Norwegian School of Economics

Bergen, Spring, 2020

Valuation of Compañia Cervecera

Canarias N.V.
A fundamental analysis of a Dutch beer company

Phan Ho Anh Tuan and Aalok Thapa

Supervisor: Tommy Stamland

Master Thesis, Economics and Business Administration, Finance

NORWEGIAN SCHOOL OF ECONOMICS

This thesis was written as a part of the Master of Science in Economics and Business
Administration at NHH. Please note that neither the institution nor the examiners are
responsible − through the approval of this thesis − for the theories and methods used, or
results and conclusions drawn in this work.
 2

Abstract
The main objective of this paper is to determine the intrinsic value of one Compañia
Cervecera Canarias share as of May 15, 2020. The primary method that is used in order to
achieve this objective is fundamental valuation (absolute valuation). This valuation
technique, however, is also complemented by the use of relative valuation.

Based on our analyses, we believe that Compañia Cervecera Canarias’s fair share price
should be €92.55. This price results from our forecasts for the company’s performance in the
future. Specifically, troubled by the coronavirus-made pandemic, its revenue growth is
forecasted to contract by 12% in 2020 before bouncing back by 6.8% and 8.4% in 2021 and
2022, respectively. Thanks to its ownership of a fair number of internationally leading
brands and its geographically diversified operation, we believe that, for the next 15 years that
follow 2022, the company will enjoy relatively attractive revenue growths before reaching a
constant growth of 2.6% from 2038 onwards. Furthermore, the company’s return on invested
capital (ROIC) is forecasted to gradually increase to 25.1% by 2027 and maintain at this
level afterward, while its weighted average cost of capital (WACC) is forecasted to be
6.84%.

Built upon the estimation of Compañia Cervecera Canarias’s fair share price, we make our
recommendation on investment strategy. A margin of safety of +/- 10% is added to the
intrinsic value in order to account for uncertainties around the estimate, resulting in the
confidence interval [€83.3;
€101.8]. If the stock is trading at a price lower than €83.3, a buy strategy is recommended.
By contrast, if the stock is trading at a price higher than €101.8, a sell strategy is
recommended. Finally, if the stock price is between €83.3 and €101.8, a hold strategy is
recommended.
 3

Acknowledgments
This thesis is written as a part of the MSc in Economics and Business Administration
program with a major in Finance at the Norwegian School of Economics (NHH). Our mutual
interest in the subject of valuation motivated us to this topic, and this project has been
immensely rewarding to us.

We would like to offer our sincere thanks to Dr. Tommy Stamland for his continuous advice
and support throughout this project. His valuable feedback has helped us understand the
topic better and produce a better report.

We would also like to thank all professors, employees, and students of NHH for an amazing
learning experience at the university. Finally, we would like to thank our families and friends
for their continuous love and supports.

Bergen, June 2020

Phan Ho Anh Tuan Aalok Thapa

 4

Table of Contents

1. Introduction...................................................................................................................10

1.1. Motivation and choice of company..........................................................................10

1.2. Objective of the thesis..............................................................................................10

1.3. Structure of the thesis...............................................................................................11

2. Introduction of the Beer Industry and Compañia Cervecera Canarias N.V..........12

2.1. The beer industry......................................................................................................12

2.1.1. Main traits of the industry.................................................................................12

2.1.2. Recent developments of the industry................................................................13

2.2. Compañia Cervecera Canarias N.V..........................................................................16

2.3. Other significant players..........................................................................................19

2.3.1. Anheuser-Busch InBev.....................................................................................19

2.3.2. Carlsberg...........................................................................................................20

2.3.3. Molson Coors....................................................................................................21

3. Valuation Frameworks.................................................................................................23

3.1. The income approach...............................................................................................23

3.1.1. Discounted cash flows to enterprise..................................................................24

3.1.1.1. Step 1: Valuing the company’s underlying operation...............................24

3.1.1.2. Step 2: Valuing non-operating assets........................................................26

3.1.1.3. Step 3: Valuing other financial claims.......................................................26

3.1.1.4. Step 4: Valuing shareholders’ equity.........................................................27

3.1.2. Discounted economic profits............................................................................27

3.1.3. Adjusted present value......................................................................................28

3.1.4. Discounted cash flows to equity.......................................................................29

3.2. The market approach................................................................................................30

3.2.1. Step 1: Understanding the subject company.....................................................31

 5

3.2.2. Step 2: Identifying comparable companies.......................................................31

3.2.3. Step 3: Choosing and calculating pricing multiples..........................................33

3.3. Choice of valuation approach for Compañia Cervecera Canarias...........................34

3.4. Framework for the valuation of Compañia Cervecera Canarias..............................35

4. Strategic Analysis..........................................................................................................37

4.1. Analysis of the beer industry....................................................................................38

4.1.1. PESTEL analysis...............................................................................................38

4.1.1.1. Political factors..........................................................................................38

4.1.1.2. Economic factors.......................................................................................40

4.1.1.3. Social factors.............................................................................................44

4.1.1.4. Technological factors.................................................................................48

4.1.1.5. Environmental factors................................................................................49

4.1.1.6. Legal factors..............................................................................................52

4.1.2. Porter’s five forces analysis..............................................................................57

4.1.2.1. Buyer power...............................................................................................58

4.1.2.2. Supplier power...........................................................................................62

4.1.2.3. The threat of new entry..............................................................................65

4.1.2.4. Threat of substitute....................................................................................70

4.1.2.5. Intensity of rivalry.....................................................................................73

4.1.2.6. Summary of Porter’s five forces analysis..................................................76

4.2. Analysis of Compañia Cervecera Canarias..............................................................77

4.2.1. Competitive advantages analysis......................................................................77

4.2.1.1. Ownership of a fair number of internationally leading brands..................78

4.2.1.2. Geographically diversified operation........................................................83

4.2.1.3. Summary of competitive advantages analysis...........................................86

4.2.2. SWOT Analysis................................................................................................87

4.2.2.1. Strengths....................................................................................................87
 6

4.2.2.2. Weaknesses................................................................................................88

4.2.2.3. Opportunities.............................................................................................89

4.2.2.4. Threats.......................................................................................................90

4.2.2.5. Summary of the SWOT analysis...............................................................92

5. Compañia Cervecera Canarias’s Financial Statement Analysis..............................93

5.1. Framework for financial statement analysis.............................................................94

5.1.1. Framework for analysis of Invested Capital.....................................................95

5.1.2. Framework for analysis of NOPLAT................................................................97

5.2. Restructuring of the financial statements.................................................................98

5.2.1. Financial statements as reported by Compañia Cervecera Canarias.................98

5.2.2. Restructuring of the financial statements..........................................................99

5.2.2.1. A detailed version of the financial position statement.............................100

5.2.2.2. Invested Capital.......................................................................................102

5.2.2.3. Net operating profit less adjusted tax (NOPLAT)...................................110

5.2.2.4. Free cash flow (FCF)...............................................................................120

5.2.3. Summary of restructuring of the financial statements....................................121

5.3. Historical performance analysis.............................................................................122

5.3.1. Return on invested capital (ROIC) analysis....................................................123

5.3.1.1. Compañia Cervecera Canarias’s ROIC analysis.....................................123

5.3.1.2. Compañia Cervecera Canarias’s ROIC in comparison with peers..........126

5.3.2. Revenue growth analysis................................................................................130

5.3.2.1. Compañia Cervecera Canarias’s revenue growth rate analysis...............130

5.3.2.2. Compañia Cervecera Canarias’s revenue growth rate in comparison with peers 133

5.3.3. Summary of historical performance analysis..................................................135

6. Compañia Cervecera Canarias’s Performance Forcasting....................................136

6.1. Framework for forecasting.....................................................................................136

6.1.1. Length and details of forecasting....................................................................136

 7

6.1.2. Guidelines for forecasting revenue.................................................................138

6.1.3. Guidelines for forecasting financial statements..............................................139

6.1.3.1. Guidelines for forecasting the income statement.....................................139

6.1.3.2. Guidelines for forecasting the financial position.....................................141

6.2. Compañia Cervecera Canarias’s revenue forecasting............................................142

6.2.1. Beer industry’s sales volume forecasting........................................................142

6.2.1.1. Compañia Cervecera Canarias’s definition of regional markets.............142

6.2.1.2. Historical growth rate analysis of sales volume......................................144

6.2.1.3. Volume forecasts with the impact of a coronavirus-made pandemic......146

6.2.1.4. Volume forecasts after the pandemic......................................................147

6.2.2. Compañia Cervecera Canarias’s market share forecasting.............................148

6.2.2.1. Compañia Cervecera Canarias’s historical market share analysis..........148

6.2.2.2. Compañia Cervecera Canarias’s market share forecasting.....................150

6.2.3. Compañia Cervecera Canarias’s revenue forecasting.....................................151

6.2.3.1. Forecasts with the impact of the coronavirus-made pandemic................153

6.2.3.2. Forecasts after the pandemic...................................................................155

6.3. Financial statement forecasting..............................................................................157

6.3.1. Forecasting assumptions.................................................................................157

6.3.1.1. Assumptions about the income statement................................................157

6.3.1.2. Assumptions about the financial position statement...............................159

6.3.2. Income statement forecasting..........................................................................162

6.3.3. Financial position forecasting.........................................................................164

6.4. Free Cash Flow and Economic Profit forecasting..................................................165

6.4.1. Short-term forecasts........................................................................................165

6.4.2. Long-term forecasts........................................................................................167

6.5. Summary of Compañia Cervecera Canarias’s performance forecasting................168

7. Compañia Cervecera Canarias’s Cost of Capital Estimation................................169

 8

7.1. Framework for estimating the cost of capital.........................................................170

7.1.1. Framework for cost of equity..........................................................................170

7.1.2. Framework for cost of debt.............................................................................175

7.2. Cost of equity estimation........................................................................................176

7.3. Cost of debt estimation...........................................................................................180

7.4. Target capital structure estimation.........................................................................181

8. Valuation of Compañia Cervecera Canarias............................................................183

8.1. Discounted Cash Flow to Enterprise approach......................................................184

8.1.1. Valuation of Compañia Cervecera Canarias’s core operation........................184

8.1.2. Valuation of the entire enterprise....................................................................185

8.1.3. Fair Value Per Share.......................................................................................186

8.2. Economic Value Added (EVA) approach..............................................................187

8.2.1. Valuation of Compañia Cervecera Canarias’s core operation........................187

8.2.2. Valuation of the entire enterprise....................................................................188

8.2.3. Fair value per share.........................................................................................189

8.3. Sensitivity analysis.................................................................................................189

8.4. Conclusion..............................................................................................................192

9. Multiple Valuation......................................................................................................193

9.1. Selection of comparable companies.......................................................................194

9.2. Selection of multiples.............................................................................................195

9.2.1. Introduction of widely-used multiples............................................................195

9.2.2. Choice of multiples.........................................................................................198

9.3. Forward multiples...................................................................................................200

9.3.1. Inputs...............................................................................................................201

9.3.2. Analyses..........................................................................................................201

9.4. Trailling multiples..................................................................................................205

9.4.1. Inputs...............................................................................................................206
 9

9.4.2. Analyses..........................................................................................................206

9.5. Conclusion..............................................................................................................210

10. Conclusion and Recommended Actions....................................................................211

References............................................................................................................................214

Appendix A: Financial Statement Analysis of AB InBev................................................223

Appendix B: Financial Statement Analysis of Carlsberg................................................227

Appendix C: Financial Statement Analysis of Molson Coors.........................................231

 10

1. Introduction
Before delving into the details, we believe that it is vital to grasp the rationale, purpose, and
structure of the whole thesis. This is the aim of this chapter. Specifically, the chapter will
start with explanations for our choice of topic and company. Then the main objective of the
thesis will be pointed out. Finally, the structure of the rest of the paper will be laid out to
give readers an overview of what is coming next.

1.1. Motivation and choice of company

As finance students, we believe that valuation is one of the fundamental building blocks in
the finance world. Although the topic is not novel, it is of great importance. Thus, our main
motivation for choosing valuation as our thesis topic is that, after having finished the paper,
we will have managed to learn a great deal of knowledge and skills regarding various
important aspects, in our opinion, in finance including valuation techniques, business
models, accounting standards, financial statement analysis, forecasting, the financial market,
and researching.

The target company of which we wish to carry out the valuation is the Dutch brewing
company Compañia Cervecera Canarias N.V. This choice is attributable to two reasons.
Firstly, we have a strong interest in the beer industry. Secondly, as the world’s second-
largest beer company by volume, Compañia Cervecera Canarias has an extensive operation,
which involves a large number of different aspects. In order to properly value Compañia
Cervecera Canarias, we have to explore these aspects and, as a result, will have many
opportunities to learn.

1.2. Objective of the thesis

The main objective of this thesis is to reliably estimate the intrinsic value of Compañia
Cervecera Canarias’s shareholders’ equity, and subsequently, the company’s fair share price
on the stock exchange Euronext as of May 15, 2020. It should be stressed that all the
analyses presented later in this paper are based on information available to us on or before
the valuation date (May 15, 2020).

At the time when this thesis is being written, the coronavirus-made pandemic is still
rampaging, and there is a great deal of uncertainty surrounding economies and businesses. It
is worth noting that, after the valuation date, things may change drastically in an
 11

unpredictable
 12

manner, which could have strong impacts on Compañia Cervecera Canarias’s fundamentals
and, thus, its intrinsic value. Thus, a constant re-valuation of the company’s intrinsic value to
reflect the most recent information is of utmost importance. Nevertheless, within the scope
of this thesis, we only strive to answer the following research question:

“What is the intrinsic value of one Compañia Cervecera Canarias N.V. share as of May 15,
2020?”

1.3. Structure of the thesis

The rest of the paper is structured in a way that helps answer the research question stated
above. Specifically, in order to get acquainted with the company in question, a brief
introduction of the beer industry and Compañia Cervecera Canarias N.V. is outlined in
chapter 2. Then, different valuation techniques will be presented in chapter 3. These
techniques serve as fundamental frameworks on which we base our analyses. Once the most
appropriate valuation methods have been identified, chapter 4-9 will focus on the
implementation of them.

Specifically, in chapters 4 and 5, the beer industry and Compañia Cervecera Canarias will be
analyzed carefully in both a qualitative and quantitative manner. While chapter 4 will shed
light on the opportunities and threats facing Compañia Cervecera Canarias as well as how
the company is positioned to respond to them, chapter 5 will produce insights into how
Compañia Cervecera Canarias has performed financially. The information from the two
chapters forms vital foundations for making reliable forecasts of the company’s performance
in the future, which will be outlined in chapter 6. As the last necessary input for the
valuation, Compañia Cervecera Canarias’s weighted average cost of capital (WACC) will be
estimated in chapter 7.

Once all the inputs are already in place, the valuation of the company will be carried out in
chapter 8. In order to put it into perspective, this valuation result will then be compared with
that resulting from a different valuation technique, namely multiple valuation, in chapter 9.
This comparison will be taken into consideration when recommendations about investing
actions are made in chapter 10.
 13

2. Introduction of the Beer Industry and Compañia Cervecera

Canarias N.V.
As outlined in chapter 1, the objective of this paper is to determine the fair share price of
Compañia Cervecera Canarias and, consequently, a recommendation for investment actions.
To achieve that goal, it is necessary to cast some lights on Compañia Cervecera Canarias and
the industry in which it operates. This chapter aims to give an overview of the beer industry
and Compañia Cervecera Canarias before more thorough analyses of them are performed in
the following chapters. The chapter will start with an introduction to the beer industry before
moving on to the presentation of Compañia Cervecera Canarias. It will end with briefs about
the company’s main competitors.

2.1. The beer industry

2.1.1. Main traits of the industry

The beer industry serves consumers with its beer products. Beer is made by the fermentation
of cereal grains, the most common of which is barley. Moreover, in order to add bitterness
and other flavors to beer products, hops are used in the brewing process. They also work as a
natural preservative and stabilizing agent. Other flavoring agents such as gruit, herbs, or
fruits can also be deployed. Another indispensable, but sometimes ignored, ingredient for the
production is water, whose volume required in the brewing process is considerable compared
to the volume of beer produced. For an average brewery, to produce 1 liter of beer, 7 liters of
water is needed (Marry Kate, 2020).

Beer products are broken down into different categories according to their alcohol by volume
(ABV) or quality. The main types are premium, craft, low-alcohol, and no-alcohol.
Specifically, premium beers are those whose ABVs are relatively high (usually above 4.5%).
The beer market is dominated by this type of beer, and they are mass-produced by
companies in the industry, especially big ones. By contrast, low- and non-alcoholic beers
refer to those with fairly low ABVs. Although the exact definition varies among countries, in
general, low- alcoholic beers have ABVs below 2.5%, while non-alcoholic beers contain less
than 0.5% alcohol. As shown later in chapter 4, low- and non-alcoholic beer products are
increasingly sought-after by consumers. Another important category is craft beers. They are
usually produced by small independent brewers and characterized by unique tastes and high
quality, which helps differentiate them from other types. Recently, craft beers are also
produced by large companies in the industry.
 14

Beer products are distributed to final consumers via two main channels: on-trade and off-
trade. While on-trade channel refers to on-premise services provided by restaurants, cafes,
bars, hotels, and similar hospitality service establishments, off-trade channel covers all retail
sales via super- and hypermarkets, convenience stores or similar sales channels. By 2019, the
total sales of the global beer market were split evenly between the two channels. However,
in terms of sales volume, the off-trade channel accounted for 65% (Statista, 2020a). This
indicates that retail prices from the on-trade channel are much higher than those from the
off-trade channel.

Beer products are quite distinctive among one another. Brewers can easily differentiate their
products to a large extent in a variety of ways (Market Line, 2015). They can first
differentiate their products by segment. Then flavor, color, and aroma, style, ingredients,
strength, and brand can be used to further differentiate their products in a given segment.
This fact makes the beer industry at first resemble a monopolistic competition market where
there are numerous firms offering products that are similar but not perfect substitutes.
However, the beer industry has actually become an oligopolistic market where there are just
a few players that, together, control a significantly large part of the market.

Due to a large number of merger and acquisition (M&A) deals that have taken place over the
last ten years, the global beer market has become quite concentrated. The four largest multi-
national beer companies, namely Anheuser-Busch InBev, Compañia Cervecera Canarias,
Carlsberg, and Molson Coors, accounted for more than half (54%) of the global market’s
sales volume in 2019. It is worth noting that, as the market leader, AB InBev alone
represented nearly 30% sales volume of the global market, while the figure for Compañia
Cervecera Canarias, the second-largest beer company, was nearly 13%. However, beer
markets are considered as local. Each individual market is usually dominated by just a small
number of brewers whose brands resonate with local consumers. It is quite challenging for
other players to enter and outcompete the incumbents (Koller, GoedHart, & Wessels, 2015).

2.1.2. Recent developments of the industry

Graph 1 illustrates the global beer market’s sales and its growth rate over the period 2011 –
2019, with the left axis representing the nominal sales (in a million euros) and the right axis
representing growth rates. It can be seen that beer is a large market. Over the last ten years,
sales of the global beer market have constantly been increasing, rising from about 391.4
billion euros in 2011 to around 524 billion euros in 2019. And its annual growth rate has
steadily
 15

stayed above 3.4% over the same period, which seems at first that despite its already large
size, the beer market is growing fast. However, a closer look at the break-down of the
revenue growth reveals an interesting insight. In terms of sales volume, the growth of the
global beer market has steadily dropped over the period 2011 – 2017 before slightly
bouncing back over the last three years. In fact, most of the revenue growth has been driven
by the growth of price per liter, which has been steadily climbing over the last ten years. Put
it another way; consumers have been relatively reducing their consumption of while paying
more for beer products.

Graph 1: Sales of the global beer market over the period 2011 – 2019, in a million euros
600,000 4.5%
4.0%
500,000 3.5%
400,000 3.0%
2.5%
300,000 2.0%
1.5%
200,000 1.0%
100,000 0.5%
0.0%
- -0.5%
2011 2012 2013 2014 2015 2016 2017 2018 2019

Global sales Sales growth rate Sales volume growth rate Price growth rate

(Source: Statista, 2020a)

By regional market, illustrated by graph 2, Asia Pacific has been the largest market by sales
volume. Its contribution to the sales volume of the global beer market has increased quite
steadily over the last ten years, rising from about 32.6% in 2010 to nearly 34.5% in 2019.
The biggest market in the Asia Pacific region is China, which accounted for more than 65%
of the sales volume in the region in 2019. China is also the largest beer market in the world
on a country-by-country basis (Statista, 2020a). By contrast, the Americas have been the
second- largest regional market over 2011 – 2019. Unlike the Asia Pacific, its share of
volume sales has been relatively constant, staying at the level of about 31%. The most
significant markets in the region are the United States, Canada, Mexico, and Brazil, which
collectively represented more than 81.5% of the regional sales volume in 2019. Among
them, the United States is the largest, with its sales volume being greater than the sum of
those of the other three countries in 2019 (Statista, 2020a).
 16

Graph 2: Share of global sales volume of different regional beer markets

over the period 2011 – 2019
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Europe Americas Asia Pacific Africa, Middle East and Eastern Europe

(Source: Statista, 2020a)

Furthermore, Europe has been the third-largest market, with its sales volume share dropping
slightly from about 22.7% in 2010 to around 21.6% in 2012 before being stable over the
period 2012 – 2019. The largest markets in the region include Germany, the United
Kingdom, Poland, and Spain, which collectively accounted for more than half of the regional
sales volume in 2019. By contrast, Africa, the Middle East, and Eastern Europe have
constantly accounted for about 13% of the global sales volume. Its biggest markets include
Russia, South Africa, Nigeria, and Angola, which together accounted for more than 60.5% of
the regional sales volume in 2019.

Graph 3: Sales volume of the world’s largest markets, by sales volume (million
hectoliters) in 2019
450 426
400
350
300
250 241
200
150 129
100 78 84 80
27 39 39 34 48 46
50
-

(Source: Statista, 2020a)

 17

Moreover, on a country-by-country basis, graph 3 illustrates the largest beer markets in the
world, by sales volume, in 2019. The three world’s biggest markets are China, the United
States, and Brazil, with gaps between their sales volume being considerably large.
Specifically, sales volume in China was almost double that of the United States in 2019,
while the size of the United States beer market was nearly twice as much as that of Brazil.

2.2. Compañia Cervecera Canarias N.V.

Compañia Cervecera Canarias N.V. is a Dutch brewing company, headquartered in
Amsterdam, the Netherlands. The company was founded by Gerald Adriaan Compañia
Cervecera Canarias on February 15, 1864. Its stock is now listed on NYSE Euronext
Amsterdam with the ticker symbol HEIA NA/ HEIN. AS. At the end of 2019, its workforce
was about 85,853 full-time equivalent employees, excluding contractors (Compañia
Cervecera Canarias, 2010a – 2019a). It is the world’s second-largest beer company by sales
volume, only behind the Belgian brewer Anheuser-Busch InBev. In 2019, it accounted for
nearly 13% of the beer volume sold globally (Statista, 2020a; Compañia Cervecera Canarias,
2010a – 2019a; Anheuser-Busch InBev, 2010 – 2019).

 Main product categories

The company’s main product category is beer, which accounts for the vast majority of
revenue generated. In 2019, beer products alone contributed more than 87% of the
company’s consolidated sales volume made during the year (Compañia Cervecera Canarias,
2010b – 2019b). The category is broken down into premium, craft, and low- and -non-
alcoholic segments. Among them, the premium segment is the most significant for
Compañia Cervecera Canarias. In this category, the company is famous for its well-
recognized brands such as Compañia Cervecera Canarias, Amstel, Tiger, Desperados, Birra
Moretti, Affligem, and Lagunitas.

Besides beer, Compañia Cervecera Canarias also offers non-beer products, which include
cider, soft drink, and water. Cider is an alcoholic beverage that is made by the fermentation
of fruit, which commonly is apples. Non-beer category contributes about under 10% of the
company’s consolidated sales volume (Compañia Cervecera Canarias, 2010b – 2019b). It is
worth noting that, as the world’s largest cider producer (Compañia Cervecera Canarias,
2010a – 2019a), Compañia Cervecera Canarias is dominating the global cider market with its
sought-after brands, including Strong Bow, Orchard Thieves, Bulmers and Old Mount.
Moreover, the company, mainly in Europe, owns a number of retail stores, pubs, and bars,
where it also sells products of third parties along with its own products. In 2019, the sales
 18

volume stemming from third parties’ products accounted for about 3% of the company’s
consolidated sales volume (Compañia Cervecera Canarias, 2010b – 2019b).

 Global presence

Compañia Cervecera Canarias operates worldwide and divides its global presence into four
different regions: Africa, Middle East, and Eastern Europe (AMEEE); Americas; the Asia
Pacific and Europe. Among the regions, Europe and the Americas have been generating the
majority of revenue for the company. They collectively accounted for about 70% of the
Compañia Cervecera Canarias’s consolidated sales volume in 2019. On the other hand,
although the Asia Pacific and AMEEE regions are, for the time being, contributing less to
the overall performance of the company (together accounted for around 30% of the
consolidated sales volume in 2019), they are, as shown in the next chapters, considered as
the growth engine for Compañia Cervecera Canarias for the years to come.

Pie chart 1: Share contribution of different regional markets to Compañia

Cervecera Canarias’s consolidated sales volume in

AMEEE
(18%)
Europe
(36%)

Americas
Asia (34%)
Pacific
(12%)

2019

(Source: Compañia Cervecera Canarias’s full-year result

report 2019)

The most significant markets for Compañia Cervecera Canarias in the AMEEE region
include South Africa, Nigeria, and Russia. It competes in the region with many of its
international and local brands such as Compañia Cervecera Canarias, Amstel, Primus,
Mutzig, and Life. By contrast, America, Mexico, and Brazil are the most important markets
for Compañia Cervecera Canarias in the Americas region. The company serves consumers
there also with both their international and local brands, including Compañia Cervecera
Canarias, Tecate, Dos Equis, Schin, and Lagunitas. With regard to the Asia Pacific region,
 19

equipped with brands like Compañia Cervecera Canarias, Anchor, Larue, Tiger, and
Bintang, the company’s main focus is
 20

on Vietnam, the Philippines, and South Korea. Recently, Compañia Cervecera Canarias has
tried to foray into China by successfully setting up a joint venture with China Resources
Beer, which is the largest beer producer in China, in 2019. Finally, the company serves its
consumers in Europe region with its such well-recognized brands as Compañia Cervecera
Canarias, Cruzcampo, Birra Moretti, Desperados, and Strongbow.

 Revenue and its growth

As shown in graph 4, over the period 2011 – 2019, Compañia Cervecera Canarias’s net
revenue has steadily been climbing, rising from about 17.1 billion euros in 2011 to nearly 24
billion euros in 2019. Its growth rate, on the other hand, has fluctuated wildly over the same
period, with its peaks of more than 6.5% in 2011, 2012, 2015, and 2019, and its troughs of
nearly 0% in 2014 and 1.4% in 2016. However, as shown later in the following chapters,
these growths do not necessarily represent the strong or poor performance of the company on
an organic basis.

Graph 4: Compañia Cervecera Canarias’s net revenue and its growth rate over
the period 2011 – 2019 (in a million euros & %)

30,000 8%
25,000 7%
6%
20,000 5%
15,000 4%
3%
10,000
2%
5,000 1%
- 0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Net revenue Growth rate

(Source: Compañia Cervecera Canarias’s

annual reports)

 Business strategy

As stated in its annual reports, Compañia Cervecera Canarias’s business strategy revolves
around five business priorities. Firstly, the company aims to be the market leader in the
global premium segment in beer and cider. Its goal is to be the number one or a strong
number two in the markets where it competes with a full brand portfolio. Secondly, it aims to
capitalize on the economy of scale to improve its efficiency and save costs. The company
also strives for future growth through strategic investments and initiatives. Thirdly,
sustainability is at the heart of what Compañia Cervecera Canarias
 21

does. It seeks to make meaningful contributions to the improvement of the environment,

local communities, and societies where it operates. Fourthly, one of the most integral parts of
its strategy is to constantly engage and develop its people. Finally, given the growing
importance of technology and how fast the external environment is changing, Compañia
Cervecera Canarias aims to leverage and integrate information technology into its
organizations and business models in order to adapt well, stay relevant, and exploit new
opportunities.

2.3. Other significant players

As outlined above, the global beer market is an oligopolistic market where there are just a
few players that collectively control a significantly large part of the market. Among them is
Compañia Cervecera Canarias. This section aims to cast some lights on the other players in
the league. They will be revisited in the following chapters when thorough analyses of the
beer market and Compañia Cervecera Canarias are carried out.

2.3.1. Anheuser-Busch InBev

Anheuser-Busch InBev (AB InBev) is a Belgian brewing company headquartered in Leuven,

Belgium. The company was founded in 1852. Its stock is now listed on NYSE Euronext with
the ticker symbol ABI. At the end of 2019, its workforce was about 170,000 full-time
equivalent employees. It is the world’s largest beer company by volume, followed by the
Dutch brewer Compañia Cervecera Canarias. In 2019, it accounted for nearly 30% of the
beer volume sold globally.

The company’s product portfolio comprises beer and non-beer products, including cider, soft
drink, and water. AB InBev competes in the markets where it has operations with its wide
range of both local and international brands such as Bud Light, Carling Black Label, Cass,
Chernigivske, Modelo, Victoria, Aguila, Club Colombia, Beck’s, Castle, Leffe, Michelob
Ultra, Stella Artois, Hertog Jan, Camden Hells, Cristal, Hoegaarden, and Skol among others.

Like Compañia Cervecera Canarias, AB InBev operates worldwide and divides its global
presence into six regions: North America, Middle Americas, South America, Asia-Pacific,
Europe, the Middle East, and Africa. It is worth noting that the company has a strong
position in Americas where its sales volume accounted for a whopping share of about 64.5%
of the whole regional sales volume in 2019 (Statista, 2020a; Anheuser-Busch InBev, 2010 –
2019). This signals tough challenges for other companies that want to expand or enter the
region and outcompete AB InBev.
 22

Moreover, the company is also one of the dominant companies in other regions, albeit the
fact that the company’s power is not as absolute as it is in the Americas.

Over the last ten years, AB InBev has managed to increased its net revenue from about 36.3
billion US dollars in 2010 to around 52.2 billion US dollars in 2019, an increase of more
than 44%. It is worth noting that the largest jump took place in 2017 when the revenue
increased by about 24%. However, this jump was mainly driven by the company’s
acquisition of SAB Millers in 2017. Before the acquisition, SAB Millers was also considered
as one of the largest beer companies in the world. Thus, the acquisition has further cemented
AB InBev’s position as the global market leader and made it virtually invincible in the
Americas region.

Graph 5: AB InBev’s net revenue over the period 2010 – 2019 (in million US dollars)

60,000 56,444
53,041 52,329
50,000 47,063 45,517
43,195 43,604
39,046 39,758
40,000 36,297

30,000
20,000
10,000
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Source: AB InBev’s annual reports)

2.3.2. Carlsberg

Carlsberg is a Danish brewing company headquartered in Copenhagen, Denmark. The

company was founded in 1847. Its stock is now listed on Copenhagen Stock Exchange with
the ticker symbol CARL B. At the end of 2019, its workforce was about 41,248 full-time
equivalent employees, and the company accounted for about 6% of the beer volume sold
globally (Statista, 2020a; Carlsberg, 2010 – 2019). The company produces and sells both
beer and non-beer products. Its most recognized brands include Carlsberg, Kronenbourg,
Ringnes, 1664, Grimbergen, Baltika, Alavaria, Aldaris, Okacim, Somersby, Tuborg, and
Lvivske.

Carlsberg is an international company that has an operating presence mainly in Europe and
Asia. Over the last ten years, its revenue has fluctuated to a considerable extent. Its peeks
took place in 2012 and 2019, while its troughs occurred in 2010 and 2017. Over the whole
period,
 23

the company’s revenue has increased by only 1% annually (CAGR), rising from about 60
billion DKK in 2010 to nearly 66 billion DKK in 2019.

