Exane BNP Paribas equity research :Beverages (-): Thirsty for a rebound

Brewers are weathering the storm better than distillers

Our analysis of how the alcoholic beverages companies are faring in the current economic downturn highlights that across the sector volumes are under pressure, there is limited scope to raise prices and trading down by consumers is prevalent. However, we believe the brewers should fare much better than the distillers in this climate. For the first six months of 2009, we expect organic sales declines of 1.5% for Diageo and 3.6% for Pernod Ricard, which is hit particularly hard in the first quarter by de-stocking in some of its key markets. We expect the brewers to deliver organic sales growth of between 1.5% and 6.2% in this period.

Only Carlsberg, AB InBev, Molson Coors to deliver sound organic EBIT growth

The impact of a weak economic environment on profits will depend on the companies' operational gearing, cost-cutting opportunities, geographical exposure, portfolio composition and cash generation. We believe Carlsberg (+12%), AB InBev (+8.7%) and Molson Coors (+11.8%) should deliver the best organic EBIT growth in H1 2009. We expect the other brewers and the distillers to generate flattish organic EBIT.

Carlsberg and AB InBev are our preferred stocks

Carlsberg (Key Buy, TP DKK370) remains our top pick. The stock offers the highest upside (+43%) among the brewers and distillers and trades at a 2009e EV/EBIT of 9.6x, compared to the sector's average of 10x. We upgrade AB InBev to Outperform (TP of EUR26 from EUR21). AB InBev offers strong cost-cutting potential in the US and high cash generation. The stock trades at a premium to the sector on most multiples but offers a 2009e free cash flow yield of 13.1% compared to the sector's average of 9.4%.