UNSP is the top pick in our coverage universe:
Bears on this stock believe that UNSP’s long-term
earnings visibility is low. We disagree – our in-depth
work and conviction on profit pool growth for the Indian
liquor industry aside (refer to our report of 21 May 2013,
Structural Rise in Liquor Profit Pool in India; OW),
Diageo itself estimates >24% EBITDA CAGR for UNSP
over the next five years.
After the initial tailwinds following the change in
management control, we expect the next leg of stock
outperformance to be catalyzed by increased
confidence in higher long-term earnings growth.
What does “economic profit positive in year 5”
mean? In its 4 July press release, following the
completion of the share purchase agreement with
United Breweries (Holdings) Ltd, Diageo reiterated that
‘the transaction is expected to be… economic profit
positive in year 5 assuming a 12% WACC.”
Economic profit is the amount remaining after
subtracting from total income the total monetary cost of
all business activities, as well as the opportunity cost of
profits. Here, we assume the opportunity cost for Diageo
to be its capital employed to acquire the UNSP stake
times its Weighted Average Cost of Capital (WACC).
Diageo holds 25.02% of the enlarged UNSP share
capital at an aggregate cost of Rs52.36bn. Hence, to be
economic profit positive in year 5, UNSP would likely
have to generate over Rs25.1bn of NOPAT in F18. At
the current tax rate and based on our estimate of F18
depreciation, EBITDA should be over Rs40.7bn.
Further, with 12-16% F13-F18 revenue CAGR, we
estimate F18 EBITDA margin of 18.0-21.5%.
In our base case, we estimate F18 EBITDA of Rs44.3bn
and margin of 19.5%.
��
Bears on this stock believe that UNSP’s long-term
earnings visibility is low. We disagree – our in-depth
work and conviction on profit pool growth for the Indian
liquor industry aside (refer to our report of 21 May 2013,
Structural Rise in Liquor Profit Pool in India; OW),
Diageo itself estimates >24% EBITDA CAGR for UNSP
over the next five years.
After the initial tailwinds following the change in
management control, we expect the next leg of stock
outperformance to be catalyzed by increased
confidence in higher long-term earnings growth.
What does “economic profit positive in year 5”
mean? In its 4 July press release, following the
completion of the share purchase agreement with
United Breweries (Holdings) Ltd, Diageo reiterated that
‘the transaction is expected to be… economic profit
positive in year 5 assuming a 12% WACC.”
Economic profit is the amount remaining after
subtracting from total income the total monetary cost of
all business activities, as well as the opportunity cost of
profits. Here, we assume the opportunity cost for Diageo
to be its capital employed to acquire the UNSP stake
times its Weighted Average Cost of Capital (WACC).
Diageo holds 25.02% of the enlarged UNSP share
capital at an aggregate cost of Rs52.36bn. Hence, to be
economic profit positive in year 5, UNSP would likely
have to generate over Rs25.1bn of NOPAT in F18. At
the current tax rate and based on our estimate of F18
depreciation, EBITDA should be over Rs40.7bn.
Further, with 12-16% F13-F18 revenue CAGR, we
estimate F18 EBITDA margin of 18.0-21.5%.
In our base case, we estimate F18 EBITDA of Rs44.3bn
and margin of 19.5%.
No comments:
Post a Comment