 2020e 2021e EBIT 16,533 17,077 17,013 18,949 21,496 (-) Tax (5,621) (5,806) (5,784) (6,443) (7,308) NOPAT 10,912 11,271 11,228 12,506 14,187 (+) D&A 3,614 4,022 4,479 4,715 5,046 (-) Capex (3,204) (3,571) (3,908) (4,904) (4,799) (-) Working Capital Needs 4,223 (4,193) (2,307) 89 339 (=)FCFF 15,545 7,529 9,493 12,407 14,774

Source: Ambev and BB Investimentos estimates

5 / 9 Ambev

Sensitivity analysis Target Price YE20

g/WACC 10.1% 10.6% 11.1% 11.6% 12.1%

4.0% 22 20 19 18 17

4.5% 23 21 20 19 17

5.0% 25 22 21 19 18

5.5% 26 23 21 20 18

6.0% 28 25 22 21 19

Sensitivity analysis P/E 20E

g/WACC 10.1% 10.6% 11.1% 11.6% 12.1%

4.0% 30.1 27.9 26.0 24.3 22.9

4.5% 31.6 29.1 27.0 25.2 23.7

5.0% 33.5 30.6 28.2 26.2 24.5

5.5% 35.7 32.4 29.7 27.4 25.4

6.0% 38.5 34.6 31.4 28.8 26.6

Source: BB Investimentos estimates

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[email protected] [email protected] Deputy Managing Director João Domingos Cicarini Junior +44 (20) 7367 5802 Equity Team Head of Sales Agribusiness Metals and Mining Nick Demopoulos +44 (20) 7367 5832 Luciana Carvalho Gabriela E. Cortez Institutional Sales [email protected] [email protected] Annabela Garcia +44 (20) 7367 5853 Catherine Kiselar Oil and Gas Melton Plummer +44 (20) 7367 5843

[email protected] Daniel Cobucci Trading

Banks and Financial Services [email protected] Bruno Fantasia +44 (20) 7367 5852

Wesley Bernabé, CFA Pulp and Paper Gianpaolo Rivas +44 (20) 7367 5842 [email protected] Gabriela E. Cortez

Vinícius Soares, CFA [email protected] Banco do Brasil Securities LLC - New York

[email protected] Real Estate 535 Madison Avenue, 33th Floor Capital Goods Georgia Jorge New York City, NY 10022 - USA

Gabriela E. Cortez [email protected] (Member: FINRA/SIPC/NFA) [email protected] Kamila Oliveira

Catherine Kiselar [email protected] Deputy Managing Director [email protected] Retailing Gabriel Cambui Mesquita Santos +1 (407) 608 1778 Electric and Other Utilities Georgia Jorge ECM

Rafael Dias [email protected] Charles Langalis +1 (646) 845 3714

[email protected] Sugar and Ethanol Nilton Jeronimo +1 (646) 845 3880 Rafael Reis Daniel Cobucci DCM

[email protected] [email protected] João Kloster +1 (646) 845 3717 Food and Beverage Transportation Luciana Batista +1 (646) 845 3864 Luciana Carvalho Renato Hallgren Head of Syndicate

[email protected] [email protected] Shinichiro Fukui +1 (646) 845 3865

Institutional Sales

Economics and Market Strategy Fixed Income Michelle Malvezzi +1 (646) 845 3715 Hamilton Moreira Alves Renato Odo Fabio Frazão +1 (646) 845 3716

[email protected] [email protected] Trading Henrique Tomaz, CFA José Roberto dos Anjos Dennis Holtzapffel +1 (646) 845 3859

[email protected] [email protected]

Richardi Ferreira BB Securities Asia Pte Ltd - Singapore

[email protected] 6 Battery Road #11-02

Singapore, 049909 Sales Team Managing Director

Institutional Investor [email protected] Marcelo Sobreira +65 6420 6577

Retail [email protected] Director, Head of Sales Head - Antonio Emilio Ruiz Fernando Leite José Carlos Reis +65 6420 6570 Antonio de Lima Junior Higor Benedetti Institutional Sales Bruno Finotello Henrique Reis Zhao Hao, CFA +65 6420 6582 Cleber Yamasaki Marcela Andressa Pereira Li Jing Ting +65 6420 6578 Daniel Frazatti Gallina Paulo Arruda

Denise Rédua de Oliveira Pedro Gonçalves

Fabiana Regina Renata Simões

Fábio Caponi Bertoluci Sandra Regina Saran

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