INVESTMENT CONCLUSION ■■
Through successive rounds of M&A, Molson Coors has become one of the largest brewers in the world. However in recent years, beer consumption (especially non-craft beers) is in decline in developed countries. This coupled with Molson Coors’ higher leverage (to fund the USD12B MillerCoors transaction) are the main reasons why Molson Coors is one of the worst performing publicly listed global brewers recently, and currently trading near/below Book Value - with a +10% FCF Yield. We believe the following factors will see the stock re-rate in 2019/2020: 1.
A continuation of the deleveraging to achieve a Debt / EBITDA ratio of 3.75x;
Increase in quarterly dividends by +40% to +70% from current levels;
Introduction of its first non-alcoholic cannabis-infused beverages for the Canadian market;
Early delivery on its cost saving targets of $700M for the 2017-2019 period; and,
A share repurchase program reinstated.
We believe the stock will re-rate to at least 12x EV/EBITDA, which implies a price of USD92.20 per share, which offers upside potential of +44% from current levels*. In a takeover scenario, we believe the stock is worth 14x EV/EBITDA, which implies a price of USD115.33, offering upside potential of +80%*.
* Based on Molson Coors’ share price of USD64.10 as at 23 November 2018