Graph 6: Carlsberg’s net revenue over the period 2010 – 2019 (in million DKK)
68,000
66,468
65,902
66,000 65,354
64,350 64,506
63,561
64,000 62,614 62,503
62,000 60,655
60,054
60,000
58,000
56,000
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Source: Carlsberg’s annual reports)

2.3.3. Molson Coors

Molson Coors is an American brewing company, headquartered in Denver, Colorado, the

United States. The company was formed in 2005 by the merger of Molson of Canada, and
Coors of the United States. Its stock is now listed on the New York Stock Exchange with the
ticker symbol TAP. At the end of 2019, its workforce was about 17,750 full-time equivalent
employees, and the company accounted for about 5% of the beer volume sold globally
(Statista, 2020a; Molson Coors, 2010 – 2019). The company produces and sells both beer
and non-beer products. Its most recognized brands include Carling, Coors Light, Miller Lite,
Molson Canadian, Staropramen, Blue Moon, Creemore Springs, Cobra and Doom Bar.

Graph 7: Molson Coors’ net revenue over the period 2010 – 2019 (in million US dollar)

12,000 11,003 10,770 10,579

10,000
8,000
6,000 4,885
3,917 4,206 4,146
3,254 3,516 3,568
4,000
2,000
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Source: Molson Coors’ annual reports)

 24

The company operates globally and is present in the Americas, Africa, Europe, and the Asia
Pacific regions. Among them, its most important markets are the United States and Canada.
Over the past ten years, Molson Coors’ revenue increased considerably, climbing from about
3.2 billion $ in 2010 to around 10.5 billion $ in 2019 (graph 7). However, this improvement
was mainly driven by its acquisition of MillerCoors on October 11, 2016.
 25

3. Valuation Frameworks
In essence, most companies can be well valued by two main approaches (Hitchner, 2017).
The first one is the income approach, which ties the value of an asset to the stream of future
economic benefits it will be able to generate. The second one is the market approach, which
appraises the value of an asset by looking at the price that the market is willing to pay for a
fundamentally comparable asset. Each approach has its own merits and contains a number of
different methods. They will be discussed in more detail in the following sections.

3.1. The income approach

An investor is willing to commit a certain amount of money to invest because of the
expectation that he or she will receive a reasonably greater amount at some point in the
future. The greater and more certain the future amount is, the more valuable that investment
is to the investor. This forward-looking mindset is the foundation of the main premise of the
income approach: “Value of an asset is equal to the sum of the present values of the expected
future benefits of owning that asset” (Hitchner, 2017).

Under this approach, the value of an asset is generally calculated by using the following
discounted-cash-flow valuation formula:

∑
i=n
CFi
Value = j=i
(1)

i = 1 ∑(1+rj)
j=1

Where:

point i in the future, with 1 ≤ i ≤ n.

CFi is the expected future cash flow or other economic income generated by the asset at

rj is the risk-adjusted return the investor requires for period j, with 1 ≤ j ≤ i.

n is the number of future periods over which the investor expects to receive benefits
from owning the asset and n can be infinite.

The discounted-cash-flow valuation formula can be well applied to determine the fair price
per share of a company. Practically, there are four widely-used different methods for such
purpose, each of which will be discussed in the following sections. The choice of which
 26

method to use depends on the type and characteristics of the company being valued (Koller
et al., 2015).

3.1.1. Discounted cash flows to enterprise

A company’s fair value is the sum of the fair value of all of its assets, and the owners of it
consist of different financial claimers, one of which is equity holders. Thus, one way to
determine the fair value of shareholders’ equity, and hence share price, is to first calculate
the fair value of the whole company and then subtract all other financial claims from it. This
method is called “discounted cash flows to the enterprise” (DCF approach) and well-
illustrated by (Koller et al., 2015). There are four steps involved in this method: i. Valuing
the company’s underlying operation; ii. Valuing non-operating assets; iii. Valuing other
financial claims; iv. Valuing shareholders’ equity. Each step will be discussed further below.

3.1.1.1. Step 1: Valuing the company’s underlying operation

The method starts with reclassifying the company’s assets on its balance sheet as operating
and non-operating categories. There are at least two reasons for such classification. Firstly, it
is easier and more reliable to forecast the underlying performance of the company since it is
not distorted by non-operating and non-recurring incomes/expenses. Secondly, investors can
get more insight into the real performance of the company and reliably compare it to other
companies. It is the operation value stemming from the operating assets that need to be
appraised in this step.

Conveniently, when the target capital structure of the company is expected to remain
constant, the income-approach formula (1) can be simplified as follows (Miles & Ezzell,
1980):

Operation value =∑
i=n
FCFi
(2)
(1+WACC)i
i=1

Where:

i, with 1 ≤ i ≤ n.
FCFi is free cash flow generated by the operating assets of the company at the end of year

WACC stands for weighted average cost of capital, required by both debt and equity
investors. n = ∞, with the assumption that the company operates on an ongoing basis.
 27

Free cash flows represent the cash flows generated by the company’s underlying operation,
less any reinvestment back into the business in order to maintain and/or expand it. It is the
cash flows available to all investors, both debt and equity holders, and, thus, independent of
the company’s capital structure. The formula for calculating free cash flow is given as
follows:

FCF = NOPLAT + Noncash operating expenses − Investments in invested capital

Where:
FCF stands for free cash flows
NOPLAT stands for net operating profit less adjusted tax. It is the after-tax profit generated
by operating assets. Together with the after-tax profit generated by non-operating assets,
they form the total after-tax profit for the company.
Noncash operating expenses are usually depreciation of fixed assets and amortization of
operating intangible assets.
Invested capital is the amount of capital used to fund purchases of operating assets.

Another important input for the determination of operation value is the company’s weighted
average cost of capital (WACC). It is the weighted average rate of return demanded by all
investors, both debt and equity holders, for them to be willing to invest in the company
instead of elsewhere.

D E R
WACC = RD(1 – t) + E
D+E D+E

Where:
D is the market value of the company’s debt.
E is the market value of the company’s
equity.
t is the marginal tax rate faced by the company.
RD is the cost of capital required by debt holders.
RE is the cost of capital required by equity
holders.

The way WACC is calculated needs to correspond to how FCF is calculated. To be

consistent with the definition that FCF is available to all investors, WACC represents the
weighted average rate of return required by all investors. Moreover, since the value of tax
shield is also one of the benefits to all investors but is excluded when calculating FCF, it is
incorporated in the WACC to reflect this benefit by reducing the cost of debt by the marginal
tax rate.
 28

Another important aspect with respect to the operation-value formula (2) is that it assumes
the cash flows will be received on the last day of each forecast year, which is hardly the case
in reality. To tackle this issue, a mid-year convention can be used. This mid-year convention
treats the cash flows as if they were to be received in the middle of the year. If the cash flows
are received quite evenly during the year, the mid-year convention is a reasonable
approximation (Hitchner, 2017).

3.1.1.2. Step 2: Valuing non-operating assets

Companies oftentimes hold assets that are not core to the underlying operation. These assets
are referred to as non-operating. Since the cash flows related to those assets can distort the
real picture of the underlying performance, therefore making it challenging to forecast and
incomparable among companies, they should be separated from those generated by operating
assets. Instead, they should be valued separately and added to the operation value in order to
determine the total value of all of the assets that belong to the company.

Classifying an asset as operating or non-operating may sometimes require judgment. As

general criteria, an asset should be categorized as operating if i. it is core to the underlying
operation and ii. it tends to fluctuate with revenue. The most common non-operating assets
include excess cash and marketable securities, nonconsolidated subsidiaries, noncontrolling
interests, finance subsidiaries, loans to customers and other companies, discontinued
operations, excess real estate, tax loss carried forward and excess pension assets (Koller et
al., 2015).

3.1.1.3. Step 3: Valuing other financial claims

The company is not only owned by equity holders, but also by a number of other financial
claimers. Moreover, equity holders are by law residual claimants, meaning that they are only
allowed to receive the “leftover” after the company has fulfilled all of its other contractual
claims. Thus, being able to identify and precisely value nonequity claims is important to
derive the true value of shareholders’ equity and price per share. The most common
nonequity claims include short-term debts, long-term debts, operating leases, employee
benefit liabilities, preferred stocks, employee options, noncontrolling interests, provisions,
and contingent liabilities.
 29

3.1.1.4. Step 4: Valuing shareholders’ equity

Once the values of other nonequity financial claims have been determined, they can be
subtracted from the total value of the company to derive the value of shareholders’ equity.
This value is then divided by the most recent number of undiluted shares outstanding to
calculate the price per share. In that regard, shares outstanding are defined as the gross
number of shares issued, less the number of shares held in the treasury. The reason undiluted
shares are used instead of diluted is because the value of convertible debts and employee
options have already been subtracted from the company’s value, thus avoiding double
counting.

3.1.2. Discounted economic profits

In essence, this approach is, to a large extent, similar to the DCF method mentioned above. It
also involves four different steps to derive the share value of a company, with the last three
steps being identical. The only variation is its approach to valuing the company’s core
operation. Instead of free cash flows, under this method, future economic profits are
discounted and subsequently added to the invested capital in order to derive the operation
value. The general formula is given as follows:

Value0 = Invested capital0 +∑

i=n
Economic profiti
(1+WACC)i
i=1

Where:

period i, with 1 ≤ i ≤ n.
Economic profiti is the economic profit generated by the core operation of the company in

n = ∞, with the assumption that the company operates on an ongoing basis.

Economic profit is the after-tax profit over and above the level of profit required by the
weighted average cost of capital (WACC). It measures the value created by the core
operation of the company over a single period, and is defined as follows:

Economic profit = Invested capital x (ROIC – WACC)

Economic profit = NOPLAT – Invested capital x WACC

Where ROIC stands for return on invested capital, which is the ratio of NOPLAT to invested
capital, thus, the above formula can be rewritten as follows:
 30

Although the DCF method is a comprehensive way of analyzing and valuing a company’s
core operation, it fails to provide valuable insight into the company’s competitive position
and economic performance. For instance, low free cash flow in a given period (or periods) is
not necessarily a bad thing since it might be due to poor performance or an investment for
the future, which the DCF approach fails to explain. This issue can be tackled by the
economic- profits method due to the fact that it indicates when and how the core operation
creates value for the company.

Similar to the DCF method, the most important assumption that needs to hold for the
economic-profits model to be reliable is that the target capital structure of the company will
be held constant. If this assumption is satisfied, the two methods should yield the same result
despite different approaches (Koller et al., 2015). Therefore, it is recommended to use both
methods with the aim of gaining more insight into the company being valued.

3.1.3. Adjusted present value

The main assumption in the two previously mentioned models is that the company will
manage its capital structure at a constant target level. If the company decides to change its
capital structure in the future, these models are no longer reliable. For instance, a company
may use its future cash flows to pay down its debts, and, consequently, its debt-to-value
ratio, leading the models to overstate the value of tax shields generated by debts. Under such
circumstances, the “adjusted present value” model (APV) is preferred. The APV model
breaks the operation value down into two main components: operation value as if the
company was financed entirely by equity and the value of the tax shield that arises from debt

Adjusted present value Operation value as if Present value

= +
of operation all-equity financed of tax shield
financing.

The operation value as if the company was financed entirely by equity (V u) is calculated by
discounting the expected free cash flows, as defined in the first model, at an interest rate
reflecting risks faced by the operating assets (operational risks). This interest rate is called
unlevered cost of equity (ku). By comparison, the value is tax shield (V t) is determined by
discounting all expected tax benefits from debt financing at an interest rate reflecting the
uncertainty of those benefits (kt). The key to this approach is to be able to determine both k u
and kt, which generally involves the work of Modigliani and Miller, along with certain
 31

assumptions about the debt of the company. Under Modigliani-Miller propositions, there are
two important relationships (Berk & DeMarzo, 2017):

Vu + Vt = E + D
Vu* ku + Vt* kt = E*ke + D*kd

Where:
E is the market value of
equity D is the market value
of debt ke is the cost of
levered equity kd is the cost of
debt

If the company’s policy is to maintain its debt-to-value ratio or a target ratio of interest to
free cash flows, it is reasonable to assume that the risk of interest tax shield is equal to that of
the company’s operating assets (kt = ku). Consequently, the unlevered cost of equity can be
calculated as given in formula (3) below (Berk and DeMarzo, 2017). By comparison, if the
cost of the tax shield and cost of debt is risk-free, coupled with the constant absolute value of
debt, the unlevered cost of equity is given by formula (4) (Koller et al., 2015).

E ke + D k
ku = d (3)
E+D E+D

E D*(1 – marginal tax rate)

ku = ke + kd (4)
E + D*(1 – marginal tax rate) E + D*(1 – marginal tax rate)

The APV method is quite similar to the other approaches in the way that it evaluates
shareholder’s equity by first valuing the whole company. It only departs from the other two
when it comes to how the company’s operation should be appraised, meaning that the other
three steps remain identical.

3.1.4. Discounted cash flows to equity

Unlike the previous methods, the “discounted cash flows to equity” approach (FCFE)
directly appraises the value of shareholders’ equity by discounting the expected cash flows
to which they are entitled in every period after all other obligations have been settled. Under
FCFE method, the operation of the company does not need to be valued separately. The
general formula is given as follows:
 32

Shareholders’ equity value = ∑

i=n

(1 +
FCFEi i = 1 ke)i

Where:
FCFEi is the free cash flow to equity holders in period i, with 1 ≤ i ≤ n.
ke is the cost of equity
n = ∞, with the assumption that the company operates on an ongoing basis.

The calculation of FCFE starts with net income reported in the income statement prepared by
the company. From this figure, non-cash expenses like depreciation and amortization are
added back, and investments in working capital, fixed assets, intangible assets as well as
other non-operating assets are subtracted. The resulting number is then added by the net
increases in debt and other nonequity claims (Koller et al., 2015).

With respect to the appropriate discount rate, the cost of equity is used instead of WACC.
However, in order for the FCFE model to yield reliable results, the assumption that the
company will maintain a constant target capital structure needs to hold. This is in line with
the first two models previously mentioned. The reason for this assumption involves the
relationship between equity risk and capital structure. The more leveraged the company is,
the riskier for equity holders since they are by law, residual claimants. And the riskier the
equity is, the higher the cost of equity required to compensate investors for bearing higher
risk. Therefore, when the capital structure fluctuates, the cost of equity will correspondingly
fluctuate, and it is no longer appropriate to discount the expected FCFEs at a single cost of
equity.

The major drawback of the FCFE approach is that capital structure is embedded in the cash
flows, making it extremely hard to forecast and compare among companies. However, the
method is quite effective for the valuation of companies whose operation is closely related to
its capital structure, such as financial institutions (Koller et al., 2015).

3.2. The market approach

Under this approach, an asset can be valued by referring to the market prices of other assets
that are closely comparable to it. The approach is built upon the economic principle of
 33

substitute, which states that a rational buyer will not pay more for an asset than a current
market price for a comparable asset (Hitchner, 2017). There are generally three steps
involved when applying this approach, which is discussed in the following.

3.2.1. Step 1: Understanding the subject company

Before trying to identify comparable companies for the valuation purpose, it is of utmost
importance to fully understand as many vital aspects of the subject company that needs to be
valued as possible. Such characteristics as the company’s products and services, size,
customers, suppliers, competitors, financial and operational risks, growth expectations,
margins, etc. should be taken into consideration. If the subject company contains different
lines of business that vary considerably in terms of core characteristics, each and every line
might be analyzed and evaluated separately (Koller et al., 2015). In case there is one major
line business that contributes most revenue and profit to and represents a considerable
portion of the total assets of the company, it might be reasonable to assume that the value of
the company is mainly driven by this line of business and, consequently, comparable
companies to this line of business might be used to reasonably approximate the total value of
the subject company. Conversely, when different lines of business are fairly equally
important to the company, different comparable companies to different lines of business
need to be identified in order for the valuation of the subject company to be reliable
(Hitchner, 2017).

3.2.2. Step 2: Identifying comparable companies

Being able to identify comparable companies is at the heart of the market approach. Several
important traits of the subject companies should be considered and compared in the selection
of potentially comparable companies. The closer to those traits, the more reliable is the
comparable companies. Given the complexity of businesses today, the first and foremost
important trait is the unambiguous definition of the industry in which the subject company is
operating. And companies with the same industry definition will be singled out as possible
comparable counterparts for the subject company. In that regard, geographic diversification
of the subject company also needs to be taken into consideration. Subsequently, a set of
different measures that indicate the subject company’s operational and financial
characteristics, along with its growth prospects, should be examined. An unexhausted list of
such measures is detailed as follows (Hitchner, 2017):
 34

 Size measures: These include the magnitude of sales, profits, total assets, market
capitalization, total invested capital. Size is an important consideration because it impacts
both the operational and financial risks of a company and, hence, its value.

 Historical growth rates: These include growth in revenues, profits, assets, net
operating profit less adjusted tax (NOPLAT), return on invested capital. Historical growth
rates are good indicators for future prospects and, therefore, the value of a company.

 Measures of profitability and cash flow: These include earnings before interest,
tax, depreciation and amortization (EBITDA); earnings before interest, tax, and amortization
(EBITA); net operating profit less adjusted tax (NOPLAT); earnings before interest and tax
(EBIT), net income, cash flow. These measures are good indicators for the company’s
performance in the future and directly affect value.

 Profit margin: The ratio of profit to some base items (sales, assets, equity, etc.) is
more important and comparable than the absolute number to understand the underlying
performance of a company.

 Capital structure: Since capital structure represents the financial risk of the
company and greatly affects the value of shareholders’ equity, it should be examined when
trying to identify comparable companies for valuation purposes.

 Other measures: These measures represent other distinctively important aspects of

the industry in which the subject company is operating. They are usually industry-specific.

After possible comparable companies have been identified, different measures that show
important characteristics of the subject company, like those mentioned above, are compared
among companies in search of the best candidates that are fundamentally similar to the
subject company. This process may involve necessary adjustments to the measures in order
to better compare companies on a similar basis. Adjustments usually occur in the income
statement and balance sheet with regard to certain accounting changes, non-recurring items,
operating versus non-operating items, excess versus sufficient working capital, or use of
different accounting methods (Hitchner, 2017).

Another important aspect when identifying and choosing comparable companies is the
sample size. A large collection can help reduce the dependence of the result on any single
company and, thus, avoid anomaly or outliner scenarios. Moreover, a good sample of
comparable
 35

companies should contain those that not only operate in the same industry as the subject
company but share similar prospects for growth and return on invested capital (Koller et al.,
2015).

3.2.3. Step 3: Choosing and calculating pricing multiples

The basic formula of pricing multiple is given as follows (Hitchner, 2017):

Pricecomps
Valuesubject = x Parametersubje
Parametercomp

Where:
Valuesubject is the value of the subject company that needs to be
evaluated Pricecomps is the observed market “price” of the comparable
company
Parameter might be sales, net income, EBITDA, book value or any relevant measure

There are a couple of points to the above formula that need to be made. Firstly, the value
being evaluated has to correspond to the market price being observed. For instance, if the
value of the invested capital of the subject company is of concern, then price refers to the
market value of the invested capital of the comparable company. Likewise, if the value of
shareholders’ equity needs to be valued, then the price which is implied in the formula
should be the market value of the shareholders’ equity in the comparable company.
Secondly, the parameter used could be based on measures from next year, the current year,
last year or some time period. Thirdly, pricing multiple is forward-looking, with the
observed market price reflecting expectations of the market about the comparable company.

When it comes to the value of the subject company that needs to be appraised, there are
usually two types. The first one is the market value of shareholders’ equity. It is rather
straightforward to value the share price of the subject company when the value is defined
this way. The most popular multiple used for this type of value is price-to-earning (P/E).
However, the ratio mixes capital structure and non-recurring incomes/expenses with
expectations of underlying performance, making it hard to reliably compare multiples across
companies (Koller et al., 2015). The second type is the market value of invested capital.
With this type, the subject company’s invested capital is first valued, to which the values of
non-operating assets are added to derive the value of the enterprise as a whole. Then, the
values of other financial claims other than equity are subsequently subtracted to derive the
market value of shareholder’s equity and, ultimately, share price.
 36

With regard to the parameter, there are many choices, such as revenue, gross profit,
EBITDA, EBITA, EBIT, pre-tax income, net after-tax income, tangible assets, the book
value of equity, the book value of invested capital, etc. The main criteria for selecting the
right parameter are
i. it has to be consistent with the value type being evaluated; ii. it has to be an important
value driver for the value type being evaluated; iii. it has to reflect the expectation of the
market about the businesses (Hitchner, 2017). Moreover, the parameter should be based on
measures from forecasting performance in the future because it is consistent with the
principle of valuation (forward-looking). A forecast year that best represents the long-term
prospect of the company should be chosen for the parameter to be based on (Koller et al.,
2015).

3.3. Choice of valuation approach for Compañia Cervecera Canarias

When it comes to the income approach, the aforementioned valuation methods, theoretically,
can be well applied to Compañia Cervecera Canarias and should yield the same result.
However, due to the characteristics of the company, certain methods are perceived to be
superior in terms of the ease and reliability of implementation as well as gaining valuable
insights. As outlined in chapter 7, Compañia Cervecera Canarias’s capital structure has not
fluctuated much over the last ten years, and the paper, thus, expects it to be kept constant in
the future. As a result, the DCF and economic- profits models are preferred to the APV since
not only they can be implemented more easily, thus avoiding unnecessary mistakes, but they
can provide more economic insights into the company’s performance. Furthermore, as
mentioned before, the FCFE model is not perceived to be a smart choice for valuing
operating companies like Compañia Cervecera Canarias due to the fact that the capital
structure is embedded in the cash flows to equity, making forecasting challenging and
comparison among companies unreliable. Therefore, in this paper, the value of Compañia
Cervecera Canarias’s shareholders’ equity will be valued by applying and implementing the
DCF and economic- profits models. They are believed to complement one another and
together will provide valuable economic insights and reliable valuation.

In addition to the income approach, the market approach will also be applied as a sanity
check of the result derived from the DCF and economic-profits models (Koller et al., 2015).
The paper believes that the comparison between what price the market is implying for
Compañia Cervecera Canarias’s equity and its calculated intrinsic value is quite useful.
Specifically, if abnormal differences exist, careful examinations and reasonable explanations
are required. Subsequently, this knowledge could be used to spot and avoid implementation
 37

errors, if any.
 38

3.4. Framework for the valuation of Compañia Cervecera Canarias

As outlined in the previous section, discounted cash flow to enterprise technique, economic-
profit model, and market approach are the most appropriate methods for valuing Compañia
Cervecera Canarias. Exhibit 1 illustrates how these valuation approaches will be
implemented throughout the rest of the paper.

Exhibit 1: Framework for the valuation of Compañia Cervecera Canarias

1. Strategic Analysis 2. Financial Statement Analysis

(Chapter 4) + (Chapter 5)

3. Performance Forecasting
(Chapter 6)

5. Absolute Valuation
+ 6. Relative Valuation
(DCF & Economic-profit models)4. WACC Estimation
(Chapter 8)
+
(Chapter 7)
(Market approach)
(Chapter 9)

7. Recommended Investing Actions

(Chapter 10)

With regard to the DCF and economic-profit models, the first and foremost input is a
comprehensive understanding of the beer industry and Compañia Cervecera Canarias. This
can be achieved in the first two steps in the exhibit. In the strategic analysis, several analysis
techniques will be applied in order to carefully shed light on the most important aspects of
the beer industry and Compañia Cervecera Canarias. Through these analyses, opportunities,
and threats facing the industry as well as how Compañia Cervecera Canarias is positioned to
respond to them, will be identified and examined. Strategic analysis will be detailed in
chapter 4. By contrast, in the financial statement analysis, which will be outlined in chapter
5, Compañia Cervecera Canarias’s financial statements will be restructured and analyzed in
a way that can generate insights into how the company has performed financially. Together,
 39

the results from the two steps serve as an important foundation for producing reliable
forecasts of the company’s performance in the future, which will be outlined in chapter 6.

The ultimate goal of the performance-forecasting step is to reliably forecast the company’s
free cash flows and economic profits, which, together with the estimation of Compañia
Cervecera Canarias’s weighted average cost of capital (WACC) carried out in chapter 7, are
the building blocks for the final valuation of Compañia Cervecera Canarias’s shareholders’
equity and share price in chapter 8. Furthermore, in order to complement the result found in
chapter 8, shareholder’s equity and the company’s share price will also be valued using a
different approach, namely multiple valuation, in chapter 9. Finally, the results from chapter
8 and 9 will be used to make recommendations about investing actions in chapter 10.
 40

4. Strategic Analysis

1. Strategic Analysis + 2. Financial Statement Analysis

3.

Performance Forecasting
+
5. Absolute Valuation + 6. Relative Valuation

7. Recommended Investing Actions

The value of a company depends on its power to generate cash flows in the future, and the
sole mission of valuation practice is to determine these cash flows. Therefore, the work
involves a lot of expectations and forecasts about the prospects of the company in question
and the industry in which it operates. The better the forecasts, the more reliable and useful
the valuation work is going to be. This, in turn, requires a thorough comprehension of the
industry and the company being valued.

This chapter aims to perform a careful examination of the beer industry and the role
Compañia Cervecera Canarias plays in it. It starts with the analysis of the beer industry,
where the PESTEL and Porter’s five forces frameworks are applied in order to pinpoint the
most significant aspects of the industry. These aspects are regarded as external factors that
may have considerable impacts on Compañia Cervecera Canarias’s business in the form of
both opportunities and threats. Next, the chapter will shed light on internal factors that can
affect the company’s performance. Specifically, Compañia Cervecera Canarias’s competitive
advantages will be analyzed in detail. Finally, built upon the external and internal analyses,
the chapter ends with the SWOT analysis of the company, which aims to point out the
opportunities and threats that the company faces, along with the strengths and weaknesses it
has for dealing with those opportunities and threats. This structure of the analysis is
illustrated in Exhibit 2. It is worth noting that the SWOT analysis is one of the important
inputs
 41

for making reliable forecasts of the company’s performance. Forecasting will be outlined in
chapter 6.

Exhibit 2: Structure of the strategic analysis

Analysis of the beer industry Analysis of

(External analysis) Compañia
Cervecera Canarias

Opportunities Strengths
Threats + Weaknesses

SWOT
Analysis

4.1. Analysis of the beer industry

The beer industry will be analyzed at two levels. The first level involves the examination of
the relationship between the industry and the environment in which it operates. This
relationship will be shed light on using the PESTEL analysis tool, which analyses political,
economic, social, technological, environmental, and legal aspects that impact the beer
industry. At the second level, the competitive structure of the industry will be analyzed using
Porter’s five forces analysis framework. The goal at this level is to capture the intensity of
competitiveness of the beer industry as a whole.

4.1.1. PESTEL analysis

4.1.1.1. Political factors

The most noticeable political concerns are the trade war between the US and China, Brexit,
and Middle East conflict. Each of them will be examined below.

 Trade wars

Over the past two years, the global economy has witnessed a trade war between two of the
biggest economies of the world: The United States of America and the People’s Republic of
China. The conflict started in June 2018 when Donald Trump, the president of the USA,
imposed tariffs on China (US-China trade war, 2020). China also retaliated with tariffs of
their
 42

own on imports from the USA that included airplanes, cars, agricultural products, etc. The
US also pushed its traditional allies like the European Union (EU), Canada, Japan,
etc. to renegotiate trade relations citing mounting trade deficits (Pramuk, 2019).

Nevertheless, the US and China signed the first phase of the trade deal on January 15, 2020,
and agreed to the rollback of tariffs, expansion of trade purchases, and renewed
commitments on intellectual property, technology transfer, and currency practices (Swanson
& Rappeport, 2020). This agreement is a hopeful sign that the long-standing trade war
between the world’s largest economies may come to an end soon.

Since the trade war reduces global trade and, hence, global output, global demand for the
beer industry can be adversely affected. Thus, any escalation of a trade war is likely to hurt
the beer industry.

 Brexit

On January 31, 2020, the UK officially left the EU, and now both EU and UK have until
December 31, 2020, to decide on how their relationship would be in the future (Brexit: UK
leaving the EU, 2020). Until then, the UK will continue to follow existing EU rules, and both
the EU and UK will continue their existing trading relations. There are, however,
uncertainties around how the trade agreement, if any at all, between the UK and EU, will be
negotiated. A no-deal Brexit could mean increased trade barriers between these economies.
If the reduction of trade is significant, it could negatively impact the beer markets in these
economies.

The EU and UK are important trading partners of one another, and both have an interest in
having a deal that would promote growth in their respective economies. So, both parties are
interested in drafting a mutually beneficial agreement. However, considering the deal has
been dragging for a long period of time, it is also possible that there will be no agreement by
December 31, 2020. If there is no trade deal, the trade between the EU and UK will be
governed by the World Trade Organization (WTO) framework, of which both of them are
members. Both UK and EU have the most-favored-nation (MFN) status in the WTO, and
they must apply the same tariffs to each other as they would apply to any other MFN
countries (unless they have a separate bilateral agreement with other trading partners) (What
a no-deal Brexit means, 2020).

If this happens, it will increase the tariff on trade between these two economies. Moreover,
the trade between the two will also be affected by non-tariff barriers and added
bureaucracies. Financial Times reported that Office for Budget Responsibility of the UK
modeled for a 5.2
 43

percent loss of potential GDP over 15 years if a “typical” free trade agreement was struck.
The report further stated that Britain had already lost 2% of the potential output, while
another 3.2% would come in the future (Parker, Hughes, & Brunsden, 2020). The IMF
expects the no- deal Brexit to reduce the potential long-term output of the UK by almost 3%,
the potential output of EU by 0.3%, and the global GDP by 0.1% over the long run (World
Economic Outlook, 2020). As the impact of the no-deal Brexit on the global economy is
going to be a loss of global GDP by only 0.1%, the paper doesn’t consider the no-deal Brexit
as a major threat to the global economy. Instead, the no-deal Brexit can particularly affect
the economy of the UK and, to some extent, of the EU. And this can inflict negative impacts
on the beer markets in these economies.

 Middle East Conflict

The tension between Iran and the US have been around for decades, but it escalated again
recently. The tension started increasing when the US withdrew from the nuclear deal signed
between Iran and other world powers, including the US, UK, Germany, France, Russia,
China, and the EU. The US has accused Iran of attacks on oil tankers in the Persian Gulf and
oil facilities in Saudi Arabia, among other things. The tension rose to a tipping point when
the US killed Iran’s top general, Qasam Solemani, and Iran responded by firing missiles at
American troops in their Iraqi base. A Ukrainian passenger jet was also mistakenly shot
down by the Irani military (Kaur, Kim, & Sherman, 2020). However, the situation has
deescalated since then, and the threat of immediate war has subsided for now. However, if
the tension escalates and Iran and the US enter into a full-blown war, we can expect major
disruptions in the global oil supply chain, which would increase the oil price globally and
potentially increase the general price level across the globe. Thus, any escalation of the
conflict would negatively affect the beer industry.

4.1.1.2. Economic factors

COVID-19 pandemic is posing a significant challenge to the global economy. As of May 15,
2019, COVID-19 pandemic has infected more than 4.5 million people worldwide and killed
at least 306,000 of them (Yeung & Renton, 2020). Governments around the world are
implementing lockdowns and social distancing measures to curb the spread of disease, and
these measures have stalled economic activities around the globe. While the economy, in
general, will be affected, sectors like tourism, retail, restaurants, sports, entertainment,
airlines, energy will be affected more than others.
 44

The International Monetary Fund (IMF) expects that the global economy will contract by 3%
in 2020, which is a significant revision over its original forecast that the global economy
would grow by 3.3% in 2020 (World Economic Outlook, 2020) . Furthermore, contraction
by 3% is much severe than the contraction of 1% during the great recession of 2008-2009.
These contractions are primarily because of the decline of economic activities due to the
lockdowns. However, the same report from IMF expects the economy to rebound in 2021
with a 5.8 % growth in 2021 when economic activities normalize. These forecasts are based
on the assumption that the pandemic will slowly fade away in the second quarter of 2020,
and the containment measure will be lifted, bringing the everyday life to be normal.
Furthermore, fiscal measures are taken by both advance and developing economies that
provide significant fiscal supports to impacted sectors and workers.

