Ambev Again Passes on Cost Inflation in Q4, Positive Indicator for Margin Rebuild in 2H 2023

Ambev ABEV3 reported slightly better results that we had anticipated in the fourth quarter and full year of 2022. Volume was slightly weaker than our estimate and revenue a touch stronger. While margins continued to contract, in line with our forecast, the revenue upside trickled down the income statement and led to slightly higher earnings per share than we had expected. The operating environment continues to be challenging, and we expect further commodity inflation to be passed through this year. However, these results show that Ambev is performing as well as can be expected, and has so far been able to pass on inflation to customers.

We retain our BRL 18 fair value estimate, and think Ambev is undervalued. The rebuilding of margins will be key to unlocking the upside to our valuation, and we interpret the growth in gross profit across its key regions as a signal that margins can improve when raw material costs normalize.

Organic fourth-quarter volume growth of 1.5% year over year was slightly disappointing, given the relatively easy comparison from a year ago. However, in the context of a 20% increase in price per hectoliter in the fourth quarter, and 17% in the full year, price elasticity appears to remain within expectations, a sign that consumers are not yet suffering from sticker shock. With Brazil representing over two thirds of 2022 volume, the country remains critical to performance and retained its momentum from earlier in the year. In Brazil Beer, fourth-quarter volume grew by 4% organically, despite 13% price increases. In Brazil NAB, growth was even better, with almost 7% volume growth and 19% pricing.