“The short-term shock to demand from the COVID-19 virus is worse than what we saw in 2008-09 with the financial crisis,” Barenberg’s beverage analysts said in a note to clients this morning, adding:
“The alcoholic beverages sector is highly exposed to the major disruptions that the hospitality sector is suffering due to COVID-19, from the cancellation of sporting events like the UEFA Euro 2020 football championships to the closure of pubs, bars and restaurants. We did not experience this during the GFC” (the global financial crisis of 2008-2009).
“Despite the weak economic climate, Euro 2008 still went ahead and we could always go to a bar to drown our sorrows. While big, the GFC was a milder shock to beverages demand than COVID-19. The only precedent we have in recent times is SARS in 2003. In the worst quarter through that crisis, net sales at Rémy Cointreau (which had the highest exposure to Hong Kong and mainland China among our coverage at the time) declined by c23%. The good news is that Hong Kong recovered fairly quickly economically once the epidemic was over.”
Barenberg predicts the worst of the impact will occur in the current quarter and the first half of the third quarter, with a return to a “new normal” generally below 2019’s trading and sales in the fourth quarter. The “new normal” will involve trading down and increased penetration of online sales.
Barenberg’s analysts are projecting an 11% drop in revenue for beverage companies and at 13% decline in EBIT and EPS to be down 4%.
It recommends selectively buying companies with defensive and geographically diversified businesses with a strong balance sheet, specifically Pernod Ricard, Heineken, Carlsberg and Campari. “The one name to avoid is Molson Coors which we think will cut its dividend” and may raise new capital. Brave investors might buy Anheuser-Busch InBev – Barenberg thinks its “liquidity and refinancing risks are manageable.”