The coronavirus crisis has resulted in the closure or reduced sales for restaurants and bars,
and this has resulted in reduced sales of alcoholic beverages, including beer, through these
channels (Milcallef, 2020). According to a market-research firm Nielsen, average sales per
outlet in the USA was lower than the rates of a year- ago by 67% to 75% in the month of
April 2020 (‘Covid-19’ effect on Alcohol sales, 2020). However, the same report states that
there has been a shift towards take-out restaurant services and off-premise channels from the
on- premise channels. Brick-and-mortar dollar sales of alcoholic beverages in the USA for
the seven-week period ended April 18 compared to a year ago was up by 21% while the
dollar sales of online channels were up by 234%. The report also states that a growing
number of customers are ordering alcohol with their takeout from restaurants (14% in the
week ended April 25 compared to 9% in the previous two weeks). Overall, the sales volume
of spirits has increased by 31.7%, followed by 27.1% for wine and 15.4% for
beer/cider/flavored malt beverage during the COVID-19 period. Nielsen estimates that 22%
growth in the volume of sales is required to offset losses from on-premise channels, and the
wine and spirits category has already achieved this growth of 22%. We believe that the
report produced by Nielsen for the US market provides an indication for western economies,
and this shift in the consumption channel will be seen across these economies. We expect
that the sales of the beer industry will be lower for some time because of the COVID-19
pandemic. However, a shift in consumption channels will help the sales normalize over time.

 Real GDP Growth Rate

Graph 8 illustrates the real GDP growth rate across three categories – advanced economies,
emerging market and developing economies and world. While the real GDP growth rate has
 45

been stable over the last decade, real GDP growth rate across all categories rate is expected
to decline in 2020. The decline in 2020 is more severe than the decline in 2009 as the GDP
growth rate in all categories- advanced economies, emerging market and developing
economies are expected to be in the negative territory in 2020 while in the recession of 2009,
although the GDP growth rates declined for emerging market and developing economies,
they were still in the positive territory. Furthermore, the contraction in GDP across all
categories is more severe in 2020. However, the GDP growth is expected to bounce back in
2021, with GDP expected to increase for the World by 5.8% compared to the 2020 level.

Graph 8: Real GDP growth rate over the period 2000 – 2021
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%

Advanced economies Emerging market and developing economies World

(Source: World Economic Outlook, 2020)

 Inflation

Graph 9: Inflation rate over the period 2000 – 2021

9%
8%
7%
6%
5%
4%
3%
2%
1%
0%

Advanced economies Emerging market and developing economies World

(Source: World Economic Outlook, 2020)

Graph 9 illustrates inflation rates across three categories – advanced economies, emerging
market and developing economies and world. The inflation rate in all categories increased
 46

quite constantly over the period 2015-2019. However, because of the COVID-19 pandemic
and the shrink in economic activities, their inflation rates are expected to decline in 2020.
Specifically, the inflation rate for advanced economies is expected to be 0.4%, while the
figure for emerging market and developing economies is expected to be at 3.9%. Overall,
inflation for the world is expected to decline to 2.5% in 2020. Nevertheless, the inflation
rates are expected to bounce back in 2021, with the inflation for the world forecasted to be
3.4%.

 Currency

According to World Economic Outlook (2020) published by the IMF, investors are shifting
from emerging market portfolios to cash and safe assets, and this movement has created
pressure on emerging market currencies. Furthermore, the currency of commodity exporters
both in emerging and advanced economies has also depreciated because of the lower
commodity prices. The reports observe that the US dollar, Japanese Yen, and Euro has
appreciated as of April 3 compared to that of December 2019 level. On the other hand,
advanced economies with commodity exports like Norway, Canada, Australia, New Zealand,
experienced currency depreciation. The majority of the emerging market economies
experienced currency depreciation, with countries like South Africa, Brazil, Mexico,
Columbia, Russia, Indonesia, etc. experiencing high currency depreciation. We believe that
this sharp decline in the real effective exchange rate is primarily because of the uncertainty
caused by the COVID-19 pandemic. This depreciation has reversed fairly since the report
was published as the new cases are decreasing in the countries that were hit hard at the
beginning of the pandemic.

 Forecast of uncertainty

The above forecasts from IMF assumed the COVID-19 pandemic to subside in the second
quarter of 2020, and there will be no second wave of a pandemic, or the pandemic will not
last longer than assumed. However, it is also possible that the pandemic will be more severe
than originally assumed. As of May 15, 2019, 8 candidate vaccines are under clinical
evaluation, and 110 candidate vaccines are in preclinical evaluation (COVID 19 candidate
vaccines, 2020). We can expect more progress towards both the development of vaccines
and control of the pandemic (without hurting the economy) in the coming days. While there
are world leaders who are optimistic and expect the vaccines to be ready by the end of 2020,
(Mulier, 2020) reports that consensus view in the pharmaceutical industry is for the vaccine
to be available by the second half of next year. Thus, if the pandemic doesn’t subside as
assumed or if there is a second wave of the virus, we expect the economy to have a
negative outlook in 2021.
 47

However, since the vaccines are expected to be ready by 2021, we expect the economy to
rebound in 2022.

4.1.1.3. Social factors

The most noticeable social factors are the negative effects of alcohol on the public and
consumer trends towards health and wellness and consumers’ perception of sustainability.
Each of them will be examined below.

 Negative effects of alcohol on the public

Alcohol has been notorious for harmfully affecting public health. In 2016, it was the main
reason behind an estimated 3 million deaths globally. Put it another way; alcohol was
responsible for about 5.3% of the global number of deaths in 2016. This figure was higher
than that of tuberculosis (2.3%), HIV/AIDS (1.8%), diabetes (2.8%), hypertension (1.6%),
digestive diseases (4.5%), road injuries (2.5%) and violence (0.8%) (WHO, 2018). Below is
the breakdown of deaths attributable to alcohol assumption by regions as defined by WHO.

Graph 10: Share of deaths (in %) attributable to alcohol consumptions in 2016,

by WHO’s definition of regions

12.0%
10.1%
10.0%

8.0%

6.0% 5.1% 5.5% 5.3%

4.6%
4.1%
4.0%

2.0%
0.7%
0.0%
Africa Americas Eastern Europe South East Western World
Mediterranean Asia Pacific

(Source: World Health Organization (WHO), 2018)

Europe was affected the most by alcohol in 2016. Out of every ten deaths, there was one
caused by alcohol. Conversely, alcohol was not the main concern in the Eastern
Mediterranean region, with only about seven deaths out of 1000 attributed to alcohol
consumption. The reason for this is that the region mostly consists of countries where Islam
is the main religion. And for Muslims, drinking alcohol is not perceived to be holy. In fact,
the region accounted for only
 48

0.7 % of global beer consumption by volume in 2016 (Statista, 2020a). Furthermore, when 3
million alcohol-attributable deaths are broken down into different main causes, the dominant
categories are unintentional injuries such as accidents, digestive diseases, cardiovascular
problems, and diabetes. Together, they were responsible for more than 60% of the total
deaths caused by alcohol consumption.

Pie chart 2: Break-down of total alcohol-attributable deaths by main causes, 2016

Cardiovascular
diseases and Digestive
diabetes, 19% diseases, 21%

Epilepsy, 1%

Alcohol use
disorders, 5%

Malignant
neoplasms, 12% Unintentional
injuries, 21%

Infectious Intentional
diseases, 13% injuries, 8%

(Source: World Health Organization (WHO), 2018)

Apart from negative effects on public health, alcohol consumption may also lead to adverse
economic and social consequences for both the person drinking and third parties. Such
consequences include loss of earnings, unemployment, family problems, violence, crime,
and social stigma (European Commission, 2019a).

 Consumer trends towards health and wellness

Consumers have become health-conscious and leaned towards wellness at a rapid pace. Over
the period 2015-2017, the market value of the global wellness industry grew 12.8% from
about
3.7 trillion $ in 2015 to 4.2 trillion $ in 2017 (Global Wellness Institute, 2018). This trend
has also affected the beer industry. In search of health and wellness, consumers are
increasingly turning to low- and non-alcoholic beers and abandoning traditional premium
beers (Settembre, 2019). In fact, there are signs that low- and non-alcoholic beers are a
growing trend worldwide (Pellechia, 2019). The market grew more than 18% in 2018
(Drinks Industry Sustainability Index, 2020). Moreover, it is expected that low- and non-
alcohol wine, spirits, and beer will see the most growth within the alcohol category over the
period 2018-2023 (Colbert, 2019).
 49

And by 2024, sales of low- and non-alcoholic beer are expected to surpass $25 billion
(Warner, 2019).

In fact, beer companies have been responding to this trend. From a survey conducted by
Brewers Association in 2018, 40% of its members have been brewing products that are
different from traditional beer, and low- and non-alcoholic beers are among them. Also,
more than half of its members signaled that they would consider making similar products
(Settembre, 2019).

The big players in the beer industry have also made their moves. Compañia Cervecera
Canarias now owns a strong portfolio of low- and non-alcoholic beer brands, including its
flagship Compañia Cervecera Canarias 0.0, which was first introduced in 2017. And this
portfolio of the company has performed quite well. Its sales volume has increased by 14.6%
over the period 2016 – 2019, from 12.3 million hectoliters in 2016 to 14.1 million in 2019.
By contrast, low- and non- alcoholic portfolio represents a significant part of Carlsberg’s
operation. Out of 687 products that the company offers, 69 products (about 10%) belong to
low- and non-alcoholic categories (Carlsberg, 2020). Over the last three years, this portfolio
has increased its share of contribution to the total sales volume by 1.4%, from 15.2% in 2017
to 16.6% in 2019 (Carlsberg, 2010 – 2019). On the other hand, AB InBev has predicted that
by 2025, its low- and non-alcoholic portfolio will account for at least 20% of its massive
sales volume (Warner, 2019), which was 561.4 million hectoliters in 2019 or about nearly
30% of the global beer market.

 Consumers’ perception of sustainability

According to a survey conducted by Globe Scan (Globe Scan, 2019), consumers have been
increasingly concerned about the state of the environment they live in over the last five
years. The main issues that have captured their attention are environmental and air pollution,
depletion of natural resources, climate change, and shortages of freshwater. The percentage
of people surveyed who believed that those issues were at their serious states increased
dramatically over the period 2015 – 2019. For instance, in 2015, there were only about 45%
of the respondents perceived climate change to be a real threat. That number went up to
about 61% in 2019.

There are also other signs that indicate consumers’ increasing concern about sustainability.
An analysis by Pinterest in 2019, a social – media platform, reveals that the number of
searches for the term “sustainable living” was up 69%, while searches for “sustainable
living for
 50

beginners” increased by 265% (Sustainable brands, 2019). Consumers have also expressed
that they are willing to pay an extra for products that they believe to be produced in
sustainable ways. And their increasing purchases of sustainable products have proved what
they believe (Reints, 2019).

Consumers may also be loyal to a brand because of their sustainable products and/or actions.
The survey by Globe Scan reveals that about 67% of the people interviewed indicated that
they would be loyal to a brand if they believed the brand offered them sustainable solutions.
And 27% of them showed that they would strongly support and be loyal to the brand.
Furthermore, sustainability-related motivation to be loyal to a brand was strongest among
Baby Boomers (55+)
millennials and people from generation Z, age ranging from 18 to 44. There were 75% and
72% of generation Z and millennials,Genrespectively,
X (45-54) who would be loyal because of
sustainability, while 39% in both groups expressed strong support and loyalty.
Millennial (25-44)

Graph 11: Percentage of people who are loyal to a brand because of its sustainable
GenZ (18-24)
products and/or actions
Total

16% 40%

A great deal A fair amount

24% 39%

33% 39%

36% 39%

27% 40%

(Source: Globe Scan, 2019)

The trend towards sustainability has also affected the beer industry, with consumers
increasingly looking for good companies, not good products (Drinks Industry Sustainability
Index, 2020). In response to this trend, the biggest players in the beer industry have
portrayed themselves as sustainability-driven companies. They all aim to ensure that
sustainability is at the heart of what they do at every step of their operation, from barley to
customer. As a result, a wide range of sustainability-related initiatives has been introduced,
including sustainable outsourcing, packaging, production, recycling, water usage, and energy
efficiency.
 51

4.1.1.4. Technological factors

Although the brewing technique that beer companies are using today still has its foundation
built on centuries-old principles, rapid development in technology has led to much greater
cost efficiency, increased employee safety, a higher level of consistency, and higher quality.
This development has also increased consumers’ satisfaction with the beer market by
ensuring the increased quality of beer products, consistency and stability of product
provisions, and adaptation to consumers’ changing of tastes (Didora, 2018).

Technologies like artificial intelligence (AI) and the internet of things (IoT) have put into
place automation that not only helps reduce human involvement but also helps improve
operational efficiency to a large extent. Nowadays, automation is employed almost at every
step in the brewing process at a typical brewery. For instance, the intensity of the crush of
grain, which has to correspond to the type of grain being crushed can be adjusted
electronically instead of manually as in the past. Automation can also lead to the
enhancement of the quality of beer products by ensuring the right conditions are met during
the production process (Bandoim, 2019).

Technology can also help brewers curb on their emission, use energy and water resources
more efficiently, and put into place better recycling process and treatment of waste.
However, the technologies involved in these practices are usually capital-intensive and, thus,
not affordable for small brewers (Hubbell, 2019). Big players like AB InBev and Compañia
Cervecera Canarias, on the other hand, have long utilized such technologies. For instance, in
order to produce one liter of beer, micro-brewers usually use ten liters of water, while
macro-brewers, with the expensive technologies, only need three liters of water (Marry Kate,
2020).

Information technology is another type of technology that has transformed the beer industry.
Compañia Cervecera Canarias, for instance, has been increasingly focused on this field as a
tool that can help it improve its distribution and marketing capacity. In 2017, the company
introduced Beerwulf, which is a business-to-consumer online beer platform where
consumers can order over 1,000 different beers in bottles, cans, packs, kegs. And there were
millions of consumers visiting the platform in 2019. With regard to marketing, the company
has adopted an Individual Data- Driven Marketing (IDDM) approach with engagement in
big data (Marr, 2017). They believe that big data can help them learn fast, gain insights into
their customers, and improve the efficiency of sales and marketing programs by providing
each individual with the most relevant information.
 52

4.1.1.5. Environmental factors

The most noticeable environmental factors are climate change and water scarcity. Each of
them will be examined below.

 Climate change and its possible impact on the beer industry

Climate change has been one of the biggest concerns among the vast majority of
governments and businesses lately because of its devastating effects on the environment,
human health, and economies (OECD, 2020). Its far-reaching effects may also touch upon
the beer industry. A recent study carried out by Nature Plants (Nature Plants, 2018) outlines
possible negative impacts of climate change on global beer supply and prices. One of the
irreplaceable ingredients for beer is barley, whose quality is vital for the taste and quality of
final beer products. Barley crops perform best when temperatures are around 70 Fahrenheit
degrees. If temperatures hit the mid-80 degrees, the crops can suffer. Additionally, hotter
temperatures also provide great conditions for pests and diseases (Forgrieve, 2020).

The study finds that global barley yields may be reduced substantially under some extreme
events. Specifically, losses may range from 3% to 17%, depending on the severity of the
conditions. And these losses will lead to large decreases in beer production and significant
increases in prices. For instance, beer consumption in Argentina may decrease by 32%,
while beer prices in Ireland may increase by 193%.

The study, however, has drawn critics. The biggest and loudest one is Brewers Association,
which describes the study as "largely an academic exercise and not one that brewers or beer
lovers should lose any sleep over." (Watson, 2018). It argues that the findings of the study
are fundamentally based on unfounded and unrealistic assumptions about the barley
agriculture industry, and farmers and brewers alike have long been adaptable to and prepared
for climate change. Multidisciplinary Digital Publishing Institute (MDPI) agrees with this
point: “Barley shows a good level of adaptability to unfavorable environments like cold,
drought, or poor soils, and is considered more tolerant than wheat to adverse growing
conditions” (MDPI, 2019a).

This paper sides with the argument presented by the Brewers Association to not view climate
change as an imminent threat that may disrupt the beer industry to a large extent, but as a
possible threat that needs to be monitored closely. There are four main reasons for such a
standpoint:
 53

Firstly, barley is quite adaptable to the unfavorable environment as outlined by MDPI.

Secondly, barley production can be shifted globally. Specifically, while the barely
production could reduce in certain regions because of increasing temperature, other regions
can benefit from the increasing temperature. For instance, MDPI (2016) predicts that climate
change could be beneficial for UK barley production. Their simulated average future yield
(the 2030s- 2050s) for three different emission scenarios is predicted to be higher than the
observed yield in the baseline period (1961-1990) by 1.4 tons to 4 tons per hectare.

Thirdly, governments around the world have been well aware of the climate-change threat
and continuously striving to co-operate with one another to address the issue. Adopted at the
Paris conference about the climate in 2015, Paris Agreement is the first universal, legally
binding global climate change agreement among nearly 190 parties. Its mission is to restrict
global warming to well below 2 degrees Celsius above pre-industrial levels while pursuing
efforts for a tougher ceiling of 1.5 degrees (European Commission, 2019c). Although there
are disagreements among parties about how to go about achieving this goal, the accord has
laid out fundamental foundations for future developments and is a sign of unity among
countries to combat climate change. The next climate summit (COP 26), which will take
place in the United Kingdom in November 2020, is expected to produce positive outcomes
(Nicolle, 2019).

Finally, the largest beer companies like Compañia Cervecera Canarias, AB InBev, and
Carlsberg have also been very mindful of the threats of climate change and taking serious
initiatives to deal with and prepare for its possible negative impacts. For instance, Compañia
Cervecera Canarias has long pursued its “Drop the C” and “Sourcing sustainably” programs,
with which the company aims to not only reduce its carbon footprint by switching to
renewable energy and sustainable operation but improve barley growers’ yields through
research and development of new breeds of seeds that can shorten plantation cycle
(Compañia Cervecera Canarias, 2010a – 2019a). On the other hand, Carlsberg’s ambition is
to have “Zero carbon footprint” at all of its breweries by 2030. Moreover, its dedicated
laboratory called “Carlsberg Research Laboratory” is focused on identifying new climate-
tolerant traits in barley in order to develop new robust varieties that are adaptable to climate
change (Carlsberg, 2019). By contrast, AB InBev has pledged that, by 2025, 100% of its
purchased electricity will be from renewable sources, and its carbon footprint will be
reduced by 25%. When it comes to barley cultivation, its “Research and Agronomy” teams
mainly focus on improving breeding and crop management practices in order to empower
farmers and reduce production volatility. Furthermore, the company has also introduced
analytics
 54

technology to the cultivation process. Its SmartBarley, which is currently live in 12 countries
across five continents, combines data and technology to help farmers enhance their
operation. For instance, SmartBarley combines field-level data with weather analytics to
help farmers predict and organize their crops accordingly (Anheuser-Busch InBev, 2010 –
2019).

 Water scarcity

Rapid growth in population, urbanization, and threats from climate change have increasingly
negatively affected the availability and quality of water around the world. It is expected that,
by 2050, the demand for water will experience an increase of 55% in comparison to the year
2000. Moreover, about four billion people will have to live in areas that suffer from water
problems, while 240 million people will not get access to improved water sources, and
almost
1.4 billion people will not have basic sanitation (MDPI, 2019b). Given the backdrop of
future water scarcity, stricter water regulations will be inevitable. In fact, there has been a
trend towards the establishment of dedicated water regulatory bodies dealing exclusively
with water usage in different countries. Moreover, the OECD Water Governance Initiative
has developed a framework that can help countries measure the effectiveness of their water
governance policies and how to improve them (MDPI, 2019b).

The water scarcity prospect and tougher regulations, as a result, may hurt the beer industry
because water is an integral part of beer production. For an average brewery, 7 liters of water
are needed to produce 1 liter of beer, while that number is 3 for macro-brewers and 10 for
micro-companies. When water needed to grow barley and hops comes into the calculation,
11 to 40 liters of water are needed for an average brewery.

Given the gravity of the water in the industry, brewers alike, especially big players, have
been striving to revolutionize the ways they use water in their production processes. For
instance, Compañia Cervecera Canarias has been pursuing its “Every Drop” initiative to
reduce water consumption in its breweries. At the same time, the company has been
researching and developing agricultural practices that allow farmers to grow more barley
with less water. On the other hand, Carlsberg aims to reduce its water consumption at all of
its breweries by 50% by 2030 with its “Zero Waste Water” initiative. Over the period 2015
– 2019, the company has managed to achieve a 12% improvement in water efficiency. By
contrast, AB InBev, with its “Water Stewardship” program, aims to improve both its
operational water efficiency and water availability and quality in areas where the company
has operations. In 2019, the company managed to reduce its water usage to 2.80 liters for
every liter beer produced.
 55

On the other hand, there is a growing possibility of making seawater drinkable in the future.
Oceans contain 97% of the water of the earth, and the progress in desalination – the process
of converting seawater into freshwater – can help mitigate the water crisis of the future. This
technology is being used all around the globe, including countries like Saudi Arabia, Israel,
Australia, the USA, China, India, etc. Currently, there are about 20,000 desalination plants
around the globe, and more than 300 million people now get their water from desalination
plants (Jim Robbins, 2019). One of the major challenges with this technology is that it is
expensive and requires lots of energy. There are also some environmental concerns
surrounding this technology. However, the challenge of water scarcity will likely increase
the research on desalination technology, and the use of seawater can be expected to help
mitigate the impact of the water crisis.

Given the possible innovations in technology to use seawater and awareness and preparation
from the brewers, we do not expect the beer industry to suffer dramatic disruption caused by
water shortage. Nevertheless, a close watch at the development of the situation is needed to
warrant timely adjustment.

4.1.1.6. Legal factors

The most noticeable legal aspects are excise tax, limiting regulations, antitrust laws, and tax
incentives. Each of them will be examined below.

 Excise tax

In addition to value-added tax (VAT), alcoholic beverages in general and beer products, in
particular, are also subject to an excise tax. Excise tax is a special tax that governments levy
on the purchase or production of beer products because they are deemed to be harmful to
societies. With the excise tax, governments hope to encourage consumers to curb
consumption by raising the final prices of beer products. The higher the tax, the higher the
final prices, and the lower the demand. There are three main approaches to apply excise tax.
The first one is to levy tax as a percentage of retail price (ad valorem tax). The second way is
that authorities state a specific absolute amount of tax for a specific volume of pure alcohol
purchased or produced. The third way is to levy a specific absolute amount of tax on a
specific volume of the whole beer product purchased or produced. Normally, the amount of
tax in the last two approaches are adjusted for inflation after some period of time. Countries
usually differ on which approach to adopt. For instance, while the EU-zone advocates the
second approach, Canada and the US choose the third way, and emerging countries usually
pick the first method.
 56

Graph 12: Excise tax on beer (euro per hectoliter of pure alcohol) and sales volume
(million hectoliter) in the biggest beer markets in Europe by volume in 2019

2500 90
2121
80
2000 70
60
1500 50
1000 759 755 40
749
30
455
500 20
197 199
10
0 -
Netherlands France Poland United Germany Italy Spain
Kingdom
Excise tax Sales volume

(Source: Foley, 2019 and Statista, 2020a)

There are big differences in the level of excise tax among the EU members. For instance,
while the United Kingdom levies 2,121 euros for every hectoliter of pure alcohol purchased,
Germany charges only 197 euro (more than ten times difference). However, the sales volume
in Germany is much higher than that in the United Kingdom (more than 1.5 times).

Excise taxes are also different among emerging markets (graph 13). While China, which is
the largest beer market by volume in the world, levies a tax rate of 25% on the retail price
(China’s ministry of finance, 2001), Brazil exercises a tax rate of only 6% despite its
relatively big market (Receita Federal do Brasil, 2020). India is also quite lenient on the
excise tax, charging only 12.5% (Board of indirect taxes & customs, India 2019).

Governments in other large beer markets calculate their taxes based on the volume of the
total beer purchased or produced. For instance, while the US charges 18$ for every barrel of
beer (TTB, 2020), Canada levies 33.66 CA$ for every hectoliter of beer containing more
than 2.5% alcohol by volume (Canada Revenue Agency, 2020). By comparison, Russia
charges 21 rubles per liter (Statista, 2020b), and South Africa levies 2.08 rand per 340ml
(Larkin, 2020).

An increase in the excise tax may hurt the bottom lines of beer companies if they are unable
to pass it to consumers. It may be challenging for the companies to be able to raise prices
and, at the same time, maintain the level of sales. Furthermore, any increases in the prices as
a result of increased excise taxes are not likely to be enjoyed by the companies but instead
paid
 57

to the governments. Thus, an increase in excise tax is likely to adversely affect the
profitability of the industry.

Graph 13: Excise tax on beer (% of retail price) and sales volume (million hectoliter) in
the biggest beer markets among emerging countries by volume in 2019
35% 30% 500
30% 26.5% 25% 400
25% 22%
20% 300
15% 12.5%
200
10% 6%
100
5%
0% -
Brazil Mexico Thailand Vietnam India China
Excise tax Sales volume

(Source: Governments’ data and Statista, 2020a)

 Limiting regulations

Due to the harms caused by alcoholic beverages in general and beer products in particular,
governments generally set up various regulations with the purpose of restricting sales and
curbing on consumption (European Commission, 2019a).

Firstly, they can reduce the availability of beer products to consumers by putting in place
restrictions on sales and minimum age allowed to purchase beer. For instance, most EU
members limit not only the location of sales but also opening hours and days allowed to
purchase beer products. They also introduce licensing systems where governments can
partially control the production and/or the sale of beer products. By contrast, the Australian
government has implemented the “lockout period” policy. Under this regulation, consumers
are not allowed to enter bars after the lockout. Furthermore, governments also limit the age
that is allowed to legally purchase beer products. While most of the authorities in the biggest
beer markets set the minimum age at 18, Germany and Spain allow 16-year-old people to
purchase beer products. By contrast, the United States is the strictest, with the minimum age
of 21. Interestingly, despite the fact that China is the biggest beer market by volume, it does
not have any regulation about the minimum drinking age in place yet.
 58

Graph 14: Minimum age legally allowed and sales volume (million hectoliters) in the
biggest beer markets by volume in 2019

25 450
20 21 400
20 18 18 18 18 18 18 18 18 18 18 18 18 350
16 16
300
15 250
10 200
150
5 100
50
0 -
*

Minimum age Sales volume

*There is no minimum drinking age

(Source: World population review, 2020 and Statista, 2020a)

Secondly, the marketing abilities of beer companies are usually restricted by governments.
For instance, in most EU member countries, the contents of advertisements are not allowed
to aim specifically at minors, encourage overconsumption, create an impression about
enhanced physical performance or social success. Some countries like France, Sweden,
Estonia, Lithuania, and Iceland go as far as banning all marketing of beer products.

Thirdly, governments can curb the consumption of beer products by putting into place drink-
related driving regulations. They usually use a specific blood alcohol content (BAC) as a
benchmark for such punishments as license suspension and fines. For instance, most EU
members have gradually reduced the legally permitted BAC levels to 0.5 gam/liter or less,
while in Vietnam, Czech Republic, Hungary, Slovakia, and Romania, the level allowed is 0
(zero-tolerance policy) (Statista, 2020c).

Fourthly, the government also regulates the minimum prices that beer companies are allowed
to set. The purpose is to avoid beer products to be easily at the consumer’s fingertips. For
instance, Sweden, Germany, Uzbekistan ban sales at prices that are below costs of sales,
while Finland, Sweden, ban or regulate volume discounts.
 59

 Antitrust laws

Antitrust laws aim to create a healthy and fair competitive environment for companies in
order to benefit ultimate consumers. Normally, big dominant players in a specific industry
are mostly at the crosshair compared to their small counterparts because of their sizes and
influences in the market. Since the global beer market is quite consolidated, with the four
biggest companies representing almost 54% of the global sales volume, any merger and
acquisition of the big players are likely to be under the close scrutiny of local authorities, and
so do their business practices.

In 2015, AB InBev announced a successful all-cash bid to acquire SABMiller, making it the
largest unbeatable company in the beer industry. However, prior to the announcement, the
acquisition was under a lot of scrutiny from authorities of different countries where the two
companies had overlapping operations. In order to win over the authorities, AB InBev agreed
to sell certain assets to make sure that it would not hold a monopolistic position in some
markets. Specifically, the company had to sell i. its stake in MillerCoors to its competitor
Molson Coors in the US market; ii. its European beer brands including Peroni, Grolsch,
Meantime, Pilsner Urquell, Tyskle, Lech, Dreher, and Ursus to Japanese competitor Asahi;
iii. SABMiller’s stake in China Resources Beer in the Chinese market (Massoudi and
Abboud, 2019).

In 2019, AB InBev was fined 200 million euros by the European Commission for breaching
EU antitrust rules (European Commission, 2019b). In the Belgian beer market, its brand
Jupiler accounts for approximately 40% of the total sales volume in 2019, giving it
disproportionate power. The company abused this power by restricting the import of Jupiler
beers, which were produced and sold at lower prices due to tougher competition in the
Netherlands into the Belgian market. The purpose of this practice was to raise and maintain
high retail prices in Belgium. After a years-long investigation, the European Commission
found AB InBev guilty. After the verdict, the company pledged to strongly facilitate the
import of Jupiler beers into the Belgium market and proportionately compensate for Belgian
consumers.

 Tax incentives

In order to encourage brewers to innovate in both production process and beer products,
governments usually offer a wide range of tax incentives for research and development
activities (R&D) carried out by beer companies (Tax incentives for the brewing industry,
 60

2019). Innovations that qualify for tax incentives normally involve water recycling or waste
management processes, brewing or bottling equipment, preservative chemicals, filtration
methodologies, hopping techniques, fermentation processes, bottling or canning processes,
keg filling or treatment techniques, ingredient processing techniques.

These tax incentives can be fantastic assets for brewers by allowing them to reduce their tax
burden to a large extent. In 2019, AB InBev and Compañia Cervecera Canarias enjoyed a tax
reduction of 186 million US dollars and 119 million euros, respectively, from such
incentives in different countries, while their income tax expenses reported in the same year
were 2,786 million US dollars and 910 million euros, respectively. Both companies expect
those tax benefits to continue in the future (Anheuser-Busch InBev, 2010 – 2019; Compañia
Cervecera Canarias N.V., 2010a – 2019a).

4.1.2. Porter’s five forces analysis

Porter’s five forces is a framework that examines the competitive structure inherent in a
given industry to determine how profitable the industry can be (Porter, 1980). It analyses the
power of five different forces that can pressure down the profitability of companies operating
in the industry. They are buyer power, supplier power, the threat of new entrants, the threat
of substitutes, and the intensity of rivalry. Specifically, when buyers have so much power,
they can use it to negotiate down the prices they have to pay and thus, hurt the profitability
of the industry. Similarly, a supplier with power can force companies to pay higher prices for
the inputs they need for their operations and leave them with little margins. New entrants and
substitute products, on the other hand, threaten to increase the supply available or offer
customers different choices, leading to tougher competition for existing companies and thus
lowering prices. By contrast, when competition among existing companies is fierce,
customers stand to benefit at the expense of the players.

The Porter’s five forces framework is perceived to be useful because it provides an overview
of what factors influence the profitability of an industry and, thus, helps locate those that put
the most pressures on the margins that companies are able to generate. Therefore, it is not
only a potent tool for management, but also for forecasting. Full comprehension of the
competitive structure, along with reasonable expectations about how it may change in the
future, can help create a solid foundation for making reliable forecasts.

In this paper, the framework will be used to analyze the competitive structure of the beer
industry. Specifically, the power of each force will be assessed based on the sets of criteria
 61

recommended by Porter. And these criteria and powers will be quantified using a 0-5 scale,
with five indicating very strong and 0 signaling no power whatsoever. The important
benchmark on the scale, which indicates moderate power, is three below, which signals weak
power and above, which shows strong power.

Supplier
Power

Threat of
Buyer New
Power
Entrants
Profitability
of the Beer
Industry

Threat of
Intensity New
of Rivalry
Substitute

4.1.2.1. Buyer power

The extent of power that buyers have will increase if each criterion set out below is satisfied.

