Research Notes

Baltika Brewery

Current price - $ 14,65
Current target price - $ 15
Recommendation - Buy

Ekaterina Rodina
204 82 75
rodina@finam.ru

As of January 1, 2004, the brewery’s market share was 20.6%, i.e. down 1.4% y-o-y due to a modest growth in output and sales, since the company focused on restructuring its distribution networks. Moreover, the brewery’s profit margins also experienced a slight decline, which is driven by the structure of revenues, with cheap beer brands in PET-packaging prevailing over higher value-added premium brands.

Although we believe 2003 was not a successful year for the company, 2004 could flash a green light for Baltika to drastically improve its performance. The brewery should manage to scale up sales, partially on the back of a new distribution network and a more aggressive advertising campaign. With moderate growth in expenses, a jump in revenues will help the company enhance its profit margins. Despite a drop in its FY 2003 profit margins, Baltika still tops the list of Russia’s consumer companies.

Our forecast for the brewery’s FY 2003 financial performance (see our Consumer Daily, dated March 24, 2004) nearly hit the mark. The company’s revenue advanced a bit to $737 mln against our forecast of $739 mln. A moderate rise in Baltika’s sales is largely attributable to restructuring of its distribution networks, about which we have written on numerous occasions in our previous research reports. In our view, the company managed to prevent its revenue and sales volumes from declining by pursuing an aggressive advertising policy and rolling out new brands in the middle and at the end of 2003. Moreover, it is noteworthy that due to rising advertising, marketing and administrative expenses, Baltika’s profit margins and EBITDA contracted 3% to $227 mln, i.e. slightly higher than we predicted ($225 mln). Although EBITDA profit margins receded to 30.8%, i.e. 3.4% down on 2002, this is still well above the consumer average (e.g. Sun Interbrew, Baltika’s key competitor, for which the FY 2003 was more successful, posted an 18.7% EBITDA margin).

The contraction in EBITDA and revenues in 2003 is driven by a rise in output and beer sales in PET-packaging (from 31% to 36%), which is much cheaper than aluminum cans and bottles. We would also like to note that the brewery’s revenue structure looks healthier due to an increase in production of licensed brands (Carlsberg), enabling the company to generate more cash compared to cheaper brands.

Baltika’s FY 2003 net profit fell short of our expectations and totaled $123 mln, i.e. down by more than 10%.

All in all, we would like to note that the brewery’s FY 2003 financial statement came as no surprise to market players. Since our forecast matched the company’s real operating results, our recommendations and upbeat forecasts related to its operating performance in 2004, about which we wrote in our Desk Note, dated January 29, 2004, remain unchanged.

Although we witnessed a recent surge in Baltika’s stocks, we reiterate our Buy recommendation on its shares with a target price of $15.

Ekaterina Rodina

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