Ambev Earnings: Brazil Remains Strong as Margins May Have Troughed

Ambev ABEV3 comfortably beat our operating income estimate in the first quarter of 2023 as margins began to recover from the severe inflationary pressures of recent quarters. We are reiterating our wide moat rating and our BRL 18 fair value estimate. We believe that a continued rebuilding of margins in Brazil could be key to unlocking the over 20% upside to our valuation, as at the close of trading on May 16.

On the whole, this was another good quarter for Ambev. Group revenue grew by 26.5% organically year over year, almost entirely driven by price/mix, with net revenue per hectoliter up 26.9%. This caused volume to decline by 0.4%, a sequential deceleration from last year and below the roughly 1% annual growth we expect in the medium term, but we attribute this to price elasticity rather than a secular shift in demand. The magnitude of the price increases implemented allowed the first-quarter gross margin to expand by 240 basis points, the first quarter of margin expansion since the second quarter of 2018. While inflation is still feeding through to the income statement (cost of goods sold per hectoliter increased by almost 20% in the first quarter) it appears that price increases are now more than enough to offset that, and we expect inflation to begin to ease in the second half of this year.

By region, Brazil remained strong, with 15.1% revenue growth, supported by 7.3% soft drinks volume growth and double-digit price/mix. On the other hand, the weakness in South and Central America, that first became apparent in the fourth quarter of last year, continued in the first quarter of this year, with volume in the Latin America South region down by 7.8%. This is a reminder that Brazil’s recovery may be fragile if the Brazilian economy is affected by slowing economic growth elsewhere. Nevertheless, we expect Latin America to be a driver of above-global-average growth in the medium term as consumers premiumize into higher price segments.