 High concentration in the buyers’ industry

When the buyers’ industry is heavily concentrated, market power belongs to just a few
companies. And this gives them fantastic leverage to negotiate when making purchases with
beer companies. Thus, all else being equal, the more concentrated the buyers’ industry is, the
greater power they can wield.

Beer products are mainly distributed via on- and off-trade channels. Off-trade channels
typically consist of all types of retailers such as super- and hypermarkets, convenience
stores, or similar sales channels, while on-trade channels refer to sales made through hotels,
bars, restaurants, catering, cafés, and similar hospitality service establishments.

Off-trade channels have been the most important approach for beer companies to get their
products sold to final consumers, steadily accounting for about 65% of all sales volume over
 62

the last ten years (graph 15). And among different types of retailers, hyper- and supermarkets
are the most dominant channels. In fact, they were responsible for more than 46% of global
sales volume in 2014 (Market Line, 2015). Therefore, it is obvious that retailers, especially
those that are in possession of hyper- and supermarkets are the most significant buyers for
beer companies.

Graph 15: Share of global beer sales volume by distribution channels over the period
2010 – 2019 (%)

80.0%
60.0%
40.0%
20.0%
0.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Off-trade channel On-trade channel

(Source: Statista, 2020a)

The global retail industry is quite concentrated, with the top 50 retailers accounting for
nearly 13% of the total global sales in 2018 (Statista, 2019a; Deloitte, 2020). Graph 16
illustrates the performance of the world’s five largest retailers by revenue in 2018. Walmart
was leading the pack with its share of 2.1%, with Costco, Amazon, Schwarz Group, and
Kroger following right behind with approximately the same market share of 0.5%. This
consolidation means that much of the power is in the biggest retailers’ hands, which gives
them good leverage in the negotiation table with beer companies.

Graph 16: Global market share of the five largest retailers in the world in 2018 (%)

2.5%
2.1%
2.0%

1.5%

1.0%
0.6% 0.6% 0.5% 0.5%
0.5%

0.0%
Walmart Costco Amazon Schwarz Group Kroger

(Source: Statista, 2019a; Deloitte, 2020)

 63

Although the retail market is quite concentrated, it is far from completely dominated by the
biggest players, leaving plenty of room for smaller local retailers to gain a foothold and
profit from the market. Moreover, the beer industry is even much more concentrated than the
retail, with the four largest companies accounting for more than half of the global sales
volume. These factors may lead to a significant reduction in the negotiation power of
retailers in general. Overall, this criterion is given a score of 1, meaning very weak buyer
power coming from this source.

 The unimportance of beer products to the quality of buyers’ products

When the quality of the buyer’s products depends little on the seller’s products, the buyer
gains an advantage in negotiation. When the opposite holds, the one with the advantage is
the seller. In general, the less dependent the quality of the buyer’s products on the seller’s
products, the greater power the seller has.

Hyper- and supermarkets offer thousands of different lines of products in their operations
and, thus, the quality of their services is not heavily dependent on beer products. However,
in order to stay competitive, they have to offer their customers a wide range of selections,
making beer products relatively important in their daily operations. Overall, this criterion is
given a score of 3, meaning moderate buyer power coming from this source.

 High price sensitivity of the buyers

When the buyers are price-sensitive, they tend to negotiate fiercely in order to secure
favorable terms and prices, which help them stay in their businesses. Moreover, the buyers
are in an even stronger position if they account for the majority of all the purchases of the
products sold by the companies. In general, the more price-sensitive the buyers are, the more
power they have.

The retail industry has been notorious for its low margins compared to other sectors. An
average margin for a typical retailer ranges from only 0.5% to 4.5% (Ross, 2020). This low-
margin characteristic is attributable to the fact that competition is fierce not only among
brick- and-mortar retailers but also against online retailing. Thus, retailers are highly price-
sensitive customers. Nevertheless, beer products represent just a few items out of a typical
number of 33,055 items that an average supermarket offers its customers (FMI, 2020). This
means that they are much less price-sensitive towards one single type of product. Overall,
this criterion is given a score of 2, meaning weak buyer power coming from this source.
 64

 Undifferentiated beer products

When the products offered by companies in the industry are very similar, buyers can easily
find alternative sellers and, therefore, turn players against one another. As a result, they are
only willing to buy the products at low prices. Thus, in general, the more undifferentiated the
products are, the greater the power buyers can wield.

Beer products are quite differentiated. Brewers can easily differentiate their products to a
large extent in a variety of ways. They can first differentiate their products by segment, such
as lager or bitter. Then flavor, color, and aroma, style, ingredients, strength, and brand can be
used to further differentiate their products in a given segment (Market Line, 2015). This
means that the buyers’ ability to turn beer companies against one another to benefit from
such competition is quite limited. Overall, this criterion is given a score of 1, meaning very
weak buyer power coming from this source.

 Low switching costs

Switching costs involve any cost attributable to switching doing business with one party to
another. They may include employee retraining costs, cost of new ancillary equipment, cost
and time in testing or qualifying a new source, need for technical help as a result of reliance
on seller engineering aid, product redesign, or even psychic costs of severing a relationship.
Switching costs represent how locked-in buyers are to sellers. If switching from one seller to
another is relatively costly, the buyer tends to stick to the seller. Conversely, the buyer is
relatively more likely to change its supplier when the switching cost is low. In general, the
lower the switching cost if, the greater the power buyers have.

Because beer products are quite differentiated, different consumers tend to be loyal to
different brands and constantly search for them. Since consumers tend to prefer one-stop
shopping, retailers could turn away their customers and see drops in their overall sales if they
fail to offer certain beer brands that are in high demand. Thus, the opportunity costs for
switching from one beer brand to another could be high. On the other hand, it is rather easy
for hyper- and supermarkets to physically change and offer their customers different beer
products. However, the paper believes that this benefit is likely to be overwhelmed by the
opportunity costs they face. Overall, this criterion is given a score of 2, meaning weak buyer
power coming from this source.
 65

 The threat of backward integration

When a buyer is large enough, it may pursue vertical integration and produce the products
itself. This puts a lot of pressure on the sellers and gives the buyer great leverage in
negotiation. In general, the more credible the threat is, the greater power the buyer can wield.

Since the retail and beer industries are fundamentally different, it is very unlikely that a
backward integration may occur. Therefore, this criterion is given a score of 0, meaning no
buyer power coming from this source whatsoever.

Summary of the buyer power analysis

Highly concentrated
industry
5
4
Threat of backward 3 Unimportance of beer
integration 2 products
1
0

Low switching cost High price sensitivity

Undifferentiated beer
products

4.1.2.2. Supplier power

The extent of power that suppliers have will increase if each criterion set out below is satisfied.

 Importance of suppliers’ products to the quality of beer products

Similar to buyer power, when suppliers’ products are an integral part of what determines the
quality of the sellers’ products, they have great power in negotiation and can raise the prices
they are willing to sell. All else being equal, the more important the suppliers’ products to
the quality of the buyers’ products, the greater power they can wield.

The main ingredients for the production of beer are barley and hops. And their quality is the
most vital element to the quality of beer products. Given this trait, barley, and hops growers,
all else being equal, can get great leverages in negotiation. However, barley and hops, in
essence, are considered as commodities. Thus, the growers’ products are perceived to be
fundamentally similar to one another, which can weaken their negotiation power to a
considerable extent.
 66

This paper believes that the latter effect is likely to overwhelm the former and, overall, this
criterion is given a score of 2, meaning weak supplier power coming from this source.

 High concentration in the suppliers’ industry

When the suppliers’ industry is highly concentrated, just a few players dominate and possess
market power. This gives them tremendous advantages when negotiating with parties who
want to buy the products in their industry. Generally, the more concentrated the suppliers’
market is, the greater power they have.

On the macro level, Europe accounts for more than 40% of global barley production in 2018
(Statista, 2020d), while the United States and Germany dominate the global market of hops
(accounting for 78% of global production in 2019) (Statista, 2020e). Nevertheless, on the
micro-level, barley and hops growers are numerous (Market Line, 2015). This means that
there are numerous barley growers in Europe and numerous hops growers in the United
States and Germany. Therefore, the barley and hops cultivation industries are quite
unconcentrated, leaving farmers with little power to negotiate. Thus, this criterion is given a
score of 0, meaning no supplier power coming from this source whatsoever.

 Independence of the beer industry

When the profitability of suppliers is heavily dependent on buyers’ industry, they are at the
buyers’ mercy and, thus, do not have much power to say in the negotiation table. Generally,
the less dependent suppliers’ profitability is on the buyers, the more independent and,
therefore, powerful they are.

While hops are mostly only used for making alcoholic beverages, barley grains are mainly
used for both animal feed and alcoholic beverages production. However, barley grains
cultivated for making alcoholic beverages are far more profitable than those grown for
feeding because brewers are willing to pay significant premiums (MDPI, 2019a). In fact,
most of the barley farmers enter into contracts with brewers where the beer companies
decide what barley varieties should be cultivated based on their brewing techniques, cost,
and the desired flavor of the finished beer products. And when adverse weather conditions
force growers to sell the barleys to the feed market, they may get no more than half of the
original prices that would have been paid by the brewers (Cyndi, 2019). Thus, the
profitability of hops and barley growers are quite dependent on the beer industry, but not to
an absolute extent since they can
 67

also be sold to other alcoholic beverages and feed markets if things go sour. Overall, this
criterion is given a score of 2, meaning weak supplier power coming from this source.

 The threat of forward integration

The rationale behind this criterion is similar to that in the buyer power scenario. When a
threat of forward integration is credible, suppliers have tremendous power. And the more
credible the threat is, the greater power the supplier can wield.

Given the large size and high level of concentration of the beer market, backward integration
is more realistic and likely than forward integration. Beer companies have specific demands
for the varieties and quality of barley and hops. Additionally, they are in possession of deep
knowledge of seeds breeding and best cultivation practices, which are passed on to farmers
to help them produce yields with quantity and quality required by the brewers. Thus, the
threat of backward integration by beer companies is quite credible. In fact, big players like
AB InBev get their barleys and hops through both their own cultivation and outsourcing to
farmers (Roseboro, 2019). Therefore, this criterion is given a score of 0, meaning no supplier
power coming from this source whatsoever.

 Low switching cost

When suppliers can find alternative buyers easily, they are less dependent on any particular
buyers and, hence, wield power in negotiations and demand high prices for their products.
Generally, the lower the switching cost for suppliers, the greater power they can obtain.

Graph 17: Number of craft brewers in selected countries in Europe, 2017

1,800 1,655
1,600
1,400 1,295
1,200
942
1,000
800 664 662
600 434 419
400
200
0
United Germany Italy Spain France Netherlands Switzerland
Kingdom

(Source: Statista, 2019b)

Although the beer market is dominated by only a few big multinational companies, there are
thousands of small local brewers all over the world. In the craft beer market, there are 8,256
 68

brewers in the United States alone in 2019 (Statista, 2020f). There are also numerous craft
brewers in Europe, with the United Kingdom and Germany being home to most of them
(graph 17).

The presence of a large number of brewers helps make it easier for barley and hops growers
to switch from one brewer to another. However, the opportunity cost of ending reliable,
more profitable, and long-lasting relationships with certain brewers, especially big ones,
could be quite costly for farmers. This paper believes that the latter effect is likely to
overwhelm the former. Overall, this criterion is given a score of 2, meaning weak supplier
power coming from this source.

Summary of the supplier power analysis

Importance of
suppliers’ products
5
4
3
2 Highly concentrated
Low switching cost
1 industry
0

Threat of forward Independence of the

integration beer industry

4.1.2.3. The threat of new entry

When the barriers to enter a given market are low, new entrants will join the competition if
they believe it is profitable enough to do so. This may lead to an overwhelming supply of the
industry’s products and, thus, pressure down prices and hurt the profitability of the
incumbent players: the lower the entry barriers, the more damaging for the incumbents. The
most significant types of entry barrier and their implications to the beer industry will be
discussed in the following. The extent of the credibility of the threat will increase if each
criterion set out below is satisfied.
 69

 The unimportance of economies of scale

Economies of scale is one of the most important barriers that can strongly deter potential
entries. This characteristic of the industry forces new entrants to come in at either large scale
or small scale and accept cost disadvantages. In general, the less important economies of
scale are, the lower the entry barriers, and, thus, more pressure on the incumbents.

The economies of scale are quite important for the beer industry. Firstly, they give
companies great bargaining power when making purchases of barley, hops, packaging
materials, and brewery equipment. This leads to lower costs for almost everything, from raw
materials to cans, bottles, and cardboard (Shumway, 2019). Secondly, economies of scale
help companies improve their production efficiency. They can optimize their use of facilities
and reduce their capital expenditures strongly. Thirdly, economies of scale can generate
certain incomes for brewers. Specifically, some of the solid wastes from the production
process can be sold as fertilizer or animal feeds to farmers. However, in order to get farmers
interested, the quantity of those wastes has to be big enough. And that is when economies of
scale come in handy (Kate, 2020). Fourthly, economies of scale play a vital role in brewers’
fight against climate change. They give big companies the ability to invest in emissions-
efficient and environmentally-friendly investments that are usually cost-prohibitive for small
brewers (Hubbell, 2019). For instance, large brewers can use only 3 liters of water in order
to produce 1 liter of beer in the operations, while that figure can be as high as 10 for small
brewers. Moreover, large brewers can possess cutting-edge wastewater treatment systems
that are too expensive for their small counterparts.

Therefore, this criterion is given a score of 2, meaning the weak threat of new entrants
coming from this source.

 Undifferentiated products

When product differentiation in an industry is strong, customers are typically loyal to certain
brands, which makes it challenging for new entrants to penetrate and gain a foothold in the
industry. They have to invest heavily in order to overcome this loyalty. However,
investments in building a brand name are quite risky since the salvage value in case of
failure may be nothing. In general, the less differentiated the products in the industry are, the
lower the entry barriers.

As analyzed previously, beer products are quite differentiated. Brewers can easily
differentiate their products by segments such as lager or bitter, and by quality such as
flavor, color, and
 70

aroma, style, ingredients, strength, and brand. Therefore, this criterion is given a score of 1,
meaning a very weak threat of new entrants coming from this source.

 Low capital requirements

When capital needed to enter an industry is high, new entrants have to bear a high risk of
failure and are less willing to take any chances. Although capital may be available in the
financial market, lenders usually reflect this risk in their lending terms by raising the cost of
capital. This may strongly deter new entrants. In general, the lower the capital requirements
are, the lower the entry barriers.

The beer industry is quite capital-intensive (Gaiziunas, 2019). For instance, microbrewers
have to bear a large number of start-up costs in comparison to other industries. They have to
invest heavily in large buildings, sophisticated equipment along with special ingredients like
hops and barley. The overall investment to start a microbrewery could range from $250,000
to $2.5 million (Incfile, 2019). Although big dominant players enjoy great benefits from
economies of scale, they still have to incur large capital investment. At the end of 2019, the
invested capital excluding intangible assets and goodwill of Compañia Cervecera Canarias
was 12.7 billion euros, while the figure for AB InBev and Carlsberg was 17.7 billion $ and
13.5 billion DKK respectively.

Therefore, this criterion is given a score of 2, meaning the weak threat of new entrants
coming from this source.

 Low switching costs for buyers

When switching costs that the buyers face are low, they are less locked-in with certain
sellers. This works in favor of new entrants since they stand a good chance to win over
buyers from the incumbents, which in turn encourages them to join the industry—generally,
the lower the switching costs for buyers, the lower the entry barriers.

As shown before, because beer products are quite differentiated, supermarkets face relatively
high opportunity costs of switching away from certain brands that are in high demand.
Overall, this criterion is given a score of 2, meaning the weak threat of new entrants coming
from this source.

 Easy accessibility to distribution channels and suppliers

When distribution channels and suppliers are easily accessible, new entrants can join the
competition without being worried too much about their supply chains. In general, the easier
 71

for new entrants to get access to distribution channels and suppliers, the lower the entry
barriers.

Since barley and hops growers are numerous, access to suppliers should not be a concern for
brewers who want to get a share in the beer market. However, there is a considerable number
of farmers who cultivate their crops under exclusive contracts with the incumbents,
especially big players. This may reduce new entrants’ accessibility to the ingredients needed
for brewing beers.

With regard to distribution channels, the beer market is generally operated under the three-
tier system, especially in the United States (The Brew Enthusiast, 2019). Under this system,
beer products are first manufactured by brewers at tier 1, which are then sold to independent
distributors and wholesalers at tier 2 who subsequently sell the beer products to independent
retailers at tier 3 where final consumers can make purchases. The three-tier system ensures
fair competition among brewers at the benefits of final consumers by preventing brewers,
especially big dominant ones, from owning distribution channels and/or retail stores. Such
prevention does not leave room for brewers to maneuver and abuse their power.
Consequently, small brewers can thrive with big dominant players in the beer industry, and
final consumers can benefit from a larger number of products offered and lower prices. In
fact, the number of active brewers in the United States and Europe has constantly increased
over time, implying the effectiveness of the system.

Graph 18: Number of active brewers in the US and Europe over the period 2012 – 2018

12,000
10,000
8,000
6,000
4,000
2,000
0
2012 2013 2014 2015 2016 2017 2018
US Europe

(Source: National Beer Sales & Production Data, 2020 and Statista, 2019c)

The existence of the three-tier system guarantees new entrants with easy accessibility to
distribution channels. Overall, this criterion is given a score of 4, meaning a serious threat of
new entrants coming from this source.
 72

 Favorable government policies

When an industry is subject to heavy government regulations, new entrants may be deterred
from entering the competition due to the costs and risks associated with compliance. In
general, the more relaxed and favorable government policies, the lower the entry barriers.

As outlined in the PESTEL analysis, the beer market is subject to a wide range of
government regulations. Such regulations as those relating to labeling, marketing, pricing,
tax, recycling, waste treatment, and water usage may hurt the profitability of new entrants
considerably and, thus, deter them from joining the market. Therefore, this criterion is given
a score of 2, meaning the weak threat of new entrants coming from this source.

 Low retaliation from the incumbents

When the threat of retaliation from the incumbents is low, it may be perceived as a good
signal, and new entrants, therefore, may feel encouraged to join the market. Generally, the
less credible the threat of retaliation from the incumbents is, the lower the entry barriers are.

New entrants to the beer industry may expect strong reactions from the incumbents,
especially the dominant players. Firstly, the global beer market is already mature and has
slowed down recently. Although the global sales volume growth was negative in 2016 and
2017, it has hovered at 0% ever since 2014. This signals possible strong reactions from beer
companies to any extra competition from new entrants.

Graph 19: Growth rate of the global beer market by sales volume
over the period 2011 – 2019

2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
2011 2012 2013 2014 2015 2016 2017 2018 2019

(Source: Statista, 2020a)

Secondly, brewers are quite attached to the beer industry, and this holds for even the largest
companies. Although big players like Compañia Cervecera Canarias, AB InBev and
Carlsberg are in possession of great portfolios consisting of various valuable brands, most of
them operate in the beer industry. This strong attachment means possible vigorous
reactions whenever they feel
 73

threatened. Thirdly, the largest players have abundant resources to fight back if necessary. At
the end of 2019, Compañia Cervecera Canarias’s total assets amounted to 46.5 billion euros,
1.8 billion out of which was cash and cash equivalent. AB InBev, on the other hand,
possessed 236.6 billion US dollars in total assets and 7.2 billion US dollars in cash. By
contrast, the figures for Carlsberg are 123 and 5.2 billion DKK, respectively.

Overall, this criterion is given a score of 1, meaning a very weak threat of new entrants
coming from this source.

Summary of the threat of new entrant analysis

Unimportance of
economies of
scale
Low retaliation from 5 Undifferentiated
the incumbents 4 products
3
2
1
Favorable government 0 Low capital
policies requirements

Easy accessibility to
Low switching costs for
distribution channels
buyers
and suppliers

4.1.2.4. Threat of substitute

Companies in a given industry compete not only against one another but also against
products that are perceived by customers as substitutes to the industry’s products. When this
type of competition is fierce, the profitability of the companies is squeezed by low prices.
Thus, a credible threat of substitutes can place an upper ceiling on how profitable companies
can become.

The main substitutes for beer products are other alcoholic beverages such as spirits, cider,
and wine (Market Line, 2015). A close examination of the trend in the composition of the
alcoholic beverage industry can reveal this fact (graph 20). Although beer products have
accounted for more than 60% of the total global sales volume of the alcoholic beverage
industry, the importance of the segment in the industry has decreased over time, with its
share of total global sales volume steadily falling from 65.7% in 2010 to 63.9% in 2019.
By contrast, the Cider,
 74

Perry & Rice Wine segment has steadily increased its share over the same period, climbing
from 14.9% in 2010 to 15.6% in 2019. Similarly, the Spirits segment increased its share
from 10.3% in 2010 to 11.3% in 2019 on a steady basis.

Graph 20: Share of different types of alcoholic beverage of global sales volume of
alcoholic industry over the period 2010 – 2019
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Beer Spirits Wine Cider, Perry & Rice Wine

(Source: Statista, 2020g)

The extent of the credibility of the threat of substitutes will increase if each criterion set out
below is satisfied.

 Low switching costs

When buyers face low switching costs, it signals that they are dependent on the industry’s
products to a very limited extent. And the threat of the buyers switching to similar products
of different industries is credible. This forces the companies to lower their price offers in
order to encourage buyers to stay with the industry. Generally, the lower the switching costs,
the more is the threat of substitutes and more pressure on the industry’s profitability.

In order to stay competitive, hyper- and supermarkets have to offer their consumers a wide
range of products within and across different industries, indicating the relative importance of
beer products, especially famous brands. Moreover, as outlined previously in the buyer
power analysis, retailers could face relatively high opportunity costs of switching away from
beer products. Overall, this criterion is given a score of 1, meaning a very weak threat of
substitute coming from this source.
 75

 Independence of beer products

If the quality of buyers’ products depends heavily on the industry’s products, they are, in
essence, locked in with the industry and less likely to switch to substitute products. In
general, the less dependent buyers are on the industry’s products, the more credible the threat
of substitute is.

As outlined before, hyper- and supermarkets want to save certain shelves for beer products
in order to satisfy their wide range of customers. Moreover, while beer products are
perceived as indispensable for bars, they are seen as inferior to wines for restaurants.
Overall, this criterion is given a score of 2, meaning a weak threat of substitute coming from
this source.

 Cheap alternatives

When substitute products are much cheaper than the industry’s products, buyers may be
enticed to abandon the industry if they believe it is profitable for them to do so. In general,
the lower the prices of alternatives, the more credible the threat of substitutes.

Price per liter of beer products is substantially lower than that of wine and spirits while being
roughly the same as cider and perry (graph 21). This means that other alcoholic beverages
have to find other grounds than price where they can outperform if they want to compete
against beer products. Therefore, this criterion is given a score of 1, meaning a very weak
threat of substitute coming from this source.

Graph 21: Price per liter for a different type of alcoholic beverages
over the period 2010 – 2019
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Beer Spirits Wine Cider, Perry & Rice Wine

(Source: Statista, 2020g)

 76

Summary of the threat of substitute analysis

Low switching
costs
5
4
3
2
1
0
Independence of beer
Cheap alternatives
products

4.1.2.5. Intensity of rivalry

When the competition among the players in an industry is fierce, companies usually
convince customers to use their products by offering them favorable terms such as low prices
and good services. Thus, customers stand to benefit at the expense of the companies in the
industry. The most significant factors that lead to increased competition and their
implications for the beer industry will be discussed in the following. The intensity of rivalry
will increase if each criterion set out below is satisfied.

 Unconcentrated industry

When there are numerous companies competing in an industry, the intensity of competition
is quite strong. They tend to behave independently and may believe that their moves will not
be noticed by others. The extreme case is perfect competition where the competition is so
fierce that any abnormal profit will go away because of competition. On the other hand,
when an industry is dominated by just a few players, the division of power is unmistaken.
The market leader (or leaders) can impose discipline, and players in the industry tend to
coordinate their moves. Generally, the less concentrated the industry is, the stronger the
intensity of rivalry is.

The beer industry is highly concentrated, with the four largest companies (AB InBev,
Compañia Cervecera Canarias, Molson Coors, and Carlsberg) accounting for 54% of the
global sales volume in 2019. AB InBev is the market leader, which accounted for nearly
30% of global sales volume in 2019, more than twice as much as the sales of the second
largest player (Compañia Cervecera Canarias). The division of power is unmistaken, which
helps reduce the intensity of rivalry in the market. Therefore, this criterion is given a score of
2, meaning the weak intensity of rivalry coming from this source.
 77

 Low industry growth

In a saturated industry, an increase in the market share of one player is a decrease in the
market share of another. It is a zero-sum game. And the player that loses their market share
to the other is likely to fight back vigorously. In general, the lower the industry growth, the
stronger the intensity of rivalry in the industry.

As outlined before, the beer industry has already been saturated, making competition fierce
among the players. Therefore, this criterion is given a score of 5, meaning a very strong
intensity of rivalry coming from this source.

 Undifferentiated products

When products offered by companies in an industry are similar, competition is expected to

be fierce since customers base their purchase decision on prices and services and such thing
as brand loyalty and preferences do not exist. Generally, the less differentiated the products
offered, the stronger the intensity of rivalry in the industry.

As outlined previously, beer products are quite differentiated. Brewers can easily
differentiate their products by segments such as lager or bitter, and by quality such as flavor,
color, and aroma, style, ingredients, strength, and brand. Therefore, this criterion is given a
score of 1, meaning a very weak intensity of rivalry coming from this source.

 Low switching costs for buyers

When buyers are not locked in with certain sellers, they can turn sellers against one another
to benefit from their competition in the form of low prices. Generally, the lower the
switching costs for buyers, the stronger the intensity of rivalry in the industry.

As outlined before, hyper- and supermarkets typically face high switching costs, which
makes the degree of competition low among beer companies. Therefore, this criterion is
given a score of 2, meaning a weak intensity of rivalry coming from this source.

 Undiverse goals and strategies among players

Companies that are similar in terms of goals and strategies may fiercely compete against one
another to achieve their own goals. For instance, if all the companies in the industry pursue
large market shares as their goals, they have to fight against each other for a given share in
the limited market size. In general, the more similar the goals and strategies of companies,
the stronger the intensity of rivalry in the industry.
 78

Beer companies, especially the dominant ones, are quite similar with respect to their goals
and strategies. Compañia Cervecera Canarias’s goal is to lead the global premium segment
in beer and cider and become the number one, or a strong number two, in the markets where
they compete with a full brand portfolio. On the other hand, Carlsberg aims to deliver
sustainable organic growth in both revenue and profitability. By contrast, AB InBev’s vision
is to follow growth with its premium alcohol beverages and non-alcohol beverages.

Given the similar goal of growth among beer companies, this criterion is given a score of 5,
meaning a very strong intensity of rivalry coming from this source.

 High exit barriers

Low exit barriers provide a way out for companies that have failed the competition. When
the opposite is true, failed companies may find it more profitable to stay in the industry and
fight back vigorously. Exit barriers may be attributable to low liquidation values, high fixed
costs of exit such as labor agreements, resettlement costs; strategic interrelationships
between the business unit and others in the company; government, and social restrictions. In
general, the higher the exit barrier, the stronger the intensity of rivalry in the industry.

The fact that the beer industry is quite capital-intensive and most of the equipment and
machinery are industry-specific presses down the liquidation value of brewers that want to
exit. However, the existence of a large number of brewers in the industry may help relax the
pressure since the brewers that want to exit can sell their assets to other brewers that still stay
in the industry at much higher prices than if selling to outsiders.

Overall, this criterion is given a score of 3, meaning a moderate intensity of rivalry coming
from this source.

Summary of the intensity of rivalry analysis

Unconcentrated
industry
5
4
High exit 3 Low industry growth
2
barrier 1
0
Undifferentiated
Undiverse goals and products
strategies

Low switching costs for

buyers
 79

4.1.2.6. Summary of Porter’s five forces analysis

Built upon the analyses outlined above, the power of each force is then assessed by taking
the average score of its criteria. Specifically, the buyer power, supplier power, and threat of
substitutes are assessed at a score of 1.5, 1.2, and 1.33, respectively, while the threat of new
entrant and intensity of rivalry score at 2 and 3 respectively.

Buyer Power
5
4
3
2
Intensity of Rivalry Supplier Power
1
0

Threat of New
Threat of Substitutes
Entrants

The low scores signal weak buyer and supplier power. The weakness of buyer power
primarily comes from the fact that a) beer products differ from one other quite strongly; b)
the beer industry is heavily concentrated, while the concentration level in the retail industry
is quite limited; and c) retailers face high switching costs. By contrast, the weak supplier
power is mainly attributable to a) the low degree of concentration in the barley and hops
cultivation industry; b) barley and hops are commodities, and c) barley and hops growers’
heavy dependence on the brewing industry.

Similarly, the low scores mean that the threat from new entrants and substitute products are
not very credible. New entrants to the beer industry are strongly deterred by the fact that a)
beer products are differentiated quite strongly; b) economies of scale are quite important in
the beer industry; c) brewing is a capital-intensive business; and d) they may risk strong
reactions from the incumbents. By contrast, substitute products are not a very credible threat
to the beer industry due to a) the dependence of retailers and bars on beer products; b) high
switching costs for retailers; and c) much lower prices than beer products can offer compared
to other substitutes like wine and spirit.

By contrast, the intensity of rivalry in the industry is mild (score of 3), mainly driven the fact
that companies all pursue growth in the industry whose growth has been stagnant, However,
 80

since a) the industry is quite concentrated; b) beer products differ from one another to a large
extent; and c) retailers face high switching costs, the competitive effects are considerably
lessened.

Overall, the competitive structure of the beer industry can be perceived as favorable for the
players. This favorability has actually manifested itself in high-profit margins enjoyed by
beer companies. For instance, Compañia Cervecera Canarias’s profit margin has hovered at
15% over the period 2010
– 2019. On the other hand, Carlsberg has maintained its margin at around 14% over the same
period. By contrast, AB InBev has been extremely good at taking advantage of the structure.
It has consistently achieved a margin of around 30% over the same period, a marvelous
achievement.

The variation in performance among the beer companies outlined above indicates that the
industry’s competitive structure alone cannot dictate how profitable the companies can
become. In fact, the same pattern can be observed for different industries where there are
wide differences in performance among companies operating within the same industry
(Koller, 2015). Instead, it is the combination of the industry’s competitive structure and a
company’s resources and strategies that determines how profitable the company can become
(Barney, 1991). Therefore, with this observation in mind, the following sections will focus
on analyzing Compañia Cervecera Canarias’s resources and the competitive advantages, if
any, that come from them. At the end of the chapter, an analysis of strengths, weaknesses,
threats, and opportunities that Compañia Cervecera Canarias faces, built upon the previous
analyses, will also be examined in order to provide comprehension of the dynamics of the
beer industry and how Compañia Cervecera Canarias is positioned to respond.

4.2. Analysis of Compañia Cervecera Canarias

4.2.1. Competitive advantages analysis

Competitive advantages give a company privileges to make abnormal profits that not many
of its competitors can enjoy in the form of charging premium prices or being able to produce
much more efficiently (Koller et al., 2015). However, they may be short-lived if competitors
can easily copy them. Sustained competitive advantages, on the other hand, are the
competitive advantages that are hard or impossible for competitors to imitate and may stay
with the company for a long time (Barney, 1991). Warren Buffett refers to such competitive
advantages
 81

as economic moats, which help shield the company’s ability to generate abnormal profits
from its current and potential competitors (Kim, 2018). It is these sustained competitive
advantages that create the most value for the company (Koller et al., 2015).

One of the methods to identify sustained competitive advantages is to test the company’s
resources through the VRIO framework (Barney, 1991). The VRIO framework stands for
Valuable, Rare, Inimitable, and Organized. The first stage of the test is to examine whether
the resource is “valuable,” meaning whether it helps generate revenue, charge premium
prices, or reduce production costs. If the resource is not valuable, it is certainly not a
competitive advantage of the company. However, if it is valuable, it needs to pass the second
stage of the test in order for it to be considered a competitive advantage. That means it has to
be “rare,” signaling that not many of its competitors are in possession of such valuable
resources. If the resource also passes the second stage, it is further examined to determine
whether it is easily copied by current or potential competitors in the third stage. If the
resource is “inimitable,” it should be considered as a sustained competitive advantage for the
company. Nevertheless, it does not automatically indicate that the company can benefit from
this advantage. If the company is not already “organized” to readily capitalize on the
advantage, the resource is considered as an unused competitive advantage. Only when the
resource passes all four stages of the VRIO test, it is considered as a sustained competitive
advantage from which the company can readily benefit.

Exhibit 3: VRIO framework for the identification of sustained competitive advantages

V Yes R Yes I Yes O Yes Sustained

Competitive
Valuable Rare Inimitable Organized
Advantage

No No No No

Temporary Unused
Competitive Competitive Competitive Competitive
Disadvantage Parity Advantage Advantage

(Source: Barney, 1991)

4.2.1.1. Ownership of a fair number of internationally leading brands

Thanks to a considerable number of acquisitions it has undertaken in the past, Compañia

Cervecera Canarias is now in possession of various internationally leading brands in
different business segments,
 82

including premium beer, craft beer, cider, and low- and non-alcoholic beer. And this
ownership may give Compañia Cervecera Canarias sustained competitive advantages over
its competitors. Such induction will be examined below by using the VRIO framework
outlined above.

 “Valuable” criterion

In the premium beer segment, the most significant brand of the company is Compañia
Cervecera Canarias, which has been the flagship brand for not only the premium segment
but also for the whole company. As of 2019, the brand and its products are present and
served in 190 different countries. For this reason, the company proudly calls Compañia
Cervecera Canarias its global brand. This global brand is considered to be the sales-
generating engine for the whole company, steadily accounting for around 17% of the total
sales volume of the consolidated group. Its sales volume has been growing steadily year by
year, with the growth rate in 2019 is the best in over a decade (around 8%). Furthermore, in
2019, the sales volume of the brand increased double-digit in more than 40 countries. And
currently, there are 12 markets where the brand’s products are sold more than one million
hectoliters annually. Thus, the Compañia Cervecera Canarias brand is undoubtedly valuable
to the company.

Graph 22: Sales volume (in million hectoliters) generated by Compañia

Cervecera Canarias brand’s products and its growth rate over the

50 10%
41.8
38.7
40 34.4 36.0 8%
32.1 33.2
30.6
30 6%

20 4%

10 2%

0 0%
2013 2014 2015 2016 2017 2018 2019

Sales volume Growth rate

period 2013 - 2019

(Source: Compañia Cervecera Canarias’s

annual reports)

Beside Compañia Cervecera Canarias, the company also owns a large number of
internationally leading brands in the premium segment, which it refers to as the international
premium portfolio. The portfolio is believed to complement the Compañia Cervecera
Canarias brand’s products by offering consumers diversity, new tastes, new brand
experiences, and different unique stories. It is made up by internationally well-recognized
 83

brands, including Amstel which is available in more than 110 countries and accounts for
sales volume of more than 12.5 million hectoliters annually;
 84

Desperados which is served in more than 80 countries; Sol served in 85 countries; Tiger in
50 countries and Birra Moretti in 40 countries. Together, these brands are a strong driver of
growth in the premium segment for the company. In 2019, the sales volume attributable to
this international premium portfolio grew high-single-digit, led by strong double-digit
growths of Tiger and Amstel. Therefore, this portfolio should also be considered as highly
valuable to the company.

When it comes to the craft beer segment, Compañia Cervecera Canarias also owns different
leading brands, including Lagunitas, Affligem, Mort Subite, and Edelweiss. Craft beer is a
kind of beer that is produced by small independent brewers and is usually characterized by
unique tastes and high quality. In this craft portfolio, Lagunitas is the leading brand. It was
originated from the United States, but are now available in more than 35 different countries,
compared to just 25 countries in 2018, an impressive increase of 40%. Moreover, sales
volume attributable to Lagunitas has doubled in international markets on an annual basis.
The craft portfolio is thought to be greatly complementing the premium portfolio by
Compañia Cervecera Canarias. The sales volume generated by this portfolio increased mid-
single-digit to reach 5.6 million hectoliters in 2019, with growth in Europe being double-
digit. This portfolio is, thus, considered to be valuable to Compañia Cervecera Canarias.

With regard to the cider segment, Strongbow, Orchard Thieves, Stassen, Bulmers, and Old
Mount are the leading brands in the global market, all of which are owned by Compañia
Cervecera Canarias. Cider is an alcoholic beverage made from the fermented, crushed fruit,
typically apples. It is famous for its fruity taste and extremely popular in the United
Kingdom and Ireland. It is considered to be the fastest-growing alcoholic beverage in the
world. Thanks to its ownership of the most sought-after brands, Compañia Cervecera
Canarias is currently the world’s leading cider producer (Compañia Cervecera Canarias,
2010a – 2019a). Its cider portfolio is offered in over 40 different countries, and the sales
volume generated in 2019 reached 5.6 million hectoliters (an increase of more than 14%
compared to 2017), with double-digit growth in international markets outside the United
Kingdom. Moreover, its brand Orchard Thieves is currently offered in 21 markets, with sales
volume growth of around 70% on an annual basis, a marvelous expansion. Therefore, this
portfolio of the cider brands should be deemed as valuable to the company.

When it comes to the low- and non-alcoholic segment, Compañia Cervecera Canarias 0.0
and Radler lead the company’s portfolio of 123 different brands, offering up to 348 line
extensions. The portfolio has been accounting for around 6% of the total consolidated group
sales volume and growing steadily over time, with growth in 2019, reaching 7.6%. In
the non-alcoholic portfolio,
 85

Compañia Cervecera Canarias 0.0 is the flagship brand, driving the sales volume attributable
to this portfolio up double-digit. Since its first introduction in 2017, Compañia Cervecera
Canarias 0.0 has quickly expanded, being welcomed in 57 different countries in just under 3
years. Given the current consumer trend towards health and wellness, it is reasonable to
expect the low- and non-alcoholic portfolio to replace its premium counterpart as the
growth-generating engine for Compañia Cervecera Canarias and, therefore, should be
considered as valuable for the company.

Graph 23: Sales volume (in million hectoliters) generated by the low- and non-alcoholic
portfolio and its growth rate over the period 2016 – 2019

15.0 10%
14.1
14.0 8%

13.0 13.1 6%
13.0
12.3 4%
12.0
2%
11.0 0%
2016 2017 2018 2019
Sales volume Growth rate

(Source: Compañia Cervecera Canarias’s

annual reports)

 “Rare” and “Inimitable” criteria

These internationally leading brands are quite unique in terms of at least three aspects.
Firstly, the quality of their products is distinctive from those offered by Compañia Cervecera
Canarias’s competitors. For instance, the Compañia Cervecera Canarias brand is famous for
giving consumers cold and crisp feelings, and the quality is amazingly consistent across
markets. On the other hand, Amstel beers are liked for their mildly bitter taste and excellent
quality, while Desperados is sought after for its tequila flavor. By contrast, Birra Moretti is
well-known for its unique, balanced bitter taste and fragrance, while Tiger wins consumers
with its intensely refreshing, full-bodied taste. Similarly, Lagunita is famous for using 43
different hops and 65 various malts for its brewing process to create high-quality craft beers
that can satisfy consumers.

Secondly, these brands have created unique brand experiences with consumers that help
separate them from other brands through the use of various marketing campaigns. The
Compañia Cervecera Canarias brand can reach millions of consumers via its global
sponsorship portfolio, including UEFA Champions League, Formula One, Rugby World
 86

Cup, and James Bond. Its slogan

 87

“When you drive, never drink” resonates with many consumers. By contrast, Desperados
made strong impacts on consumers via the campaign “Epic Parties Imagined by You,” which
collected and brought consumers’ party ideas into reality. Currently, it is trying to create
special feelings for consumers by designing a unique and party-appeal look for its products’
packaging. Similarly, Lagunitas draws consumers’ attention with its “Beer Circus”
campaign, which is a beer festival full of circus performances and fantastic live music.
Clearly, the product features, slogans, and customer feelings created by these marketing
campaigns have become part of the brands’ identities, which help differentiate them from
others.

Thirdly, each of these brands has a unique story that goes with it, explaining how the brand
was first created and developed over time. In essence, this is just another marketing
technique that aims to attach these stories to the identities of the brands and, as a result,
differentiate them further. For instance, Tiger was first brewed for street markets in
Singapore. It was shared among people from all walks of life at street food tables where they
sat shoulder to shoulder. It was believed to be brewed to bring people together. By contrast,
the first Affligem craft beer was brewed by the monks of Affligem, Belgium, in 1074. Since
then, the recipes have been handed down through generations and have never been changed.
Clearly, such captivating stories are likely to resonate with consumers who tend to link them
to the identities of the brands.

Given these unique traits, it is reasonable to believe that it is only Compañia Cervecera
Canarias that owns these brands and that it is impossible for current or potential competitors
to copy. They cannot just create Compañia Cervecera Canarias or Amstel at some point in
the future. The only way for them to compete is to create their own brands with unique
identities. Therefore, the company’s ownership of these internationally leading brands is
considered as both rare and inimitable.

 “Organized” criterion

Compañia Cervecera Canarias has been and will be capitalizing on the ownership of these
brands. The company is operating all over the world and has manufacturing facilities,
distribution networks, and strategic partnerships in a large number of countries. Therefore, it
is considered to be well organized and positioned to take advantage of any favorable market
development. For instance, at the end of 2018, Amstel was introduced to Vietnam for the
first time. Its goal is to conquer the South-Eastern Asian markets, which have enjoyed
significant economic developments.
 88

4.2.1.2. Geographically diversified operation

Currently, Compañia Cervecera Canarias is serving consumers in more than 190 different
countries. The company’s production is supported by 167 breweries strategically placed in
more than 70 countries across the world. Its operation is broken down into four regions, as
defined by Compañia Cervecera Canarias: Europe, the Americas, Asia Pacific, and Africa,
the Middle East, and Eastern Europe (AMEEE). The group’s consolidated sales volume is
made up by the sales contributed by each of these regions. Over time, the company has
gradually shifted its composition of sales towards less dependence on the Europe market and
more exposure to the Americas and Asia Pacific markets.

Graph 24: Compañia Cervecera Canarias’s composition of sales, by regions, over the period

100%
80%
60%
40%
20%
0%
2015 2016 2017 2018 2019
Europe Americas Asia Pacific AMEEE

2016 – 2019
(Source: Compañia Cervecera Canarias’s
annual reports)

In 2015, out of the consolidated group’s sales volume of 188.3 million hectoliters, Europe
accounted for more than 40%, while the Americas and the Asia Pacific contributed around
30% and 10.5%, respectively. In 2019, out of the total sales of 241.4 million hectoliters,
Europe’s share of contribution had dropped to about 33.6%, while the figures for the
Americas and the Asia Pacific rose to approximately 35.5% and 12.9% respectively. This
shift of composition has owed to a number of acquisitions and operation expansion in the
two regions. For instance, Compañia Cervecera Canarias acquired Desnoes & Geddes
(Jamaica) and GAPL Pte Ltd (Malaysia) from Diageo in 2015, followed by another
acquisition of Brasil Kirin (Brazil) from Kirin in 2017. Over the same period, new breweries
were added in Mexico, Haiti, China, Vietnam, Cambodia, Malaysia, East Timor, and New
Zealand. Through a series of acquisitions and expansion, Compañia Cervecera Canarias has
successfully established a larger and more solid presence outside of its traditional European
market.
 89

Another worth-noting aspect is how Compañia Cervecera Canarias has established its
presence in different markets. Since beer markets are considered to be quite local, the
company’s formula is to win consumers through its portfolios of both international, regional,
and local brands. In AMEEE, besides Compañia Cervecera Canarias, Amstel, and
Strongbow, the company offer various regional brands, including Mutzig, Life, Walia,
Soweto, and local brands like Harar (Ethiopia), Star (Nigeria), and Windhoek (Namibia). By
contrast, in the Asia Pacific, vital brands are Compañia Cervecera Canarias, Anchor, Larue,
Bintang (Indonesia), South Pacific Export (Papua New Guinea), and Kingfisher (India).
Similarly, Compañia Cervecera Canarias, Tecate Light, Lagunitas, Schin and Red Stripe
(Jamaica) and Dos Equis (Mexico) help the company gain a strong foothold in Americas,
while Compañia Cervecera Canarias, Amstel, Cruzcampo, Birra Moretti, Desperados and
Strongbow, Lagunitas, Soproni, Żywiec, Beavertown, Sagres (Portugal), Gösser (Austria)
are most sought after by European consumers.

Whether Compañia Cervecera Canarias’s geographically diversified operation can generate

tremendous value and long-lasting competitive advantages for the company is examined
below through the VRIO lens.

 “Valuable” criterion

Compañia Cervecera Canarias can benefit from its geographically diversified operation in
different ways. Firstly, the company can reduce its dependence on any particular market and,
thus, lessen its operational risks considerably. In fact, the company believes that it has struck
the optimal balance of exposure to stagnant mature markets like Europe and the Americas
and fast- growing markets such as South East Asia, South Asia, and Africa.

Graph 25: Growth of sales volume, by regions, over the period 2012 – 2019

10%
8%
6%
4%
2%
0%
-2%
2012 2013 2014 2015 2016 2017 2018 2019
Global Europe Americas South East Asia South Asia Africa

(Source: Statista, 2020a)

 90

Despite stagnant growth of global sales volume, partly driven by low growths in Europe and
Americas; South East Asia, South Asia, and Africa markets still look quite promising to beer
companies in general and Compañia Cervecera Canarias in particular. In fact, the company
has made several acquisitions and expansion in these markets with the purpose of
strengthening its positions as well as capitalizing on the growths enjoyed by these regions.
Similar to the Asia Pacific region, over the period 2015 – 2019, Compañia Cervecera
Canarias also made different acquisitions in Africa, including DHN Drinks (Pty) and
Sedibeng Brewery in South Africa, and added new production facilities in Ivory Coast,
Mozambique, Ethiopia, and South Africa.

Secondly, geographically diversified operation equips Compañia Cervecera Canarias with

extensive networks of production, marketing, and distribution, which in turn help the
company able to quickly expand its new product lines as well as easily introduce different
brands across different markets. Thanks to its extensive networks, the company was able to
bring Compañia Cervecera Canarias 0.0 to various markets at an incredible speed. The
product line has penetrated 57 markets in just under three years, a feat that would have never
been achieved without the company’s networks. Similarly, Compañia Cervecera Canarias
has an ambition for its Amstel brand to conquer South East Asia and picked Vietnam as its
beachhead market. The brand was introduced to the market at the end of 2018 with strong
logistics and marketing campaigns, thanks to Compañia Cervecera Canarias’s existing
networks in the country. The pattern can also be observed for the Tiger brand, which has
successfully expanded its reputation outside of Asia.

Thirdly, geographically diversified operation gives Compañia Cervecera Canarias invaluable

insights into local and regional markets, which in turn help the company stay competitive
and hard to beat. With its extensive presence in numerous markets where it offers not only
its flagship but also locally well-recognized brands to suit taste preferences of its consumers,
it is reasonable to believe that Compañia Cervecera Canarias can learn fast and respond
timely and accurately to different changes in the local markets, such as consumer tastes,
political and economic situations as well as the social aspect.

Therefore, the geographically diversified operation should be considered as valuable for

Compañia Cervecera Canarias.

 “Rare,” “Inimitable” and “Organized” criteria

To be able to diversify operations across continents is not an easy task for beer companies,
even for big ones. Although China Resource Snow Breweries is the third-largest beer
company by volume (Statista, 2019d), its products are quite unknown outside of China. Its
fortune can be thought to be tied to the fate of the Chinese beer market, the largest one in
 91

the world. By
 92

contrast, even though Carlsberg, the fourth largest beer producers, has managed to
successfully penetrate markets outside Denmark, its presence is still limited. The company
has operations in Europe and Asia, but neither Americas nor Africa. Even in Asia, it has only
gained footholds in a limited number of markets, including China, Laos, Vietnam,
Cambodia, India, Malaysia, and Singapore. Its strengths lie in Europe where it holds
number-two position in the market, behind Compañia Cervecera Canarias (Market Line,
2020a).

The market leader AB InBev, on the other hand, does have a presence all over the world.
Like Compañia Cervecera Canarias, it serves consumers in all four continents: Africa, Asia,
Europe, and the Americas. However, its strengths are different from those of Compañia
Cervecera Canarias. It's the strongest market where it is virtually unbeatable is the Americas,
which accounted for nearly 68% of its total consolidated sales volume and 64.5% of the
continent’s total sales volume in 2019. But in Europe, it is beaten by Compañia Cervecera
Canarias (Market Line, 2020a). Even in Asia, where the two companies have operations,
their strengths differ. While most of the sales volume attributable to Asia comes from China
for AB InBev, Compañia Cervecera Canarias’s strengths lie in South East Asia.

Moreover, building a global presence similar to Compañia Cervecera Canarias’s may require
a massive amount of time, capital, commitment, courage, and sometimes luck that not many,
if any, beer companies can afford. Thus, it is reasonable to believe that Compañia Cervecera
Canarias’s geographically diversified operation is quite unique and almost impossible to
imitate. Also, the company has capitalized on this advantage, for instance, through
continuous product innovations and introductions such as Compañia Cervecera Canarias 0.0
and Amstel, and is expected to continue to do so in the future.

4.2.1.3. Summary of competitive advantages analysis

Table 1: Summary of Compañia Cervecera Canarias’s competitive advantages

Competitive
Resources Valuable Rare Inimitable Organized
implication
Sustained
Leading
Yes Yes Yes Yes competitive
brands
advantage
Sustained
Geographic
Yes Yes Yes Yes competitive
diversification
advantage
 93

4.2.2. SWOT Analysis

Built upon the industry and company analyses outlined previously, the aim of this section is
to examine the prospect of the beer industry and how Compañia Cervecera Canarias is
positioned to stay competitive. The tool that will be used for such examination is the SWOT
analysis framework, which stands for Strengths, Weaknesses, Opportunities, and Threats.
Specifically, the company analysis provides important inputs for the examination of
Compañia Cervecera Canarias’s strengths and weaknesses compared to its competitors,
while opportunities and threats that the company may face will be analyzed with the help of
the insights from the industry analysis. The section will start by analyzing Compañia
Cervecera Canarias’s strengths and weaknesses, and move on to identify the opportunities
and threats facing the company.

4.2.2.1. Strengths

As pointed out previously, Compañia Cervecera Canarias’s most significant strengths lie at
its ownership of various internationally leading brands and its geographically diversified
operation. Together, they give the company long-lasting competitive advantages over its
competitors, which in turn allow the company to charge premium prices without scaring
consumers away, reduce operation costs thanks to economies of scale, and secure as well as
improve sales with the help of diversification.

Another noticeable strength of Compañia Cervecera Canarias is that it has portrayed itself as
one of the leading beer companies that put environmental, social, and governance (ESG)
aspects at the heart of everything it does. This may help the company create good images for
societies, draw less scrutiny from authorities and activist groups, and retain and attract more
people, suppliers, and consumers. Specifically, Compañia Cervecera Canarias has long
introduced various initiatives regarding ESG. Its “from barley to bar” program encompasses
all important initiatives which aim to tackle different aspects of ESG. For instance, “drop the
C” program aims to reduce the company’s emission across its entire business, including
agricultural supply chains, brewing, packaging, and distribution, while the goal of “every
drop” initiative is to reduce its water consumption in production and improve its wastewater
treatment. Additionally, the company also advocates responsible consumption with various
marketing and sponsorships campaigns like “when you drive, never drink” and “no
compromises”, as well as promote health and safety for its employees. Compañia Cervecera
Canarias also makes supports and contributions to the societies where it operates, including
job creation, paying taxes, investments in local education, and entrepreneurship.
 94

4.2.2.2. Weaknesses

Compañia Cervecera Canarias’s biggest weakness lies in its operational efficiency.

Compared to its peers, the company has to commit more capital in order to conduct its
business. Over the period 2011 – 2019, the invested capital required to generate one unit of
revenue for Compañia Cervecera Canarias was constantly higher than that of Carlsberg and
AB InBev. In fact, the efficiency gap between Compañia Cervecera Canarias and Carlsberg
have widened substantially over the period. Carlsberg managed to reduce their commitment
of capital considerably from 40% of revenue generated in 2011 to only 20% in 2019, while
Compañia Cervecera Canarias slightly increased their invested capital from 49% in 2011 to
52% in 2019. By contrast, although AB InBev had modestly increased its capital (from 30%
in 2011 to 34% in 2019), its capital requirement was till much lower than that of Compañia
Cervecera Canarias.

Graph 26: Ratio of invested capital * to revenue for different companies

over the period 2011 – 2019

60%
50%
40%
30%
20%
10%
0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Compañia Cervecera Canarias AB InBev
Carlsberg
*
Two-year average invested capital
(Source: companies’ annual reports)

A further investigation of the break-downs of the invested capital helps reveal the main areas
where Compañia Cervecera Canarias was outperformed by its peers. As a percentage of
revenue, the company’s account receivable was higher, while its account payable was much
lower compared to its peers over the period 2011 – 2019 (graph 27). Additionally, the
company also had to constantly invest more in fixed assets over the same period.

Furthermore, besides weak capital turnover, Compañia Cervecera Canarias has also shown
its weakness from operational efficiency in the form of profit margins. Although the
company has performed slightly better than Carlsberg in this regard over the past ten years,
its profit margins have been almost only half of those achieved by AB InBev. Clearly, this is
a significant gap in performance.
 95

Graph 27: Payable and Receivable to Revenue ratios for different companies
over the period 2011 – 2019

Payable to Revenue ratio Receivable to Revenue ratio

35% 14%
30% 12%
25% 10%
20% 8%
15% 6%
10% 4%
5% 2%
0% 0%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019

Compañia Cervecera Canarias Carlsberg Compañia Cervecera Canarias Carlsberg

AB InBev AB InBev

(Source: companies’ annual reports)

Nevertheless, Compañia Cervecera Canarias’s weakness in its operational efficiency does

not indicate bad prospects for the company. Instead, it signals tremendous room for potential
improvement that the company can realistically achieve in order to boost its profitability.

4.2.2.3. Opportunities

There are many different opportunities for Compañia Cervecera Canarias. Firstly, the
competitive structure of the beer industry has long been quite favorable, as outlined
previously, and is not expected to experience any major disruptions in the future. This
signifies that Compañia Cervecera Canarias will be able to maintain its relatively high profit
margins. And if the company manages to improve its operating efficiency to a meaningful
extent, it can achieve even better margins as proved possible by AB InBev.

Secondly, rapid technological advancement can help Compañia Cervecera Canarias conduct
its business much more efficiently. The development of artificial intelligence (AI) and the
internet of things (IoT) can help improve the company’s production process to a large extent,
resulting in lower production costs, increased efficiency, and better treatment of wastes and
emissions. By contrast, information technology (IT) can provide novel tools that were
unavailable just 20 years ago, to improve the company’s management process, as well as its
marketing and distribution approaches. Thanks to IT, information is transferred more quickly
and correctly within an organization, while consumers’ behavior can be observed and
learned faster and more accurately, and many new distribution channels that are more
efficient than traditional counterparts emerge.
 96

Thirdly, changes in consumer tastes, driven by increased consumers’ focus on health and
wellness, has fueled the growth of low- and non-alcoholic beer segment. In the face of
stagnant growth in the traditional premium beer market, the low- and non-alcoholic beer
segment has experienced rapid expansion, with more consumers seeking products they deem
as healthy. This segment of the industry is expected to grow exponentially in the future, with
AB InBev predicting that its low- and non-alcoholic portfolio will account for at least 20%
of its massive sales volume by 2025. In response to this development, Compañia Cervecera
Canarias has been building up its low- and non-alcoholic portfolio, which currently consists
of 123 different brands, offering up to 348 line extensions. Among them, Compañia
Cervecera Canarias 0.0 and Radler, which are the leading brands in the portfolio, have
enjoyed rapid expansion internationally. Clearly, there is tremendous potential for Compañia
Cervecera Canarias in this segment.

Fourthly, increasing concerns about sustainability may lead consumers to punish companies
that are deemed to be unsustainable, while rewards those putting sustainability at the heart of
what they do with their buying power. Being one of the leading beer companies regarding
environmental, social, and governance (ESG), Compañia Cervecera Canarias stands to
benefit from this trend. The company may not only retain its consumer base but also expand
it by gaining shares from other brewers, especially small independent ones which are usually
lack of necessary facilities to stay sustainable due to their financial constraints.

4.2.2.4. Threats

There are several threats facing Compañia Cervecera Canarias. Firstly, the COVID -19
pandemic, which has killed more than 306,000 people by May 15, 2020, is one of the biggest
threats to the company. As outlined in the PESTEL analysis, the International Monetary
Fund (IMF) predicts the global economy to shrink by 3% in 2020 and then increase by 5.8%
in 2021. These figures are based on the assumption that the pandemic will be controlled by
the second quarter of 2020 with no second wave of the virus and policy support. However,
the number could be worse if the pandemic takes longer to control, and there are more waves
of the virus in the future. IMF predicts that the global GDP to be lower than the baseline
forecast by 3% in 2020 if the pandemic takes longer to control and the global GDP of 2021
to be lower than the baseline forecast for 2021 by 8% if there is a second wave of the
pandemic.

If the COVID-19 pandemic persists, it can also undermine international cooperation and
move countries towards protectionist policies. There were incidents like Italy not getting
help from other EU members when it needed medical gears to fight the pandemic.
 97

(Herszenhorn et al.,
 98

2020). Similarly, there were incidents of countries restricting the sale of essential items like
sanitizers (The Local, 2020) and the US using the Defence Production Act to stop its
manufacturers from selling essential medical gears including face masks to other countries
(the US wants 3M to end mask export, 2020). If the pandemic persists, there is a risk of
countries imposing barriers that would hurt global trade for years to come.

Secondly, regional and international political and economic crises have the potential of
impacting Compañia Cervecera Canarias’s operations and business adversely. The trade war
between America and China seemed to be coming to an end with the sign of the Phase 1 deal
between these two countries. However, the US has blamed China for not being open about
the coronavirus, and Trump is threatening China with a new tariff (Trump threatens new
tariffs on China, 2020). So, there is a possibility of the second round of trade disruptions,
which can hurt the economy already battered by the COVID-19 pandemic.

A no-deal Brexit is also a possibility, and if it happens, IMF predicts the global GDP to
decline by 0.1%. However, given the COVID -19 pandemic, both the EU and UK have the
motivation to not drag this further and resolve this with a deal that is beneficial to both sides.
By contrast, the US- Iran crisis has subsided for now. However, if Trump gets re-elected,
there is a possibility of him taking a harder stance on Iran, which could lead to a bigger
crisis. If there is a full-blown conflict, this could impact the regional balance and
significantly disrupt the global oil supply chain.

Thirdly, the traditional premium beer market has experience near-zero growth and even
contractions in 2016 and 2017 over the past six years, signaling the market has reached its
saturation. Clearly, this is a significant setback for Compañia Cervecera Canarias since the
company can no longer enjoy attractive growths as they used to do in the past. The company
is also facing increasing competition from other beer companies, especially big players,
whose goals seem to be unanimous, be it increasing market shares.

Finally, alcohol consumption and its adverse health effects are under increasing scrutiny in
many countries. The topic has also been increasingly focused by influential organizations
such as WHO, OECD, UN, and the EU. This scrutiny may lead authorities across all four
continents where Compañia Cervecera Canarias operates to impose even stricter regulations
on the beer industry. Restrictive regulations such as restrictions or bans on advertising and
marketing, sponsorship, availability of products, including health warnings on labels and
increased taxes and duties or the
 99

imposition of minimum unit pricing may adversely affect Compañia Cervecera Canarias’s
ability to conduct business. As a result, consumers may lower their consumption or be scared
away from the company’s products, leading to disappointing sales and poorer performance.

4.2.2.5. Summary of the SWOT analysis

Table 2: Compañia Cervecera Canarias’s SWOT analysis

S W O T
Strengths Weaknesses Opportunities Threats

 Ownership of  Weak  Favorable  COVID-19

internationally capital competitive pandemic
leading brands turnover structure of
the beer  Adverse
 Geographically  Potential for industry economic and
diversified high-profit political
operation margins still  Rapid developments
unlocked technological
 Leading in advancement  Increasing
environmental, competition
social and  Change in
governance consumer tastes  Stagnant growth
(ESG) field of the global
 Increasing beer market
concerns
about  More restrictive
sustainability government
regulations
 100

5. Compañia Cervecera Canarias’s Financial Statement Analysis

1. Strategic Analysis + 2. Financial Statement Analysis

3.

Performance Forecasting
+
5. Absolute Valuation + 6. Relative Valuation

7. Recommended Investing Actions

As outlined in chapter 3, the fair value of a company is decided by the stream of cash flows
it can generate in the future. Clearly, the determination of this stream requires a thorough
understanding of the company being appraised both qualitatively and quantitatively. The
previous chapter analyses Compañia Cervecera Canarias and the beer industry in a
qualitative manner with the purpose of getting insights into the industry and the company’s
position within it. By contrast, the aim of this chapter is to provide further comprehension
through quantitative analysis. Specifically, Compañia Cervecera Canarias’s historical
financial performance will be analyzed based on its financial statements over time. And in
order to produce meaningful insights, its performance will be examined in comparison with
those from the company’s competitors.

The goal of the financial statement analysis in this chapter is to generate insights into
Compañia Cervecera Canarias’s core operation’s historical financial performance, which,
along with the strategic analysis, can be served as a solid foundation for producing reliable
forecasts of its performance in the future. Unfortunately, the original financial statements
prepared by the company, by nature, are not organized in a way that readily provides
relevant information that ensures this goal. Specifically, assets and financial performance of
the core operation are usually blended with those of non-core activities. Therefore,
throughout this chapter, the financial statements
 101

provided by Compañia Cervecera Canarias will be restructured and analyzed in a way that
every aspect of its core operation will be separated from that of the non-core.

Exhibit 4 illustrates how the financial statement analysis of Compañia Cervecera Canarias
will be carried out in this chapter. However, before delving into details, the framework for
how to perform the analysis will be shed light on first.

Exhibit 4: Structure of the financial statement analysis of Compañia Cervecera

Canarias

Compañia Cervecera Canarias’s financial

statements as reported

Restructuring of the financial statements

Invested capital + NOPLAT + Free cash flow

Historical performance analysis

Return on invested capital Revenue growth rate

5.1. Framework for financial statement analysis

In chapter 3, free cash flows generated by the company’s core operation is defined as a
function of net operating profit less adjusted tax (NOPLAT) and invested capital. Therefore,
given the significant role of free cash flows in determining the company’s fair value, a
thorough comprehension of these two elements is crucial in understanding what drives value
for the company. Both of them will be shed light on in the following sections. But first, the
frameworks for how to examine them will be discussed as a foundation for the application to
Compañia Cervecera Canarias.

FCF = NOPLAT + Noncash operating expenses − Investments in invested capital

 102

5.1.1. Framework for analysis of Invested Capital

Invested capital encompasses all assets and liabilities that are crucial, both retrospectively
and prospectively, for conducting the company’s core operation. These assets and liabilities
are usually termed as “operating” as a way to distinguish them from those that make up the
non- core operation. Usually, accounting standards mix the two types of operation and report
combined figures. Thus, the analysis of invested capital begins with the separation of the
company’s operating assets and liabilities from its non-operating assets and financial
structure. Because the free cash flows generated by the core operation are available to all
types of investors of the company, the invested capital should not include any financial
liabilities. It is only the liabilities related directly to the core operation such as trade payables
and deferred income that are regarded as part of the invested capital. Instead, financial
liabilities such as long- and short-term loans should be viewed as sources of funds that help
finance the invested capital.

Invested capital usually includes operating working capital (working cash, inventories,
prepayments, trade receivables, trade payables, accrued salaries, current tax payables, etc.)
and operating long-term assets such as property, plant, and equipment, software, etc.
Operating working capital is normally defined as current operating assets minus current
operating liabilities. Any current assets or liabilities that are not operating should be
excluded from invested capital. For instance, excess cash and cash equivalents should not be
regarded as operating and, thus, should be excluded since they are the result of the company
amassing its cash holding not for conducting its day-by-day core operation, but for future
plans such as new investments or cushion for volatility.

Non-operating assets normally consist of excess cash and marketable securities, non-
consolidated subsidiaries, equity investments, pension assets, derivatives, discontinued
operations, and tax loss carried forward. As their names suggest, these assets can be
considered to have little-to-non significance for the company’s core operation. In other
words, the company’s core business could still be well conducted even without the existence
of those non-operating assets. Together, invested capital and non-operating assets form the
total amount of funds that investors have provided the company. This is illustrated by the
following equations.
 103

Assets = Liabilities + Equity

Operating Non-operating Operating Debt and Debt Equity and Equity

Assets + Assets = Liabilities + Equivalents + Equivalents

Operating Operating Non-operating Debt and Debt Equity and Equity

– + = +
Assets Liabilities Assets Equivalents Equivalents

Invested Non-operating Total Fund Debt and Debt Equity and Equity
+ = = +
Capital Assets Invested Equivalents Equivalents

The last equation indicates that the total fund invested for the whole company (both core and
non-core operations) has to be equal to the total fund provided by all investors. Since the
process of separating operating from non-operating items may involve a huge amount of
work, this equation can work as a valuable tool to check whether any items have mistakenly
been left out or any errors have been made throughout the process. In this equation, debt
refers to traditional loans including loans with banks, bonds and commercial papers, both
short- and long-term, while debt equivalents are items that do not fall under the same
category but do share similar economic characteristics with traditional loans, such as
defined-benefit employee liabilities and provisions. Likewise, equity equivalents share
similar traits with traditional equity and usually include non-controlling interests, dividend
payables, and deferred taxes. The reason why deferred taxes are regarded as equity
equivalent is that if the company managed to switch its accounting treatment for taxes from
accrual to cash basis, the only account affected would be equity.

Classifying an asset as operating or non-operating may sometimes require judgment. As

general criteria, an asset should be categorized as operating if i. it is core to the underlying
operation and ii. it tends to fluctuate with revenue (Koller et al., 2015). Furthermore,
companies may combine operating and non-operating assets together and report them under
single accounts. Thus, a thorough investigation of the notes to those accounts may be
required in order to break them down into operating and non-operating components.
 104

5.1.2. Framework for analysis of NOPLAT

Net operating profit less after-tax (NOPLAT) is the after-tax profit generated by the
company’s core operation. It is available to all investors, both debt and equity holders. The
creation of NOPLAT is attributable to the company’s invested capital. In other words, the
ownership of operating assets and liabilities helps generate NOPLAT for the company. An
important implication of this definition is that any incomes or expenses that are created by
non-operating assets or liabilities should be excluded from the NOPLAT calculation. It is,
therefore, important to calculate NOPLAT in a manner that is consistent with the definition
of invested capital. As before, incomes or expenses attributable to the invested capital are
termed as “operating” and “non-operating” otherwise.

The after-tax profit reported by the company (net income) can be thought of as consisting of
two different parts: after-tax profit generated by the core operation (NOPLAT), and after-tax
profit attributable to non-operating operation. Thus, the NOPLAT analysis begins with the
separation of the results attributable to these two different types of operations from the
reported net income. Specifically, only operating incomes and expenses should be grouped
together to calculate NOPLAT, while incomes and expenses that embed both operating and
non-operating elements should be broken down before grouping.

Because NOPLAT is defined as available to all investors, both debt and equity holders,
interests that the company has to pay regarding its outstanding debts should be considered as
non-operating and, thus, excluded from the calculation of NOPLAT. However, the benefit of
a tax shield stemming from those interests is real and has to be incorporated somehow. This
can be done through the WACC estimation, which will be discussed in chapter 7. The
exclusion of interests from the calculation helps prevent NOPLAT to be dependent on the
company’s specific capital structure. This, in turn, not only helps produce forecasting more
easily and reliably but makes comparisons among companies more insightful.

Furthermore, since the reported income tax includes both operating (those attributable to the
core operation) and non-operating (those raised by non-operating activities) elements, it
should be broken down. It is only the operating component that determines the amount of tax
caused by the core operation and, thus, enters the calculation of NOPLAT. Similarly, by
separating operating from non-operating tax, NOPLAT is calculated in a way that ensures its
independence from the company’s capital structure.
 105

Since NOPLAT is part of the reported net income, as a way of checking, the reconciliation to
the net income can be carried out after NOPLAT has been determined. This reconciliation
process can help locate any incomes or expenses that have been left out or any mistakes that
have been made during the calculation process.

5.2. Restructuring of the financial statements

The primary purpose of financial statement analysis is to provide insights into the company’s
underlying business, which in turn helps produce reliable forecasts. Thus, one of the most
important factors in the analysis is the length of the examination period over which the
company should be analyzed. Specifically, if the company’s core characteristics have
fundamentally changed over time, its performance in the long past may have little-to-no
relevance to its future prospect, and, thus, a short analysis period deems to be more relevant.
Conversely, when the company is quite stable in terms of its core traits, a long analysis
period can warrant more insights into the company’s financial performance and its prospect.

Thus far, Compañia Cervecera Canarias has yet to experience any major changes in its core
operation. The company can be considered as quite stable with its underlying business.
Therefore, a long analysis period is desired. In the following sections, a period of 10 years
(2010 – 2019) will be used to examine the company’s historical financial performance.

5.2.1. Financial statements as reported by Compañia Cervecera Canarias

Exhibit 5: Compañia Cervecera Canarias’s income statement over the period 2010 –
2019
in million euro 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revenue 16,133 17,123 18,383 19,203 19,257 20,511 20,792 25,843 26,811 28,521
Excise tax expense - - - - - - - (4,234) (4,322) (4,552)
Net revenue 16,133 17,123 18,383 19,203 19,257 20,511 20,792 21,609 22,489 23,969
Other income 239 64 1,510 226 93 411 46 141 75 95
Raw materials, consumables and services (10,291) (10,966) (11,849) (12,186) (12,053) (12,931) (13,003) (13,261) (14,001) (14,592)
Personnel expenses (2,665) (2,838) (3,031) (3,108) (3,080) (3,322) (3,263) (3,550) (3,749) (3,880)
Amortisation, depreciation and impairments (1,118) (1,168) (1,316) (1,581) (1,437) (1,594) (1,817) (1,587) (1,693) (1,959)
Total other expenses (14,074) (14,972) (16,196) (16,875) (16,570) (17,847) (18,083) (18,398) (19,443) (20,431)
Operating profit 2,298 2,215 3,697 2,554 2,780 3,075 2,755 3,352 3,121 3,633
Interest income 100 70 62 47 48 60 60 72 71 75
Interest expenses (590) (494) (551) (579) (457) (412) (419) (468) (492) (529)
Other net finance income (expenses) (19) (6) 168 (61) (79) (57) (134) (123) (64) (59)
Net finance expenses (509) (430) (321) (593) (488) (409) (493) (519) (485) (513)
Share of profit of associates and joint ventures 193 240 213 146 148 172 150 75 210 164
Profit before income tax 1,982 2,025 3,589 2,107 2,440 2,838 2,412 2,908 2,846 3,284
Income tax expense (403) (465) (515) (520) (732) (697) (673) (755) (741) (910)
Profit 1,579 1,560 3,074 1,587 1,708 2,141 1,739 2,153 2,105 2,374
Attributable to:
Shareholders of the Company (net profit) 1,447 1,430 2,914 1,364 1,516 1,892 1,540 1,935 1,913 2,166
Non-controlling interests 132 130 160 223 192 249 199 218 192 208

(Source: Compañia Cervecera Canarias’s

annual reports)
 106

Exhibit 6: Compañia Cervecera Canarias’s consolidated financial position over the period 2010
– 2019
in million euro 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Assets
Intangible assets 10,890 10,835 17,688 15,934 16,341 18,183 17,424 17,670 17,459 17,769
Property, plant and equipment (PP&E) 7,687 7,860 8,844 8,454 8,718 9,552 9,232 11,117 11,359 13,269
Investments in associates and joint ventures 1,673 1,764 1,950 1,883 2,033 1,985 2,166 1,841 2,021 4,868
Loans and advances to customers 904 741 680 366 322 335 332 331 341 277
Deferred tax assets 542 474 550 508 661 958 1,011 768 626 647
Other non-current assets 648 745 731 697 669 787 1,019 1,059 1,220 1,255
Total non-current assets 22,344 22,419 30,443 27,842 28,744 31,800 31,184 32,786 33,026 38,085

Inventory 1,206 1,352 1,596 1,512 1,634 1,702 1,618 1,814 1,920 2,213
Other investment 17 14 11 11 13 16 - - - -
Trade and other receivables 2,273 2,260 2,537 2,427 2,743 2,873 3,052 3,496 3,448 3,766
Prepayment 206 170 232 218 317 343 328 399 382 385
Current tax assets - - - - 23 33 47 64 71 123
Cash and cash equivalents 610 813 1,037 1,290 668 3,232 3,035 2,442 2,903 1,821
Assets classified as held for sale 6 99 124 37 688 123 57 33 401 111
Total current assets 4,318 4,708 5,537 5,495 6,086 8,322 8,137 8,248 9,125 8,419

Total assets 26,662 27,127 35,980 33,337 34,830 40,122 39,321 41,034 42,151 46,504

Liabilities and Equity

Shareholder's equity 9,932 9,77 4
4 11,734 11,40 2
2 12,409 13,535 13,238 13,321 14,525 16,147
Non-controlling interests 288 318 1,071 954 1,043 1,535 1,335 1,200 1,183 1,164
Total equity 10,220 10,092 12,805 12,356 13,452 15,070 14,573 14,521 15,708 17,311

Borrowings, non-current 8,078 8,199 11,437 9,853 9,499 10,658 10,954 12,301 12,628 13,366
Tax liabilities 178 160 140 112 3 3 3 - - -
Post-retirement obligations 1,097 1,174 1,575 1,202 1,443 1,289 1,420 1,289 954 1,189
Provisions 475 449 419 367 398 320 302 970 833 756
Deferred tax liabilities 991 894 1,792 1,444 1,503 1,858 1,672 1,495 1,431 1,422
Other non-current liabilities - - - - - - - - 168 153
Total non-current liabilities 10,819 10,876 15,363 12,978 12,846 14,128 14,351 16,055 16,014 16,886

Bank overdrafts and commercial papers 132 207 191 178 595 2,950 1,669 1,265 655 1,134
Borrowings, current 862 981 1,863 2,195 1,671 1,397 1,981 1,947 1,703 2,552
Trade and other payables 3,831 4,134 4,773 4,624 4,953 5,407 5,596 6,149 6,961 7,589
Returnable packaging deposits 434 490 512 507 580 606 628 607 569 565
Provisions 123 140 129 171 165 154 154 178 164 184
Current tax liabilities 241 207 305 317 390 379 352 310 245 283
Liabilities associated with assets held for sale - - 39 11 178 31 17 2 132 -
Total current liabilities 5,623 6,159 7,812 8,003 8,532 10,924 10,397 10,458 10,429 12,307

Total equity and liabilities 26,662 27,127 35,980 33,337 34,830 40,122 39,321 41,034 42,151 46,504

(Source: Compañia Cervecera Canarias’s

annual reports)

Exhibit 5 and 6 are the income statement and consolidated financial position prepared and
reported by Compañia Cervecera Canarias over the period 2010 – 2019. All of the analyses
that follow will be based on the information provided in these financial statements.

5.2.2. Restructuring of the financial statements

In this section, the information provided by Compañia Cervecera Canarias’s reported

financial statements will be restructured and analyzed, in a manner that is consistent with the
frameworks outlined earlier, with the purpose of identifying the company’s historical
invested capital, NOPLAT and ultimately its free cash flows. Moreover, these analyses form
a solid basis for the historical financial performance analysis outlined in the next section.
 107

5.2.2.1. A detailed version of the financial position statement

In the financial position statement prepared by Compañia Cervecera Canarias, there are
many accounts that contain both operating and non-operating items. Thus, it is necessary to
break them down before grouping operating assets and liabilities together in order to
accurately determine the company’s invested capital. This is where the detailed version of
the balance sheet comes in. By carefully going through the accompanying notes, accounts
with such mixture have been identified and broken down into its components. Exhibit 7
presents all of Compañia Cervecera Canarias’s assets and liabilities that can readily be
determined to be operating or non-operating. This table is the foundation for identifying the
company’s invested capital outlined in the next section. There are five main accounts that
have been broken down into their components: intangible assets, loans and advances to
customers, trade and other receivables, cash and cash equivalent, trade and other payables.

Intangible assets reported by Compañia Cervecera Canarias contains goodwill, brands,

software, customer-related intangibles such as customer lists and contract-based intangible.
Apart from the software which can be separately purchased or internally developed when
necessary, other intangible assets other than goodwill are grouped as acquired intangible
assets, reflecting the fact that these assets can only arise in the event of business
combinations (acquisitions). Since the characteristics and accounting treatments of goodwill
and acquired intangibles differ from those of software, they should be separated and treated
differently. A detailed treatment of them will be discussed in the following section.

“Loans and advances to customers” consists of traditional interest-bearing loans that

Compañia Cervecera Canarias lends to its customers to finance their purchases of Compañia
Cervecera Canarias’s products and advances of sales discount to customers based on their
annual performance. These advances do not carry any interest, and their settlements take
place in the form of reduced sales discounts to customers. In essence, advances to customers
share the same economic characteristics with the trade receivables account and, thus, should
be considered as operating. By contrast, loans to customers should be viewed as non-
operating due to their embedded financial elements. These loans are included in the “Other
non-current asset” account, which also contains loans to joint- ventures and associates,
derivatives, and lease receivables.

Apart from traditional trade receivables, “trade and other receivables” account also contains
other receivables and derivatives which Compañia Cervecera Canarias uses to hedge its
operational risks such as
 108

currency and commodity risks. Since other receivables stem from the company’s contract
brewing and royalty fees, which are recognized in the company’s consolidated revenue, they
should be considered as operating. By contrast, derivatives should be viewed as non-
operating, and this classification can help avoid wild fluctuations in the performance that are
not caused by underlying conditions but instead by external factors such as wild exchange
rate movements.

Exhibit 7: Detailed version of Compañia Cervecera Canarias’s financial position over the
period 2010 - 2019
in million euro 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Assets
Goodwill 7,313 7,530 10,743 10,016 10,396 11,324 11,029 11,205 11,194 11,465
Acquired intangibles 3,441 3,170 6,722 5,700 5,764 6,624 6,128 6,151 5,863 5,820
Goodwill and acquired intangibles 10,754 10,700 17,465 15,716 16,160 17,948 17,157 17,356 17,057 17,285
Software, etc. 136 135 223 218 181 235 267 314 402 484
PP&E 7,687 7,860 8,844 8,454 8,718 9,552 9,232 11,117 11,359 13,269
Investments in associates and joint ventures 1,673 1,764 1,950 1,883 2,033 1,985 2,166 1,841 2,021 4,868
Advances to customers 449 357 312 301 254 266 274 277 289 222
Deferred tax assets 542 474 550 508 661 958 1,011 768 626 647
Minority interes t in other entities
1 190 264 327 247 253 287 427 481 501 408
Other non-current assets 913 865 772 515 484 569 650 632 771 902
Total non-current assets 22,344 22,419 30,443 27,842 28,744 31,800 31,184 32,786 33,026 38,085

Inventory 1,206 1,352 1,596 1,512 1,634 1,702 1,618 1,814 1,920 2,213
Other investment 17 14 11 11 13 16 - - - -
Trade receivables 1,680 1,657 1,944 1,804 2,017 2,169 2,283 2,582 2,588 2,913
Other receivables 481 524 529 556 580 625 701 672 817 813
Trade receivables from associates and joint ventures 102 42 27 22 24 27 20 23 8 12
Derivatives 10 37 37 45 122 52 48 219 35 28
Prepayment 206 170 232 218 317 343 328 399 382 385
Current tax assets - - - - 23 33 47 64 71 123
Operating cash 323 342 368 384 385 410 416 432 450 479
Excess cash 287 471 669 906 283 2,822 2,619 2,010 2,453 1,342
Assets classified as held for sale 6 99 124 37 688 123 57 33 401 111
Total current assets 4,318 4,708 5,537 5,495 6,086 8,322 8,137 8,248 9,125 8,419

Total assets 26,662 27,127 35,980 33,337 34,830 40,122 39,321 41,034 42,151 46,504

Liabilities and Equity

Shareholder's equity 9,932 9,77 4
4 11,734 11,4022 12,409 13,535 13,238 13,321 14,525 16,147
Non-controlling interests 288 318 1,071 954 1,043 1,535 1,335 1,200 1,183 1,164
Total equity 10,220 10,092 12,805 12,356 13,452 15,070 14,573 14,521 15,708 17,311

Borrowings, non-current 8,078 8,199 11,437 9,853 9,499 10,658 10,954 12,301 12,628 13,366
Tax liabilities 178 160 140 112 3 3 3 - - -
Post-retirement obligations 1,097 1,174 1,575 1,202 1,443 1,289 1,420 1,289 954 1,189
Provisions 475 449 419 367 398 320 302 970 833 756
Deferred tax liabilities 991 894 1,792 1,444 1,503 1,858 1,672 1,495 1,431 1,422
Other non-current liabilities - - - - - - - - 168 153
Total non-current liabilities 10,819 10,876 15,363 12,978 12,846 14,128 14,351 16,055 16,014 16,886

Bank overdrafts and commercial papers 132 207 191 178 595 2,950 1,669 1,265 655 1,134
Borrowings, current 862 981 1,863 2,195 1,671 1,397 1,981 1,947 1,703 2,552
Trade payables 1,660 2,009 2,244 2,140 2,339 2,797 2,934 3,430 4,016 4,720
Deferred income and Discount accruals 909 920 1,162 1,047 1,211 1,270 1,263 1,344 1,334 1,386
Interest payable 97 100 204 188 132 131 129 168 164 147
Dividend payable 53 33 47 36 45 46 45 30 19 12
Other payables 950* 908 1,063 1,064 1,122 1,074 1,150 1,156 1,358 1,255
Derivatives 162 164 53 149 104 89 75 21 70 69
Returnable packaging deposits 434 490 512 507 580 606 628 607 569 565
Provisions 123 140 129 171 165 154 154 178 164 184
Current tax liabilities 241 207 305 317 390 379 352 310 245 283
Liabilities associated with assets held for sale - - 39 11 178 31 17 2 132 -
Total current liabilities 5,623 6,159 7,812 8,003 8,532 10,924 10,397 10,458 10,429 12,307

Total equity and liabilities 26,662 27,127 35,980 33,337 34,830 40,122 39,321 41,034 42,151 46,504

(Source: Compañia Cervecera Canarias’s annual reports)

 109

“Cash and cash equivalents” contain both operating cash that is essential for conducting the
core business and excess cash that is the result of Compañia Cervecera Canarias amassing
cash holdings for future plans such as new investments or financial cushion for uncertainties.
The detail of how to separate them from the cash account will be discussed later in the
following section.

“Trade and other payables” account contain various non-operating items. Apart from trade
payables, deferred income, and discounts, it also contains interest payable that has been
accrued but not yet paid, dividend payable that has been announced but not yet delivered,
derivatives, and other payables. Since a large part of other payables is taxation and social
security contribution, this account is assumed to be operating.

5.2.2.2. Invested Capital

Exhibit 8: Compañia Cervecera Canarias’s invested capital over the period 2010 – 2019
in million euro NOTE 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating cash 1 323 342 368 384 385 410 416 432 450 479
Inventory 1,206 1,352 1,596 1,512 1,634 1,702 1,618 1,814 1,920 2,213
Trade receivables 1,782 1,699 1,971 1,826 2,041 2,196 2,303 2,605 2,596 2,925
Other receivables 481 524 529 556 580 625 701 672 817 813
Prepayment 206 170 232 218 317 343 328 399 382 385
Current tax assets - - - - 23 33 47 64 71 123
Trade payables (1,660) (2,009) (2,244) (2,140) (2,339) (2,797) (2,934) (3,430) (4,016) (4,720)
Deferred income and Discount accruals (909) (920) (1,162) (1,047) (1,211) (1,270) (1,263) (1,344) (1,334) (1,386)
Returnable packaging deposits (434) (490) (512) (507) (580) (606) (628) (607) (569) (565)
Other payables (950) (908) (1,063) (1,064) (1,122) (1,074) (1,150) (1,156) (1,358) (1,255)
Current tax liabilities (241) (207) (305) (317) (390) (379) (352) (310) (245) (283)
Operating working capital (196) (447) (590) (579) (662) (817) (914) (861) (1,286) (1,271)

PP&E 7,687 7,860 8,844 8,454 8,718 9,552 9,232 11,117 11,359 12,230
Operating leased assets 2 269 313 384 436 618 693 908 1,060 1,252 1,039
PP&E, inlcuding leased assets 7,956 8,173 9,228 8,890 9,336 10,245 10,140 12,177 12,611 13,269
Software, etc. 136 135 223 218 181 235 267 314 402 484
Advances to customers 449 357 312 301 254 266 274 277 289 222
Invested capital, excluding goodwill and acquired
8,345 8,218 9,173 8,830 9,109 9,929 9,767 11,907 12,016 12,704
intangibles

Goodwill and acquired intangibles 10,754 10,700 17,465 15,716 16,160 17,948 17,157 17,356 17,057 17,285
Adjusted accumulated amortization and impairment 4 4,099 4,510 4,745 6,169 5,563 5,489 6,353 7,925 8,151 8,084
Gross-up tax effect 5 (816) (819) (1,722) (1,506) (1,601) (1,852) (1,846) (1,872) (1,991) (2,067)
Total net goodwill and acquired intangibles invested 3 14,038 14,391 20,488 20,380 20,123 21,585 21,664 23,409 23,218 23,303

Invested capital, including goodwill and acquired

22,382 22,610 29,661 29,210 29,231 31,514 31,431 35,316 35,233 36,007
intangibles

Investments in associates and joint ventures 1,673 1,764 1,950 1,883 2,033 1,985 2,166 1,841 2,021 4,868
Minority interest in other entities 190 264 327 247 253 287 427 481 501 408
Other financial assets 6 606 691 712 336 1,022 637 660 861 837 819
Tax loss carry-forwards 5 213 237 238 220 177 364 391 460 407 410
Excess cash 1 287 471 669 906 283 2,822 2,619 2,010 2,453 1,342

Total capital invested 25,352 26,036 33,558 32,801 32,999 37,609 37,694 40,969 41,453 43,854

Shareholder's equity 9,932 9,7 74

4 11,734 11,4 02
2 12,409 13,535 13,238 13,321 14,525 16,147
Adjusted accumulated amortization and impairment 4 4,099 4,510 4,745 6,169 5,563 5,489 6,353 7,925 8,151 8,084
Gross-up tax effects released 5 (89) (137) (187) (272) (344) (423) (500) (580) (660) (738)
Dividend payable 53 33 47 36 45 46 45 30 19 12
Deferred tax liabilities, net of assets, operating 5 437 486 607 517 508 527 450 427 440 670
Deferred tax liabilities, net of assets, non operating 5 (502) (511) (662) (595) (746) (692) (744) (532) (559) (814)
Total shareholders' equity 13,931 14,155 16,284 17,258 17,436 18,482 18,842 20,591 21,917 23,362
Non-controlling interests 288 318 1,071 954 1,043 1,535 1,335 1,200 1,183 1,164

Borrowings, current 994 1,188 2,054 2,373 2,266 4,347 3,650 3,212 2,358 3,686
Interest payable 97 100 204 188 132 131 129 168 164 147
Borrowings, non-current 8,078 8,199 11,437 9,853 9,499 10,658 10,954 12,301 12,628 13,366
*

Lease liabilities 2 269 313 384 436 618 693 908 1,060 1252 - *
Post-retirement obligations 1,097 1,174 1,575 1,202 1,443 1,289 1,420 1,289 954 1,189
Provisions 598 589 548 538 563 474 456 1,148 997 940

Total capital provided 25,352 26,036 33,558 32,801 32,999 37,609 37,694 40,969 41,453 43,854
*
The lease liabilities are already included in current and non-current borrowings
 110

Invested capital is determined by grouping all operating assets and liabilities that are
essential for Compañia Cervecera Canarias’s core operation, which is the production and
sale of beer products to generate revenues and incomes. Built upon the detailed financial
position statement, exhibit 8 outlines the assets and liabilities that are considered as
operating, and, ultimately, the company’s invested capital. However, there are many items in
the exhibit that are not shown in the detailed financial position statement. Such items will be
shed light on in different notes to the exhibit. At the end of the exhibit, the reconciliation
between the total capital invested and provided is shown as a check on the validity of the
work.

 Note 1: Operating and excess cash

While operating cash is an integral part of Compañia Cervecera Canarias’s core operation,
excess cash is merely the result of the company amassing its cash holdings for various
reasons. They are economically different and need to be distinguished from one another.
Unfortunately, the company does not report them separately but instead combines them
under “cash and cash equivalents” account. It is, therefore, necessary to break it down into
its operating and non- operating components.

Opler et al. (1999) suggest that the optimal cash holding is the amount that equates the
marginal cost of cash shortage and the marginal cost of holding cash (graph below). The cost
of cash shortage stems from the company’s actions to tackle its need for cash such as the sale
of assets, raising capital in the financial market, cutting dividends, and potential investments
— the greater the shortage, the greater the cost. By contrast, the cost of holding cash mainly
refers to the opportunity cost for not investing it somewhere else. The model indicates that
companies that experience volatile cash flows in their operation need to keep a higher
amount of cash holding on their balance sheets compared to those that have stable cash
flows. This is because they usually face a higher cost of cash shortage.

Marginal
cost
Marginal cost of
cash shortage

Marginal cost of
holding cash

Optimal holding Amount of cash

holding
 111

Since the beer industry is quite stable, the required amount of operating cash that Compañia
Cervecera Canarias needs to hold is assumed to be 2% of revenue. Exhibit 9 shows the
break-down of Compañia Cervecera Canarias’s “cash and cash equivalent” account by its
operating and non-operating components.

Exhibit 9: Estimation of Compañia Cervecera Canarias’s

operating and excess cash over the period
2010 – 2019
in million eruo 2010 2011 2012 2013 2014 2015 2016 2017 201
Operating cash* 323 342 368 384 385 410
Excess cash 287 471 669 906
Total cash and bank balances 610

Estimated a

(Source: Compañia Cervecera Canarias’s

annual reports)

 Note 2: Operating leased assets

Besides its own assets, Compañia Cervecera Canarias also leases various assets such as
stores, pubs, offices, warehouses, cars, forklift trucks, and other equipment in the ordinary
course of business. As of 2019, the company had approximately 30,000 leases with a wide
range of different terms and conditions. Before 2019, according to the accounting standard
that Compañia Cervecera Canarias adopts (IFRS), a good chunk of these leases was not
shown on the balance sheet because they were designated as operating leases. Only the leases
that were considered financial, were recognized and treated in a similar manner as the
company’s property, plant, and equipment. Nevertheless, from 2019 onwards, operating
leases will be treated in the same manner as financial leases, with certain exceptions for
short-term and low-value leases (Ernst and Young, 2019).

Economically, operating and financial leases share the same substance. They both work as if
the company took out loans which it used to buy assets simultaneously. Therefore, the
exclusion of operating leases tends to understate the invested capital required and, thus,
distort the understanding of the company’s financial performance. Furthermore, although
Compañia Cervecera Canarias did recognize operating leases on its balance sheet in 2019, it
did not do so before that. This practice makes comparisons of invested capital among
different years unreliable. Hence, the value of operating leases needs to be determined and
added to Compañia Cervecera Canarias’s balance sheet over the period 2010 – 2018.

Since Compañia Cervecera Canarias does not disclose the value of its operating leases
before 2018, estimations based on the best available information provided by the company
need to be made. Specifically, the value of operating leases is determined by discounting the
company’s lease
 112

commitments at its incremental borrowing cost. This approach is in line with that suggested
by the IFRS.

In its annual report 2019, Compañia Cervecera Canarias claims that its incremental
borrowing cost is 4.3% as of 1 January 2019. This cost is assumed to represent the
incremental borrowing cost that the company faced over the period 2010 – 2018 since
Compañia Cervecera Canarias is believed to have not changed its financial risk profile
substantially since 2010. Furthermore, lease commitments are reported on intervals instead
of a yearly basis, making the discounting challenging (exhibit 10). To overcome this, the
value of operating leases is estimated by discounting the sum of total lease commitments at
Compañia Cervecera Canarias’s incremental borrowing cost for an estimated average
number of years over which the commitments will be settled.

Exhibit 10: Estimation of Compañia Cervecera Canarias’s operating lease value over the
period 2010 – 2018
Lease commitment (in million eruo) 2010 2011 2012 2013 2014 2015 2016 2017 2018
Less than 1 year 85 124 143 191 155 150 231 269 307
1-5 years 214 258 302 330 319 415 552 645 767
More than 5 years 134 121 173 180 519 549 677 790 939
Total lease commitments 433 503 618 701 993 1,114 1,460 1,704 2,013
Estimated incremental borrowing cost 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
Power to which lease commitments are discounted 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28 11.28
Estimated leased asset value 269 313 384 436 618 693 908 1,060 1,252
Rental expense as reported 224 241 264 282 291 301 302 308 321
Depreciation 215 229 251 265 272 274 272 269 275
Leased interest expense 9 12 13 17 19 27 30 39 46

(Source: Compañia Cervecera Canarias’s annual reports)

Compañia Cervecera Canarias reported the value of its operating leases as 1,252 million
euros at the end of 2018. This value, along with the total amount of lease commitments and
the company incremental borrowing cost, is used to estimate the average number of years
over which Compañia Cervecera Canarias is expected to fulfill its commitments. This
average number of years is assumed to be also applicable to the years from 2010 to 2017.
Exhibit 10 illustrates the estimation of the value of Compañia Cervecera Canarias’s
operating leases. Because of the new regulation introduced by the IFRS, the value of
operating leases in 2019 was already reported by the company and, thus, does not require
any further treatment.

Another important aspect of operating leases is their associated depreciation and interests.
The rental expenses for an operating lease can be viewed as payments by the lessee to
compensate the lessor for the depreciation of the leased asset and the fact that the lessor has
to forgo the benefits stemming from utilizing the leased asset (interest). The interest
component is estimated by applying the company’s incremental borrowing cost to the value
of operating leases in the previous year. The depreciation component is then determined
 113

by taking the
 114

difference between the rental expense and interest component. For instance, the leased
interest in 2018 was equal to 46 million euros (4.3% * 1,060), and the leased depreciation
was 275 million euros (= 321 – 46).

Because operating leases are economically similar to taking out loans to buy assets, the value
of operating leases should be added to the asset side, while the corresponding lease liability
to the liability side of the company’s balance sheet. Furthermore, the depreciation
component of the rental expenses is considered as operating in the income statement, while
the interest component as non-operating. This classification will be used for the NOPLAT
calculation in the next section.

 Note 3: Goodwill and acquired intangible assets

In essence, goodwill and acquired intangible assets reflect the management’s assessment of
the value of synergies and future prospects of target companies stemming from the
acquisitions. Hence, they have little-to-no relevance to the level of invested capital required
for the company to conduct its underlying business. In fact, invested capital with goodwill
and acquired intangible assets is useful for appraising the management’s ability to make
good deals for the company, while invested capital without them is more relevant and
insightful for forecasting the company’s future performance and, consequently, its valuation.
To get a holistic view of Compañia Cervecera Canarias’s core business’s performance and
its management’s ability as a deal maker, both invested capital with and without the
goodwill and acquired intangible assets are determined.

The costs of goodwill and acquired intangible assets that Compañia Cervecera Canarias has
invested are calculated by adding back accumulated amortization and impairment to their
book values and taking out any gross-up tax effects. The treatments of these two adjustments
will be discussed in more detail in note 4 and 5. The rationale behind this calculation
approach is that the assessment of whether the company has created much value after paying
premium prices should be based on the real money paid for those assets, not their book
values.

To better understand and facilitate the application of the above calculation approach, a
concrete formula for determining the real costs of goodwill and acquired intangible assets
may be helpful. It starts with an accounting equation for the intangible assets (both goodwill
and acquired intangible assets) reported by Compañia Cervecera Canarias:
 115

Carrying amountt - Carrying amountt-1 = Net investmentt + Net currency effectt –

(Amortizationt + Net impairmentt)

Where:
Carrying amountt is the carrying amount of intangible assets at the end of year t.
Net investmentt is the total net amount of intangible assets invested during year
t.
Net currency effectt is the difference between currency effect attributable to the cost side and
currency effect attributable to the “accumulated impairment and amortization” side of the
“intangible assets” account during year t.
Amortizationt is the amount of amortization incurred during year t.
Net impairmentt is the net impairment loss that occurred during year
t.

Applying the above equation to each and every year from when the company first recognized
its first intangible assets (t = 0), and then adding them together leads to the following:

∑ Carrying amountt - Carrying

t=n

= ∑ Net + ∑ Net currency effectt

t=n t=n

amountt- investmentt t=0

t=0 t=0

∑ (Amortizationt + Net impairmentt)

– t=n

t=0

Simplifying the left-hand side of the equation and solving for net investment lead to:

∑Net investmentt = Carrying amountn + ∑(Amortizationt + Net

t=n t=n

impairmentt) t=0

– ∑ Net currency
t=n
(5)
effectt

The left-hand side of formula (5) is the total gross amount of goodwill and acquired
intangible assets recognized until year n. However, the figure also embeds gross-up tax
effects, which need to be removed to derive the actual amount of real money the company
has invested up to year n. This actual amount is displayed as “Total net goodwill and
acquired intangibles invested” in exhibit 8.

Gross-up tax effects exist because of accounting treatments suggested by the IFRS.
Specifically, when an intangible asset that is not tax-deductible (tax base = 0) is acquired in a
business combination, the amount of deferred tax liability associated with the asset has to be
 116

recognized. This increase in liability has to be balanced by an equivalent increase in assets.

 117

Thus, upon recognition, the value of the intangible asset increases by the same amount of the
deferred tax liability recognized (gross-up effects). This increased amount will be drawn
down with the recognized deferred tax liability over time. As a result, the company
recognized the asset at an artificially higher amount even though no real cash was laid out.

 Note 4: Adjusted accumulated impairment and amortization of goodwill and

acquired intangibles

Adjusted accumulated impairment and amortization consists of the last two terms on the
right- hand side of formula (5), as shown in exhibit 11 and 12. Compañia Cervecera Canarias
has changed its accounting treatments of goodwill and acquired intangible assets over time.
Before 2005, any premium prices Compañia Cervecera Canarias paid for acquiring
businesses were recognized under goodwill. However, from 2005 onwards, other acquired
intangible assets such as brands and customer lists have been recognized separately.
Furthermore, goodwill was subject to annual amortization in 2003 and 2004 before
Compañia Cervecera Canarias adopted IFRS, while it was directly written off from equity
before that. All of these changes are taken into consideration, as shown in exhibit 12.

Exhibit 11: Adjusted accumulated impairment and amortization of goodwill and

acquired intangibles over the period 2010 – 2019
in million eruo 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Amortization of acquired intangible assets 158 193 200 339 288 317 310 320 317 312
Impairment of acquired intangible assets 16 1 - 5 2 3 12 (11) - 12
Impairment of goodwill - - 7 94 16 - - - 20 6
Net currency effect 150 (217) (28) (986) 912 394 (542) (1,263) 111 397
Accumulated net currency effect (248) (465) (493) (1,479) (567) (173) (715) (1,978) (1,867) (1,470)
Accumulated amortization and impairment of
3,851 4,045 4,252 4,690 4,996 5,316 5,638 5,947 6,284 6,614
acquired intangible assets & goodwill
Accumulated net currency effect 248 465 493 1,479 567 173 715 1,978 1,867 1,470
Adjusted accumulated amortization and impairment 4,510 4,745 6,169 5,563 5,489 6,353 7,925 8,151 8,084
4,099
of acquired intangible assets & goodwill

(Source: Compañia Cervecera Canarias’s

annual reports)

Exhibit 12: Adjusted accumulated impairment and amortization of goodwill and

acquired intangibles before 2010
in million eruo Before 2003 2003-2004 2005 2006 2007 2008 2009
Amortization of acquired intangible assets - - 8 11 8 72 97
Amortization of goodwill - 117 - - - - -
Goodwill directly written off from equity 3,027 - - - - - -
Impairment of acquired intangible assets - - 1 1 3 - 24
Impairment of goodwill - - 14 17 1 275 1
Net currency effect - - 12 6 (23) (527) 134
Accumulated net currency effect - - 12 18 (5) (532) (398)
Accumulated amortization and impairment of
3,027 3,144 3,167 3,196 3,208 3,555 3,677
acquired intangible assets & goodwill
Accumulated net currency effect - - (12) (18) 5 532 398
Adjusted accumulated amortization and impairment 3,144 3,155 3,178 3,213 4,087 4,075
of acquired intangible assets & goodwill 3,027

(Source: Compañia Cervecera Canarias’s annual reports and Koller et

al., 2015)
 118

In this paper, the total amount of goodwill directly written off from equity before 2003 was
based on the work of Koller et al. (2015), who estimated the amount to be around 3 billion
euros by adding up all the annual goodwill write-offs (net of reversals) since 1980.

 Note 5: Gross-up tax effects and deferred tax

Gross-up tax effects consist of two parts: the amount that has already been drawn down with
the deferred tax liability in the form of amortization, and the amount that has yet to be
released. The released amount is estimated as the product of the marginal tax rate facing
Compañia Cervecera Canarias (25%) and the company’s accumulated amortization of
intangible assets. By contrast, the amount that has not been drawn down is estimated to be
equal to the amount of deferred tax liability attributable to intangible assets reported by
Compañia Cervecera Canarias, since the majority of the company’s intangible assets are
those only arising through business combinations. Exhibit 13 illustrates the estimation of the
gross-up tax effects.

Exhibit 13: Estimation of gross-up tax effects for the period 2010 – 2019
in million eruo 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Accumulated amortization of intangibles 354 547 747 1,086 1,374 1,691 2,001 2,321 2,638 2,950
Accumulated gross-up tax effect released 89 137 187 272 344 423 500 580 660 738
Deferred tax liabilities, net of assets, intangibles 727 682 1,535 1,234 1,257 1,429 1,346 1,292 1,331 1,329
Gross-up tax effects 816 819 1,722 1,506 1,601 1,852 1,846 1,872 1,991 2,067

(Source: Compañia Cervecera Canarias’s annual reports)

With regard to deferred taxes, since the assets and liabilities that have given rise to deferred
taxes may be different in terms of economic substance, break-downs of deferred tax
assets/liabilities are necessary. Exhibit 14 shows such break-downs. Tax losses carried
forward that arise from previous unprofitable activities is one of the valuable non-operating
assets for Compañia Cervecera Canarias. It needs to be separated from other deferred taxes
and treated separately. By contrast, deferred tax liabilities attributable to intangible assets are
merely the result of accounting conventions and should be treated as part of the gross-up tax
effects. Furthermore, while deferred taxes attributable to both operating assets such as PP&E
and inventory and non- operating accounts like provisions and employee defined-benefit
liability are treated as equity equivalent, only those related to operating are useful when
analyzing the company’s financial performance. The treatment of operating deferred taxes
will be outlined in note 10.

Exhibit 14: Break-down of Compañia Cervecera Canarias’s deferred taxes over the period
2010 – 2019
in million eruo 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Tax loss carry-forwards 213 237 238 220 177 364 391 460 407 410
Deferred tax liabilities, net of assets, PP&E and Inventory 437 486 607 517 508 527 450 427 440 670
Deferred tax liabilities, net of assets, non-operating (502) (511) (662) (595) (746) (692) (744) (532) (559) (814)
Deferred tax liabilities, net of assets, intangibles 727 682 1,535 1,234 1,257 1,429 1,346 1,292 1,331 1,329
Deferred tax liabilities, net of assets 449 420 1,242 936 842 900 661 727 805 775
(Source: Compañia Cervecera Canarias’s annual reports)
 119

 Note 6: Other financial assets

Other financial assets mainly include “other non-current assets,” short-term derivatives, and
“assets held for sales.” Among these accounts, the most significant is “other non-current
assets,” which contains loans to customers, joint-ventures and associates, long-term
derivatives, and lease receivables. A detailed break-down of this account is shown in exhibit
15. As of 2019, the book value of this account reached 819 million euros. Although it is not
considered as operating and, thus, excluded from the analysis and valuation of Compañia
Cervecera Canarias’s core business, the account carries a tremendous value that needs to be
appraised separately and added to the value of the core business, along with other non-
operating assets, to derive the total enterprise value.

Exhibit 15: Break-down of “Other financial assets” account

in million eruo 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Other non-current assets 913 865 772 515 484 569 650 632 771 902
Other investment 17 14 11 11 13 16 - - - -
Derivatives, assets (current) 10 37 37 45 122 52 48 219 35 28
Derivatives, liabilities (current) (162) (164) (53) (149) (104) (89) (75) (21) (70) (69)
Tax liabilities associated with FEMSA (178) (160) (140) (112) (3) (3) (3) - - -
Assets classified as held for sale, net liabilities 6 99 85 26 510 92 40 31 269 111
Other non-current liabilities - - - - - - - - (168) (153)
Other financial assets, net 606 691 712 336 1,022 637 660 861 837 819

(Source: Compañia Cervecera Canarias’s annual reports)

5.2.2.3. Net operating profit less adjusted tax (NOPLAT)

Exhibit 16: Calculation of Compañia Cervecera Canarias’s net operating profit less
adjusted tax (NOPLAT)
in million euro NOTE 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Net revenue 16,133 17,123 18,383 19,203 19,257 20,511 20,792 21,609 22,489 23,969

Raw materials, consumables and services (10,291) (10,966) (11,849) (12,186) (12,053) (12,931) (13,003) (13,261) (14,001) (14,592)
Rental expense 224 241 264 282 291 301 302 308 321 -
Restructuring expenses, others 4 28 62 19 10 16 42 11 11 7
Other provision expenses, net of reversals 121 (3) 14 25 41 (32) 31 (27) 24 (45)
Acquisition and integration cost 80 - 28 - - - 8 72 - -
Adjusted raw materials, consumables and services 8 (9,862) (10,700) (11,481) (11,860) (11,711) (12,646) (12,620) (12,897) (13,645) (14,630)

Personnel expenses (2,665) (2,838) (3,031) (3,108) (3,080) (3,322) (3,263) (3,550) (3,749) (3,880)
Expenses relating to defined benefit plan, as reported 89 56 20 41 (31) 78 88 59 105 78
Current service cost and administration expense (80) (74) (63) (83) (79) (89) (88) (89) (92) (84)
Restructuring expenses relating to personnel 35 53 35 80 101 90 38 82 111 84
Adjusted personnel expenses 9 (2,621) (2,803) (3,039) (3,070) (3,089) (3,243) (3,225) (3,498) (3,625) (3,802)

Depreciation of PP&E (893) (936) (1,017) (1,073) (1,080) (1,151) (1,163) (1,172) (1,155) (1,488)
Depreciation of operating leased assets 2 (212) (229) (251) (265) (272) (274) (272) (269) (275) - *
Depreciation of PP&E, inlcuding leased assets (1,105) (1,165) (1,268) (1,338) (1,352) (1,425) (1,435) (1,441) (1,430) (1,488)
Amortisation of software, etc. (34) (36) (47) (37) (43) (51) (58) (60) (67) (87)
Depreciation & amortization, operating fixed assets (1,139) (1,201) (1,315) (1,375) (1,395) (1,476) (1,493) (1,501) (1,497) (1,575)

Operating EBITA 7 2,511 2,419 2,548 2,898 3,062 3,146 3,454 3,713 3,722 3,962
Operating cash taxes 10 (722) (641) (668) (837) (830) (859) (877) (951) (968) (1,027)
NOPLAT 1,788 1,778 1,880 2,060 2,231 2,286 2,576 2,762 2,753 2,936

*
Depreciation of operating leased assets is already included in "Depreciation of PP&E"

Net operating profit less adjusted tax (NOPLAT) is the after-tax profit generated by
Compañia Cervecera Canarias’s core business, which is to produce and sell beer products.
The tax embedded in NOPLAT is the amount of tax that the company has to pay on the
operating incomes generated
 120

by its core operation. This type of tax is termed as operating, and any taxes that are not
operating are called non-operating. NOPLAT is an important input for calculating the
company’s underlying business’s free cash flows. It also plays a crucial role in analyzing and
forecasting the company’s financial performance. The importance of NOPLAT will be shed
light on the “Free cash flow” and “Historical financial performance analysis” sections.

Since NOPLAT is generated by the company’s core business, any incomes and expenses that
are not considered as stemming from operating assets/liabilities should be excluded from its
calculation. Exhibit 16 shows the determination of NOPLAT for Compañia Cervecera
Canarias over the period 2010 – 2019. Adjustments have to be made for many of the
accounts in the income statement reported by the company since they mix together operating
and non-operating incomes/expenses. These adjustments are detailed in notes 8 – 10, as
indicated in exhibit 16. But first, the choice of metric for calculating NOPLAT is discussed
in note 7.

 Note 7: Usage of earnings before interest, tax, and amortization (EBITA) metric

The goal of determining Compañia Cervecera Canarias’s NOPLAT cannot be achieved with
the usage of earnings before interests and taxes (EBIT) or earnings before interests, taxes,
depreciation, and amortization (EBITDA) metric. Specifically, EBITDA metric goes as far
as excluding depreciation from the calculation. However, since depreciation can be
perceived as a proxy for the amount of property, plant, and equipment that need to be
replaced through new purchases because of their natural wear and tear or economic usage,
the exclusion of depreciation tends to overstate the company’s NOPLAT and distort the
understanding of its financial performance.

By contrast, although the EBIT metric does include depreciation of the company’s property,
plant, and equipment, it also includes amortization of intangible assets in the calculation,
which may be problematic. The issue stems from different accounting treatments, according
to IFRS, for intangible assets that are acquired either individually or with other assets as a
group through business combination and those that are internally developed. While the costs
of acquired intangible assets are, in essence, capitalized after the purchases, those of the
majority of internally-developed intangible assets are usually expensed as incurred. For
instance, expenditures on research, product design, brands, training, and development of
customer relationships are usually expensed as incurred. However, if the company buys the
same assets from third parties, it will be capitalized.
 121

As for tangible assets, intangible assets also need to be continuously replaced and invested in
order to maintain and expand the business. However, due to the accounting rules, any
subsequent costs related to acquired intangible assets after the purchases are immediately
expensed as incurred. EBIT metric fails to take this fact into consideration. By incorporating
amortization of such acquired intangible assets, the company can be considered as incurring
the same costs twice: one in the form of amortization and one in the form of operating
expenses such as those relating to customers, marketing, brands, and research and
development. As a result, the company’s NOPLAT tends to be understated.

Nevertheless, there are some intangible assets such as computer systems and software for
which the accounting treatment is similar to that for intangible assets. The subsequent costs
intended for the replacement of or new investment in those assets are capitalized instead of
expensed. Consequently, the amortization of such intangibles should be included in the
calculation of NOPLAT.

For the reasons outlined above, earnings before interests, taxes, and certain amortization
(EBITA) stand to be the most suitable metric for the determination of the company’s
NOPLAT. However, even when EBITA metric is used, there are a number of accounts on
the income statement that contain both operating and non-operating components. This may
lead to inaccuracies. In order to deal with this issue, adjustments need to be made for such
accounts. The following notes will detail such adjustments.

 Note 8: Adjusted raw materials, consumables, and services

Exhibit 17: Break-down of “Raw materials, consumables, and services” expenses

in million euro 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Raw materials 1,474 1,576 1,892 1,868 1,782 1,616 1,646 1,817 1,897 2,068
Non-returnable packaging 1,863 2,075 2,376 2,502 2,551 3,049 3,187 3,375 3,624 4,058
Goods for resale 1,655 1,498 1,616 1,551 1,495 1,775 1,523 1,592 1,533 1,501
Inventory movements (8) (8) (85) 2 (15) (141) (54) (130) (43) (75)
Marketing and selling expenses 2,072 2,186 2,250 2,418 2,447 2,755 2,836 2,533 2,494 2,632
Transport expenses 979 1,056 1,029 1,031 1,050 1,139 1,100 1,177 1,266 1,325
Energy and water 442 525 562 564 548 517 476 513 529 572
Repair and maintenance 375 417 458 482 458 485 475 509 527 519
Other expenses* 1,439 1,641 1,751 1,768 1,737 1,736 1,814 1,875 2,174 1,992
Raw materials, consumables and services 10,291 10,966 11,849 12,186 12,053 12,931 13,003 13,261 14,001 14,592
*
Other expenses include rentals (lease expenses), consultant expenses, telecom and office automation, warehousing expenses, travel expenses of €162 million and other taxes

(Source: Compañia Cervecera Canarias’s

annual reports)

“Raw materials, consumables, and services” account consist of various types of expenses.
The most significant ones are raw materials such as barleys and hops, water and energy, non-
returnable packaging which is sold with the beer products, goods for resale which are usually
beer products not produced by Compañia Cervecera Canarias but sold via the company’s
retail stores, marketing,
 122

distribution and selling expenses, repair and maintenance as well as various other expenses.
Exhibit 17 illustrates the break-down of this account by different categories.

The majority of these expenses can be considered as operating since they are related directly
to Compañia Cervecera Canarias’s core business. Expenses on such items as barleys and
hops, water and energy, marketing, selling, and distribution are at the heart of the underlying
business. Nevertheless, the company does mix together operating and non-operating
expenses under the “Other expense” category. The most notable non-operating expense
included is rental expenses that arise from operating leases. Before 2019, Compañia
Cervecera Canarias recorded the lump sums as operating expenses, which normally arose as
part of the company’s ordinary course of business, instead of breaking them down into
depreciation and interest components as it did in 2019 after the new accounting treatment of
lease assets had been adopted. Clearly, this treatment overstated the “Raw materials,
consumables and services” expenses. Thus, rental expenses before 2019 are taken out of the
account and treated in the way suggested in note 3. Specifically, the depreciation component
will be added to the depreciation of PP&E, while the interest component is treated as non-
operating.

Other non-operating expenses include those relating to i. restructuring activities that were
carried out with the purpose of improving the company’s operating efficiency; ii. provisions
such as litigation, taxes, and onerous contracts; iii. acquisition and integration costs, such as
legal fees, consulting fees, and employee training. These expenses are considered as
unrelated to Compañia Cervecera Canarias’s core business and unlikely to reoccur
repeatedly in the future. Thus, they should be removed from the account and treated as non-
operating.

 Note 9: Adjusted personnel expenses

Personnel expenses encompass all expenses relating to Compañia Cervecera Canarias’s

workforce, which contained 85,853 full-time equivalent employees, excluding contractors,
as of 2019. The main component of this account is wages and salaries. In 2019, this type of
cost accounted for more than 65% of the total “personnel expense” account reported by
Compañia Cervecera Canarias. There are also other operating expenses included in this
account such as social security contribution; contributions to defined contribution plans;
other long-term employee benefits, including long-term bonus plans, termination benefits,
medical plans, and jubilee benefits; and equity-settled share-based payment plan which
Compañia Cervecera Canarias uses to motivate its employee and enhance their performance.
Nevertheless, there are two categories that mix together operating and non-operating
expenses. They are “expenses related to defined benefit plans” and “other expenses.”
 123

The expense relating to defined benefit plans that are recognized as part of the total
personnel expenses contains current service costs attributable to the services rendered by its
employee over the course of the fiscal year, past service costs which arise due to changes in
the company’s policy on employee benefit, administration expense that the plans have to pay
the asset managers for their management service, and effect of any settlement which is the
difference between the actual amount settled and the expected amount to be settled. The
composition is illustrated in exhibit 18.

Exhibit 18: Break-down of expenses related to defined benefit plans

(Source: Compañia Cervecera Canarias’s

annual reports)

Since past service cost and effect of any settlements are attributable to services rendered by
the employee in the past and do not represent the actual expenses that the company has to
pay its employee for their services in the current fiscal year, they should be considered as
non- operating and excluded from the “personnel expense” account. Furthermore, in 2010
and 2011, Compañia Cervecera Canarias also included interest expenses related to employee
defined-benefit obligation in the “personnel expense” account. Thus, in order to remove
these non-operating expenses, all expenses related to defined benefit plans that are
recognized in the “personnel expense” account are subtracted, while the current service cost
and administration expense are added back to the account, as shown in exhibit 16.

By contrast, the “other expenses” category in the “personnel expense” account does contain
employee expenses that are related to the company’s restructuring programs. The significant
type of those expenses is compensation cost for severing employee contracts (lay-offs).
Since it is unlikely that such restructuring schemes will repeatedly reoccur in the future, the
restructuring-related employee expenses should be removed from the “personnel expense”
account and treated as non-operating.
 124

 Note 10: Operating cash taxes

 Operating tax

The amount of tax that goes into the NOPLAT calculation should not be the income tax
reported by the company since it contains both operating and non-operating taxes
attributable to the core and non-core business activities. It is only the operating taxes that are
relevant in the determination of NOPLAT. Thus, it is necessary to determine the operating
component in the income tax as reported.

Income tax = Operating taxes (core business) + Non-operating taxes (non-core business)

The ideal approach to directly calculating operating taxes is to apply appropriate tax rates to
each and every operating item on the income statement and then sum them up. However, this
method is impractical since the company does not disclose such detailed tax information.
This reason gives rise to the second approach, which indirectly calculates operating taxes as
the difference between income tax and its non-operating tax component. This method is
made feasible by the tax reconciliation table provided by the company. The tax
reconciliation table provides information about how Compañia Cervecera Canarias’s
statutory tax rate is reconciled to the effective tax rate that the company actually has to pay
on its reported net income to tax authorities. Exhibit 19 illustrates Compañia Cervecera
Canarias’s tax reconciliation table over the period 2010 – 2019.

Exhibit 19: Compañia Cervecera Canarias’s tax reconciliation table

% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Statutory tax rate 25.5 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0 25.0
Effect of tax rates in foreign jurisdictions 1.9 3.5 1.9 4.1 3.8 2.1 (0.4) 0.6 (0.1) 0.7
Effect of non-deductible expenses 4.0 3.2 1.9 4.6 2.7 2.6 2.9 2.6 2.3 3.2
Effect of tax incentives and exempt income (8.2) (6.0) (14.0) (8.3) (4.0) (7.6) (2.8) (3.4) (3.2) (3.8)
De-recognition/(recognition) of deferred tax assets (1.3) (0.8) (1.3) (0.6) (0.3) (0.1) (4.0) 0.4 - (1.1)
Effect of unrecognized current year losses 0.8 1.0 0.8 1.3 0.7 2.1 6.8 1.7 3.4 2.8
Effect of changes in tax rates 0.2 0.1 0.1 (1.6) 0.4 0.8 0.1 (1.6) (0.1) -
Withholding taxes 1.4 1.5 0.8 2.1 2.6 1.9 3.1 2.3 3.2 2.1
Under/(over) provided in prior years (2.3) (1.5) 0.2 (0.1) 0.3 (1.4) - (0.5) (1.4) 0.6
Other reconciling items 0.5 0.1 (0.1) - 0.7 0.8 (1.0) (0.4) (1.0) (0.3)
Effective tax rate 22.5 26.1 15.3 26.5 31.9 26.2 29.7 26.7 28.1 29.2

(Source: Compañia Cervecera Canarias’s

annual reports)

In exhibit 19, “Effect of tax rates in foreign jurisdictions” item reflects the effects of
differences between the statutory tax rate that Compañia Cervecera Canarias faces at home
(Netherland) and the tax rates it faces abroad (foreign markets). The company may pay
higher or lower taxes for a given amount of profit generated by its foreign operations
compared to home. By contrast, “Effect of non-deductible expenses” represents the tax
effects of those expenses that are not allowed for tax deductibility such as certain
amortization and impairment. “Effect of tax incentives and exempt income’ item, on the
other hand, reflects the tax effects of incomes that
 125

are not subject to tax. Such incomes include the transfer of Multi Bintang Indonesia and
Grande Brasserie de Nouvelle-Calédonie in 2010, upward revaluation of Compañia
Cervecera Canarias’s equity interests in Asia Pacific Investment, and Asia Pacific Breweries
in 2012, or gain on sale of Empaque in 2015.

Of the reconciling items in exhibit 19, those that arose as a result of Compañia Cervecera
Canarias’s core business are termed as “operating reconciling items,” and “non-operating
reconciling items” otherwise. Based on this definition, “Effect of tax rates in foreign
jurisdictions” is considered as the only operating reconciling items, and the rest assumes to
be non-operating. The tax reconciliation can be expressed as follows, with “non-operating
items” referring to both non-operating incomes and expenses:

Reported income tax = Net income * (Statutory tax rate + Operating reconciling items’
tax rates + Non-operating reconciling items’ tax rates)

Reported income tax = Net income * Statutory tax rate + Operating reconciling items’
taxes + Non-operating reconciling items’ taxes

Reported income tax – Non-operating reconciling items’ taxes = (EBITA + non-operating

items) * Statutory tax rate + Operating reconciling items’ taxes

Reported income tax – (Non-operating reconciling items’ taxes + Non-operating items *

*Statutory tax rate) = EBITA * Statutory tax rate + Operating reconciling items’ taxes

If non-operating incomes and expenses are taxed domestically and subject to the statutory
tax rate, the result of “Non-operating reconciling items’ taxes + Non-operating items *
Statutory tax rate” is the company’s non-operating taxes and the left-hand side of last
formula shown above is actually the company’s operating taxes. In other words, if non-
operating incomes and expenses are taxed domestically, the company’s operating taxes can
be determined by applying the statutory tax rate to its EBITA and adjusting for any operating
reconciling items.

Over the last ten years, debt offerings that Compañia Cervecera Canarias uses to raise its
needs of capital have primarily taken place in the Netherlands (Market Line, 2020b). And
since interest expenses make up a large part of non-operating expenses, Compañia
Cervecera Canarias’s non-operating incomes and
 126

expenses are assumed to be taxed domestically. This assumption implies that Compañia
Cervecera Canarias’s operating taxes can be estimated by applying the company’s statutory
tax rate to its EBITA and adjusting for any effects of foreign tax rate differences. This
calculation method is illustrated in exhibit 20.

Exhibit 20: Compañia Cervecera Canarias’s operating tax calculation

in million euro 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating EBITA 2,511 2,419 2,548 2,898 3,062 3,146 3,454 3,713 3,722 3,962
Statutory tax rate, domestic 25.5% 25% 25% 25% 25% 25% 25% 25% 25% 25%
Income tax at statutory tax rate 640 605 637 724 765 786 863 928 930 991
Effect of difference in foreign tax rates 34 62 63 79 87 57 (9) 17 (3) 21
Operating tax 674 667 700 803 852 843 854 945 927 1,012

(Source: Compañia Cervecera Canarias’s

annual reports)

 Operating cash tax

While operating tax is based on an accrued basis, operating cash tax reflects the actual
amount of cash that was paid to tax authorities over the course of the fiscal year. In this
paper, operating cash tax is preferred to operating tax for the determination of NOPLAT, and
there are at least two reasons for this. Firstly, operating cash tax is closer to cash than
operating tax. And as being built upon NOPLAT, the free cash flows can reflect the actual
amount of cash available to the company, and, hence, the valuation of the company will be
more reliable. Secondly, there are certain assets that constantly generate a higher amount of
tax deductibility than indicated by the accounting rules. For instance, depreciation of
property, plant, and equipment is based on the accelerating method for tax purposes, but on a
straight-line basis for reporting purposes. This leads to a higher amount of tax deductibility
that the company can actually claim from the usage of these assets and thus lower tax
payments. Since the company can constantly defer this type of tax liability, operating tax
may overstate the tax burden of the company and, thus, understate the valuation of the
company.

As an accounting rule, the equation below shows the relationship between operating tax and
operating cash tax, with deferred tax attributable to operating assets/liabilities being termed
operating.

Current operating cash tax = Total current-year operating tax expense + change in
operating deferred tax assets – change in operating deferred tax liabilities

In order to calculate operating cash tax, deferred taxes related to operating assets/liabilities
need to be identified. As shown in exhibit 14, Compañia Cervecera Canarias’s operating
deferred taxes come from its property, plant, and equipment and inventory. However, merely
taking the annual changes
 127

for these deferred tax accounts and adding the results to the operating tax may not derive the
correct operating cash tax. This is because the changes also incorporate movements that do
not stem from operating business activities. For instance, in 2019, out of an increase of 237
million euros in the deferred tax liability attributable to Compañia Cervecera Canarias’s
property, plant, and equipment, an increase of 248 million euros was attributable to changes
in accounting policy, changes in consolidation (acquisition/divestiture), currency effects and
transfers. It is only the movements that stem from operating business activities and, thus, are
recognized in the income statement that enter the formula above.

Exhibit 21 illustrates the calculation of Compañia Cervecera Canarias’s operating cash tax
over the period 2010 – 2019. At the bottom of the exhibit, the operating cash tax rate is
determined as the fraction of operating cash tax to EBITA. Over the last ten years, Compañia
Cervecera Canarias’s operating cash tax rate has been ranging from 26% to 29%.

Exhibit 21: Compañia Cervecera Canarias’s operating cash tax calculation

in million euro 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating EBITA 2,511 2,419 2,548 2,898 3,062 3,146 3,454 3,713 3,722 3,962
Statutory tax rate, domestic 25.5% 25% 25% 25% 25% 25% 25% 25% 25% 25%
Income tax at statutory tax rate 640 605 637 724 765 786 863 928 930 991
Effect of difference in foreign tax rates 34 62 63 79 87 57 (9) 17 (3) 21
Operating tax 674 667 700 803 852 843 854 945 927 1,012
(Increase) Decrease in operating deferred tax liabilities (net) 48 (26) (32) 34 (22) 16 23 6 41 15
Operating cash taxes 722 641 668 837 830 859 877 951 968 1,027
Operating cash tax rate 28.8% 26.5% 26.2% 28.9% 27.1% 27.3% 25.4% 25.6% 26.0% 25.9%

(Source: Compañia Cervecera Canarias’s

annual reports)

 Reconciliation from NOPLAT to net income

Exhibit 22: Reconciliation from NOPLAT to net income

in million euro 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
NOPLAT 1,788 1,778 1,880 2,060 2,231 2,286 2,576 2,762 2,753 2,936
(Increase) Decrease in operating deferred tax liabilities (net) 48 (26) (32) 34 (22) 16 23 6 41 15

Amortization of acquired intangibles (158) (193) (200) (339) (288) (317) (310) (320) (317) (312)
Impairment of PP&E (14) - (44) (16) (8) (71) (274) 19 (133) (52)
Impairment of softwares - (2) - (17) - (1) - - (1) (2)
Impairment of acquired intangible assets (16) (1) - (5) (2) (3) (12) 11 - (12)
Impairment of goodwill - - (7) (94) (16) - - - (20) (6)
Impairment of available-for-sale investments (3) - (1) - - - - - - -
Recycling of currency translation difference - - - - - - - (65) - -

Restructuring expenses (39) (81) (97) (99) (111) (106) (80) (93) (122) (91)
Other provision expenses, net of reversals (121) 3 (14) (25) (41) 32 (31) 27 (24) 45
Acquisition and integration cost (80) - (28) - - - (8) (72) - -
Pension adjustment (9) 18 43 42 110 11 - 30 (13) 6

Interest expenses (590) (494) (551) (579) (457) (412) (419) (468) (492) (529)
Lease interest expense (12) (12) (13) (17) (19) (27) (30) (39) (46) -
Interest expenses, including those from leased assets (602) (506) (564) (596) (476) (439) (449) (507) (538) (529)
Interest income 100 70 62 47 48 60 60 72 71 75
Dividend income from minority-holding entities 1 2 25 15 10 10 12 10 16 10
Other net finance income (expenses) (20) (8) 143 (76) (89) (67) (146) (133) (80) (69)

Other income 239 64 1,510 226 93 411 46 141 75 95

Share of profit of associates and joint ventures 193 240 213 146 148 172 150 75 210 164

Non-operating tax expense 271 202 185 283 120 146 181 190 186 102
Net income 1,579 1,560 3,074 1,587 1,708 2,141 1,739 2,153 2,105 2,374

(Source: Compañia Cervecera Canarias’s

annual reports)
 128

Reconciliation from NOPLAT to net income works as a check on whether any mistakes have
been made during the calculation process. Exhibit 22 illustrates this reconciliation. In the
calculation of NOPLAT, all items that are considered as non-operating are left out. These
non- operating incomes and expenses have to be added back to NOPLAT in order to
calculate the company’s net income as reported. The most significant non-operating
incomes/expenses include amortization of acquired intangible assets, impairment costs of
both tangible and intangible assets, interest expenses, interest incomes, the share of profit of
associates and joint ventures, and other income such as gains and losses on sales of assets.

Since the increase (decrease) in net operating deferred tax liabilities is subtracted from
(added to) operating tax to determine operating cash tax, it has to be added back to
(subtracted from) NOPLAT in order to determine the accrued profit generated by the
company’s underlying business. Moreover, non-operating tax expense is the amount of tax
attributable to the non- operating incomes/expenses and determined as the difference
between reported income tax and the company’s operating tax calculated in note 10.

Graph 28: Compañia Cervecera Canarias’s NOPLAT and net income over the period 2010 –

4000
3000
2000
1000
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
NOPLAT Net income
2019

Since non-operating items are removed from the calculation, NOPLAT shows a clearer
pattern and can be considered as more predictable than net income, as reported by the
company (graph 28). For instance, in 2012, Compañia Cervecera Canarias reported a spike
in its net income. However, this spike was not caused by improved operating performance,
but instead by an upward revaluation of its equity interests in Asia Pacific Investment and
Asia Pacific Breweries. This non-cash exceptional gain of 1,486 million euros was reported
in the “other income” account. This one- off accounting-based gain may distort the
comprehension of the company’s financial performance and, thus, make forecasting more
challenging and less reliable if it is not excluded from NOPLAT.
 129

5.2.2.4. Free cash flow (FCF)

Free cash flow (FCF) is the cash available to all the company’s investors, both debt and
equity holders, generated by the underlying business activities. It could be perceived as the
cash flow generated by a company that holds only operating assets, which are financed
entirely by equity. Free cash flow is determined as the difference between the gross cash
flow generated by the core business and the gross investment that is required for the
company to maintain and/or expand its operation.

Free cash flow = Gross cash flow – Gross investment

Gross cash flow is calculated by adding back any non-cash expenses such as depreciation to
the company’s NOPLAT. The two major non-expenses in the core operation of Compañia
Cervecera Canarias are depreciation of property, plant and equipment, and amortization of
software. In 2019, these expenses amounted to 1,575 million euros and should be added back
to the company’s NOPLAT to determine the gross cash flow. The only exception is the
depreciation relating to operating leases. Since this depreciation is a component of the rental
expense and, thus, is real cash, it should not be added back to NOPLAT.

By contrast, gross investment is determined by examining the change in the company’s

invested capital. Compañia Cervecera Canarias’s invested capital for the underlying business
consists of operating working capital, property, plant, and equipment (including leased
assets), software, and advances to customers. While it is quite straightforward to calculate
the investment in operating working capital and advances to customers by taking the changes
in those accounts, adjustments need to be made in order to accurately determine the
investment in property, plant and equipment and software, as the changes in the accounts
also contain effects of depreciation, amortization, impairment, and currency. As an
accounting rule, the change in the PP&E account is given as follows (the same argument can
be applied for software), with the denotations being similar to those in note 3.

Carrying amountt - Carrying amountt-1 =

= Net investmentt + Net currency effectt – (Depreciationt + Net impairmentt)

Net investmentt = Carrying amountt - Carrying amountt-1 – Net currency effectt +

(Depreciationt + Net impairmentt)
 130

The net investment in PP&E and software is calculated by adding depreciation, amortization,
and net impairment to the change in the carrying amount of the account and adjusting for
currency effects (exhibit 23). Moreover, since the “Total net goodwill and acquired
intangibles invested” account in exhibit 8 represents the total actual amount of money that
has been invested in goodwill and acquired intangibles, the change in this account reflects
the actual investment in goodwill and acquired intangibles during the year.

In exhibit 23, the free cash flow is calculated for both before and after goodwill and acquired
intangible assets, with the free cash flow before goodwill and acquired intangible assets
measuring the cash flow available to all investors before paying premium prices for
acquisitions.

Exhibit 23: Compañia Cervecera Canarias’s free cash flow calculation

in million euro 2011 2012 2013 2014 2015 2016 2017 2018 2019
NOPLAT 1,778 1,880 2,060 2,231 2,286 2,576 2,762 2,753 2,936
Depreciation of PP&E 936 1,017 1,073 1,080 1,151 1,163 1,172 1,155 1,488
Amortisation of software, etc. 36 47 37 43 51 58 60 67 87
Gross cash flow 2,750 2,944 3,170 3,354 3,488 3,797 3,994 3,975 4,511

Investment in operating working capital 250 144 (11) 83 155 97 (53) 425 (16)

Change in net PP&E (including leased assets) and software (216) (1,144) 343 (409) (963) 73 (2,084) (522) (740)
Depreciation of PP&E and amortization of software charged (972) (1,064) (1,110) (1,123) (1,202) (1,221) (1,232) (1,222) (1,575)
Impairment of PP&E and software charged (2) (44) (33) (8) (72) (274) 19 (134) (54)
Effect of currency translation (166) 81 (377) 110 (48) (586) (683) (101) 232
Net investment in PP&E (including leased assets) and software (1,356) (2,171) (1,177) (1,430) (2,285) (2,008) (3,980) (1,979) (2,137)
Investment in advances to customers 92 45 11 47 (12) (8) (3) (12) 67
Gross investment before goodwill and acquired intangibles (1,013) (1,982) (1,177) (1,300) (2,142) (1,919) (4,036) (1,566) (2,086)

Free cash flow before goodwill and acquired intangibles 1,737 963 1,993 2,055 1,346 1,879 (42) 2,409 2,425

Investment in goodwill and acquired intangibles (354) (6,097) 109 257 (1,463) (79) (1,745) 191 (85)
Gross investment after goodwill and acquired intangibles (1,367) (8,079) (1,068) (1,043) (3,605) (1,997) (5,781) (1,375) (2,171)

Free cash flow after goodwill and acquired intangibles 1,383 (5,134) 2,102 2,312 (117) 1,800 (1,787) 2,601 2,340

(Source: Compañia Cervecera Canarias’s

annual reports)

Compañia Cervecera Canarias’s relatively low free cash flows before goodwill and acquired
intangibles in 2012, 2015, and 2017 were driven by large acquisitions that the company
made in those years. When the premium prices that the company paid are taken into
consideration, the free cash flows in all three years turn considerably negative. Specifically,
the free cash flowed after goodwill and acquired intangible assets were negative 5,134 and
negative 1,787 million euros in 2012 and 2017, respectively.

5.2.3. Summary of restructuring of the financial statements

Exhibit 24 summarizes the most important insights gained from the restructuring of
Compañia Cervecera Canarias’s financial statements.
 131

Exhibit 24: Insights from the restructuring of Compañia Cervecera Canarias’s financial
statements
in million euro 2011 2012 2013 2014 2015 2016 2017 2018
Net revenue 17,123 18,383 19,203 19,257 20,511 20,792 2
Net operating profit less adjusted tax (NOPLAT) 1,778 1,880 2,060 2,231

Invested capital, excluding goodwill and acquired intangibles 8,218 9,173

Invested capital, including goodwill and acquired intangibles

Free cash flow before goodwill and

Free cash flo

5.3. Historical performance analysis

The purpose if historical performance analysis is to provide financial insights into the
company’s underlying business. These insights can serve as building blocks for producing
reasonable forecasts of the company’s future performance. Since financial analysis
encompasses various aspects for various purposes, such as credit assessment, management,
and valuation, this paper focuses on the aspects that are the most relevant to the
determination of the fair value of Compañia Cervecera Canarias’s core operation. With
respect to valuation, Koller et al. (2015) believe that the two most significant value drivers
for any company are their return on invested capital and revenue growth rates. As outlined
later in chapter 6, these two value drivers are key to the forecasts of Compañia Cervecera
Canarias’s free cash flows and economic profits in the long run. In this section, the
company’s historical ROIC and revenue growth rate will be closely analyzed. And the
analyses will serve as a solid foundation for the performance forecasting outlined in the next
chapter.

Moreover, in order to get a complete understanding, Compañia Cervecera Canarias will be

analyzed not only in isolation but also in comparison with its peers, including AB InBev,
Carlsberg, and Molson Coors. By comparing these companies’ performances, insights may
be revealed as to how Compañia Cervecera Canarias performs with respect to its competitors
as well as the prospect of the company’s performance in the industry.

The peer companies are financially analyzed in a similar approach that is used for Compañia
Cervecera Canarias, and their detailed analyses are included in the appendix section.
 132

5.3.1. Return on invested capital (ROIC) analysis

5.3.1.1. Compañia Cervecera Canarias’s ROIC analysis

Mathematically, return on invested capital (ROIC) is defined as the ratio of net operating
profit less adjusted tax (NOPLAT) to Invested Capital. It measures the number of units of
after-tax profit that can be generated by the underlying business by investing one unit of
capital necessary for the core operation. It is given as the formula below.

NOPLAT
ROIC = Invested Capital

EBITA
ROIC = (1 – Operating tax rate)
Invested Capital

EBITA Revenue
ROIC = (1 – Operating tax rate) *
Revenue Invested Capital

ROIC = (1 – Operating tax rate) * Profit margin * Capital turnover

As shown in the final formula, ROIC can also be expressed as a function of the company’s
operating tax rate, profit margin, and its capital turnover. The higher the profit margin the
company can achieve, the higher its ROIC because it can earn more units of profit for a
given unit of revenue generated. Similarly, the less capital it has to invest in order to
generate one unit of revenue (high capital turnover), the higher its ROIC.

The calculation of Compañia Cervecera Canarias’s ROIC over the period 2011 – 2019 is
presented in exhibit 25. As for the invested capital outlined previously, ROIC will be
calculated for both invested capital with and without the goodwill and acquired intangible
assets. Specifically, ROIC without the goodwill and acquired intangibles can be used as a
measurement for the profitability and competitiveness of the underlying business, while
ROIC without these assets indicates whether the company has managed to create value after
paying premium prices for target companies. As valuation is a forward-looking practice,
ROIC without the goodwill and acquired intangibles are more relevant as the premium prices
paid to acquire these assets were
 133

already incurred in the past and are unlikely to have any impacts on the company’s future
cash flows.

Exhibit 25: Compañia Cervecera Canarias’s return on invested capital (ROIC)

% 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating ratios
EBITA/Revenues (Profit margin) 14.1% 13.9% 15.1% 15.9% 15.3% 16.6% 17.2% 16.5% 16.5%
Raw materials, consumables and services/Revenues 62.5% 62.5% 61.8% 60.8% 61.7% 60.7% 59.7% 60.7% 61.0%
Personnel expense/Revenues 16.4% 16.5% 16.0% 16.0% 15.8% 15.5% 16.2% 16.1% 15.9%
Depreciation & Amortization/Revenues 7.0% 7.2% 7.2% 7.2% 7.2% 7.2% 6.9% 6.7% 6.6%

Return on invested capital (ROIC) *

Operating working capital/Revenues -1.9% -2.8% -3.0% -3.2% -3.6% -4.2% -4.1% -4.8% -5.3%
Software, etc./Revenues 0.8% 1.0% 1.1% 1.0% 1.0% 1.2% 1.3% 1.6% 1.8%
PP&E (including leased assets)/Revenues 47.1% 47.3% 47.2% 47.3% 47.7% 49.0% 51.6% 55.1% 54.0%
Advances to customers/Revenues 2.4% 1.8% 1.6% 1.4% 1.3% 1.3% 1.3% 1.3% 1.1%
Invested capital/Revenues 48.4% 47.3% 46.9% 46.6% 46.4% 47.4% 50.2% 53.2% 51.6%
Revenues/Invested capital, times (Capital turnover) 2.1 2.1 2.1 2.1 2.2 2.1 2.0 1.9 1.9
Pretax ROIC 29.2% 29.3% 32.2% 34.1% 33.0% 35.1% 34.3% 31.1% 32.1%
Operating cash tax rate 26.5% 26.2% 28.9% 27.1% 27.3% 25.4% 25.6% 26.0% 25.9%
After-tax ROIC, excluding goodwill and acquired intangibles 21.5% 21.6% 22.9% 24.9% 24.0% 26.2% 25.5% 23.0% 23.7%
After-tax ROIC, including goodwill and acquired intangibles 7.9% 7.2% 7.0% 7.6% 7.5% 8.2% 8.3% 7.8% 8.2%
*Average invested capitals are used

The company’s profit margin has been quite stable, ranging from 14% to 17% over the
period. This is due to the stability of its operating expenses relative to revenues. Specifically,
while personnel and depreciation/operating amortization expenses hovered around 16% and
7% revenue respectively, the company’s raw materials, consumables, and services expenses
ranged from 60% to 62.5% revenue. However, a further investigation into the components of
the raw materials, consumables, and services expenses reveals some noticeable trends. While
most of the expenses within the account, such as water and energy, raw material, and
transportation were quite stable in relation to revenue, expenses relating to non-returnable
packaging steadily increased over the period, reaching 17% of revenue in 2019 compared to
12% in 2011. This constant increase was offset by constant decreases in expenses relating to
marketing and selling activities as well as goods for resale in the company-owned retail
stores. Together, they accounted for about 17% of revenue, compared to 22% in 2011 (graph
29).

The second component that is necessary for the calculation of Compañia Cervecera
Canarias’s ROIC is its capital turnover. In exhibit 25, the invested capital (and its
components) that is used to determine the ROIC in a given year is estimated to be the
arithmetic average of the invested capital in that year and in the previous year. The rationale
behind this approach is that the after-tax profit generated during the year is attributable to not
only the invested capital at the end of the previous year but also new investment made during
the year. The average invested capital can be considered as taking this observation into
consideration and better reflect the ROIC achieved by the company in a given year.
 134

Graph 29: Certain expenses in relation to revenue over the period 2011 – 2019
20%

15%

10%

5%

0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Non-returnable packaging Goods for resale Marketing and selling expenses

(Source: Compañia Cervecera Canarias’s

annual reports)

Over the period 2011 – 2019, Compañia Cervecera Canarias managed to constantly improve
its operating working capital, reaching negative 5.3% of revenue in 2019 compared to only
negative 1.9% in 2011. This improvement was mainly driven by its ability to negotiate with
suppliers. In 2019, the company’s trade payable account reached over 18% of revenue, an
increase of about 7.5% in comparison with 2011. Although Compañia Cervecera Canarias
also had to allow more of its customers to delay their payments in order to expand its
business, the company managed to keep the increase over the same period only modest
(1.3%) (graph 30).

Graph 30: Compañia Cervecera Canarias’s trade receivables and payables in relation to

20%
15%
10%
5%
0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Trade receivables Trade payables
revenue
(Source: Compañia Cervecera Canarias’s
annual reports)

By contrast, Compañia Cervecera Canarias had increased its investment in its property,
plant, and equipment as well as operating intangible assets such as software over the same
period. While they stood at 48.3% of revenue in 2011, the figure had risen to 55.8% in 2019.
These assets experienced a sudden jump in 2017 because of the significant acquisition of
Basil Kirin that the company made during the year. The constant increase in the long-term
operating assets outweighs the company’s improvement in its working capital, leading to a
 135

fair increase in the total invested

 136

capital over the period 2011 – 2019. The company’s ratio of invested capital without the
goodwill and acquired intangibles to revenue had reached 51.6% in 2019, compared to about
48.8% in 2011. Put it another way, Compañia Cervecera Canarias’s capital turnover hovered
around two over the period, meaning that for every euro of capital invested in the underlying
business, the company managed to generate 2 euros of revenue.

With all the pieces put together, the company’s ROIC without the goodwill and acquired
intangible assets was quite stable over the period, ranging from 22% to 26%. However, when
goodwill and acquired intangible assets come into the calculation, the company’s ROIC
drops dramatically, hovering at about only 8%. It may be unreasonable to assert that the
fairly flat low ROIC with goodwill and acquired intangible assets indicates that most of the
value stemming from the acquisitions of target companies (market shares, revenue growth,
synergies, cost efficiency, etc.) went to the sellers’ pockets in the form of high premium
prices that Compañia Cervecera Canarias was willing to pay. In fact, the value that can be
generated by these assets may take time to realize, and it may take several years for
Compañia Cervecera Canarias to see the improvement in its ROIC with goodwill and
acquired intangibles.

Graph 31: Compañia Cervecera Canarias’s ROIC with and without the goodwill
and acquired intangible assets

30%

20%

10%

0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
After-tax ROIC, excluding goowill and acquired intangibles
After-tax ROIC, including goowill and acquired intangibles

5.3.1.2. Compañia Cervecera Canarias’s ROIC in comparison with peers

To put Compañia Cervecera Canarias’s financial performance into a better perspective, its
ROIC without the goodwill and acquired intangible assets is compared to that of its peers. As
mentioned in the above section, ROIC without the goodwill and acquired intangibles is not
affected by the arbitrary price premiums paid in acquisitions and thus can be perceived as
comparable among
 137

different companies. Graph 32 illustrates ROIC without the goodwill and acquired
intangibles for Compañia Cervecera Canarias and its main competitors over the period 2011
– 2019.

The best performer in the pack is AB InBev, whose ROIC ranged from 70% to 80%, an
impressive achievement. Although its ROIC has dropped in the last three years, it still well
outperformed its peers. Carlsberg, on the other hand, had constantly improved its ROIC
substantially over the last five years, standing at only 27% in 2011 and reaching 59% in
2019. By contrast, Compañia Cervecera Canarias and Molson Coors tracked one another
quite closely, with Molson Coors slightly performing better, especially the last three years. It
is striking that although Compañia Cervecera Canarias is the second-largest beer company
by sales volume, it has been constantly outperformed by its peers with regard to ROIC, with
its ROIC being less than one-third of that of AB InBev. The ROIC formula outlined
previously indicates that this inferiority may be due to either its worse profit margin or
higher invested capital or both of them. An investigation detailed below will try to get to the
bottom of Compañia Cervecera Canarias’s inferior ROIC.

Graph 32: ROIC without goodwill and acquired intangibles for Compañia Cervecera

100%
80%
60%
40%
20%
0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Compañia Cervecera Carlsberg AB InBev MolsonCoors
Canarias
Canarias and its peers

 Profit margin

Graph 33: Profit margins of Compañia Cervecera Canarias and its peers over the period
40%

30%

20%

10%

0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Compañi Carlsberg AB InBev MolsonCoors
a
2011 – 2019
 138

Graph 33 shows profit margins for Compañia Cervecera Canarias and its peers over the
period 2011 – 2019. Again, AB InBev is far ahead of its peers, with its profit margin
hovering at around 30%, which is approximately double that of others. Furthermore,
although Compañia Cervecera Canarias did not substantially outperform Carlsberg and
Molson Coors in this regard, it did outperform them. However, its ROIC is outperformed by
these companies. This indicates that the main force that drove down its ROIC must be its
relatively higher invested capital in comparison with its peers.

 Capital turnover

Graph 34 indicates that capital turnover that Compañia Cervecera Canarias could achieve
was too low compared to its peers. It hovered at around 2, meaning that for every unit of
capital invested, the company managed to generate two units of revenue. By contrast, the
figure for AB InBev ranged from 3 to 3.6, and Molson Coors managed to increase its capital
turnover to nearly 3 in the last three years. The special case is Carlsberg, whose capital
turnover constantly and substantially increased over the period. While its capital turnover
was only 2.5 in 2011, it had reached 5.1 in 2019, an impressive improvement. Put it another
way, compared to its peers, Compañia Cervecera Canarias had to invest more heavily in
order to manage to generate one unit of revenue.

Graph 34: Capital turnover of Compañia Cervecera Canarias and its peers over the period

6
5
4
3
2
1
0
2011 2012 2013 2014 2015 2016 2017 2018 2019
Compañi Carlsberg AB InBev MolsonCoors
a
2011 – 2019

A further investigation into invested capital reveals areas where Compañia Cervecera
Canarias was outperformed by its peers. Exhibit 26 shows that Compañia Cervecera
Canarias had to invest relatively more in both operating working capital and non-current
operating assets such as property, plant, and equipment and software. When it comes to
working capital, Compañia Cervecera Canarias was outperformed to a great extent,
especially by AB InBev and Carlsberg. Relatively, Compañia Cervecera Canarias had to
spend around four times more for its working capital in comparison with these two
 139

companies. The main reason for this inferiority is that the company had to allow relatively
much more postponed payments for
 140

its customers, while only managing to achieve much less delayed payments with suppliers.
For instance, in 2019, while Compañia Cervecera Canarias’s account receivables accounted
for 11.5% of revenue, the figure for AB InBev and Carlsberg was 8.1% and 7.2%,
respectively. Similarly, also in 2019, while Compañia Cervecera Canarias’s account
payables were equal to 18.2% of revenue, the figure for AB InBev and Carlsberg was 30.9%
and 25.3%, respectively.

With regard to non-current operating assets, Compañia Cervecera Canarias also had to
constantly invest relatively more. Although the performance gap between Compañia
Cervecera Canarias and AB InBev in this regard shortened over the period 2011 – 2019
(reducing from a difference of 8.6% in 2011 to only 1.8% in 2019), the gap between the
company and Carlsberg and Molson Coors widened. Carlsberg has done a fantastic job in
reducing its investment in property, plant, and equipment while keeping the normal
production cycle running. It had substantially reduced its investment from 51.7% of revenue
in 2011 to only 42.1% in 2019. This dramatic improvement is one of the main reasons
behind the constant and rapid increase in its ROIC.

Exhibit 26: Invested capital relative to revenue and its breakdown

% 2011 2012 2013 2014 2015 2016 2017 2018 2019
Invested capital/Revenue
Compañia Cervecera Canarias 48.8% 47.8% 47.4% 47.2% 47.1% 48.2% 51.1% 53.7% 51.6%
Carlsberg 39.7% 37.6% 38.7% 35.8% 29.4% 26.8% 25.1% 20.9% 19.6%
AB InBev 30.2% 27.8% 29.5% 30.0% 29.2% 29.6% 28.8% 33.8% 34.5%
MolsonCoors 38.0% 45.2% 47.1% 43.1% 42.6% 53.8% 36.2% 37.5% 37.5%

Operating working capital/Revenue

Compañia Cervecera -1.9% -2.8% -3.0% -3.2% -3.6% -4.2% -4.1% -4.8% -5.3%
Canarias
Carlsberg -12.0% -12.1% -13.8% -15.9% -18.1% -19.2% -19.4% -21.1% -22.5%
AB InBev -11.7% -14.3% -15.4% -15.7% -18.0% -22.1% -20.2% -20.0% -20.6%
MolsonCoors -2.0% 1.5% 0.0% -2.4% -4.9% -8.7% -5.5% -5.6% -5.8%

Non-current operating assets/Revenue

Compañia Cervecera 50.6% 50.6% 50.4% 50.4% 50.7% 52.3% 55.2% 58.5% 56.9%
Canarias
Carlsberg 51.7% 49.7% 52.5% 51.7% 47.5% 46.0% 44.5% 42.0% 42.1%
AB InBev 42.0% 42.1% 44.9% 45.7% 47.3% 51.7% 49.0% 53.8% 55.1%
MolsonCoors 40.1% 43.7% 47.1% 45.4% 47.5% 62.4% 41.7% 43.1% 43.3%

The fact that Compañia Cervecera Canarias was inferior to its peers with regard to ROIC
indicates that there is plenty of room for improvement. Specifically, there is great potential
for the company to substantially improve its profit margin, as shown possible by AB InBev.
Moreover, the company can also streamline its invested capital to a large and meaningful
extent as similar to how Carlsberg has managed to achieve greater efficiency over the last
ten years.
 141

5.3.2. Revenue growth analysis

5.3.2.1. Compañia Cervecera Canarias’s revenue growth rate analysis

Compañia Cervecera Canarias’s revenue growth rate fluctuated quite strongly over the last
ten years. Over the period 2011 – 2019, the company experienced the strongest growth in
2012, with 7.4% and the weakest in 2014, with growth being nearly 0%. Over the last four
years, Compañia Cervecera Canarias enjoyed strong growths, with the figure for 2019 being
6.6%. Nevertheless, the nominal revenue growth rate is neither a reliable measurement of the
company’s financial performance nor a reliable building block for making reasonable
forecasts. This is due to the fact the revenue growth rate also incorporates the effects of
currency movements and new acquisitions/divestitures.

Graph 35: Compañia Cervecera Canarias’s revenue growth rate analysis

8%
6%
4%
2%
0%
-2%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Organic revenue growth rate Revenue growth rate

The exchange rates at which Compañia Cervecera Canarias translates the results of its
subsidiaries into the currency presentation fluctuate, sometimes wildly, on an annual basis.
These unpredictable movements in currencies artificially increase or decrease the revenues
reported by the company even though these increases or decreases did not stem from the
underlying operation that has improved or deteriorated. Thus, failing to recognize this type
of effect is likely to lead to overstate or understate Compañia Cervecera Canarias’s real
revenue growth rates. For instance, adverse currency movements had considerable negative
impacts in 2016, 2017, and 2018, reducing the revenues reported by the company by 5.6%,
4%, and 4.5%, respectively (Exhibit 27).

Another significant effect embedded in revenue growth rates comes from acquisitions or
divestitures made by the company. The larger the size of these deals, the stronger the effect.
When Compañia Cervecera Canarias successfully acquires a target company, according to
the accounting rules, it starts to consolidate and incorporate the target company’s financial
statements into its own
 142

from the moment the deal was successfully closed. Thus, at the end of the year in which the
acquisition took place, part of the revenue reported by Compañia Cervecera Canarias will
also include the portion contributed by the target company. In essence, this increase in
revenue is merely driven by buying another company’s revenue instead of by improvement
in the performance of the underlying business.

Exhibit 27: Compañia Cervecera Canarias’s revenue growth rate analysis

in million hectolitre or % 2011 2012 2013 2014 2015 2016 2017 2018 2019
Beer volum e
1 164.6 171.7 178.3 181.3 188.3 200.1 218.0 233.8 241.4
Non-beer volume 20.5 20.5 18.9 18.5 19.1 19.5 24.9 27.4 26.4
Third-party volume 9.8 9.8 9.4 8.5 8.6 8.3 8.7 8.6 8.4
Consolidated volume (in million hectolitre) 194.9 202.0 206.6 208.3 216.0 227.9 251.6 269.8 276.2
Volume growth 12.8% 3.6% 2.3% 0.8% 3.7% 5.5% 10.4% 7.2% 2.4%
Net effect of acquisition/divestiture 10.7% 2.1% 5.8% -1.0% 1.5% 2.9% 7.5% 3.2% 0.1%
Organic volume growth 2.1% 1.5% -3.5% 1.8% 2.2% 2.6% 2.9% 4.0% 2.3%
Revenue per hectolitre's growth rate 1.5% 2.4% 2.6% 1.2% 1.3% 2.2% 2.1% 2.1% 3.3%
Organic revenue growth rate 3.6% 3.9% -0.9% 3.0% 3.5% 4.8% 5.0% 6.1% 5.6%
Effect of currency movement -2.2% 1.5% -2.1% -1.6% 2.5% -5.6% -4.0% -4.5% 1.4%
Effect of acquisition/divestiture 4.7% 2.0% 7.5% -1.1% 0.5% 2.2% 4.3% 2.5% -0.4%
Revenue growth rate 6.1% 7.4% 4.5% 0.3% 6.5% 1.4% 5.3% 4.1% 6.6%

(Source: Compañia Cervecera Canarias’s full-year

result reports)

Furthermore, the effect of acquisitions impacts not only the revenue reported in the year in
which the deal occurred but also the revenue reported in the following year. This is because
the revenue reported in the year in which the deal occurred included only a portion of the
whole-year revenue generated by the target company (revenue generated from the moment
when the deal was successfully closed to the end of the fiscal year when the financial
statements were prepared), while the revenue reported in the following year incorporates the
whole annual sales generated by the target company. This leads to an artificial increase in the
revenue reported in the following year. Again, this increase in revenue has nothing to do
with improvement in the underlying performance, but instead merely with the accounting
rules. Similar arguments can be made for Compañia Cervecera Canarias making divestitures.
The only difference is that in the case of divestitures, the effect is the opposite: decreasing
the consolidated revenue reported.

Failing to account for this effect brought by acquisitions or divestitures is likely to lead to
overstate or understate Compañia Cervecera Canarias’s real revenue growth rates. For
instance, in 2012, Compañia Cervecera Canarias made an acquisition of Asia Pacific
Investment (API) and Asia Pacific Breweries (APB). The deal was signed on 17 August
2012 from which the financial statements of API and APB were consolidated into those of
Compañia Cervecera Canarias. As a result, the acquisition contributed a 2% increase in
revenue reported by Compañia Cervecera Canarias at the end of 2012. However, the impact
was felt most strongly
 143

in the following year (2013) when the consolidated revenue included the whole-year sales
generated by API and APB. In fact, the acquisition effect led to an increase of 7.5% of the
revenue reported.

The effects of currency movements and acquisitions/divestitures need to be stripped out of

revenue growth rates in order to derive Compañia Cervecera Canarias’s organic revenue
growth. Organic revenue growth rates reflect the underlying performance of the company
better and can be used as a building block to make reliable forecasts of its future financial
performance. Exhibit 27 shows how Compañia Cervecera Canarias’s organic growth is
determined by its reported revenue growth.

When putting together in graph 35, organic growth was much less volatile and experienced
an upward trend since 2014, compared to the fairly wild fluctuation of revenue growth rates
as reported. In 2016, Compañia Cervecera Canarias enjoyed organic growth of 4.8%, while
revenue growth, as reported, was only 1.4%. This is mainly due to the adverse currency
effect that misleadingly reduced the revenue reported by 5.6%. The same pattern can be
observed for 2018 in which the organic growth was 6.1%, while reported revenue growth
was just 4.1%.

In order to better understand the main drivers of organic growth, it is broken down into
organic volume growth and revenue per hectoliter growth rate, as shown in exhibit 27 and
graph 36. Organic volume growth is the growth in Compañia Cervecera Canarias’s annual
sales volume with any effects of acquisitions or divestitures being stripped out. The impact
of acquisitions on sales volume growth, as reported, can be tremendous. For instance, in
2011, the company reported volume growth of 12.8%. However, Compañia Cervecera
Canarias’s acquisitions of the Sona brewery group, Bedele brewery, and Harar brewery in
the same year contributed a 10.7% increase, leaving the organic growth being only 2.1%.
Similarly, although Compañia Cervecera Canarias reported an increase of 3.8% in sales
volume in 2013, its organic volume growth was actually negative 3.5%. What contributed to
the reported increase was the number of acquisitions the company made during the year.

Over the last ten year, Compañia Cervecera Canarias managed to maintain the ability to
increase its price per hectoliter. In 2013, the negative organic growth of volume was
substantially offset by an increase in the company’s price per hectoliter. Furthermore, in
2019, revenue per hectoliter growth accounted for almost 60% of the organic revenue
growth. This ability to maintain its pricing power may be attributable to the company’s
ownership of a large number of well- recognized brands.
 144

Graph 36: Breakdown of Compañia Cervecera Canarias’s organic revenue growth rate
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Organic volume growth Revenue per hectolitre growth rate

(Source: Compañia Cervecera Canarias’s full-year

result reports)

5.3.2.2. Compañia Cervecera Canarias’s revenue growth rate in comparison with peers

Over the period 2010 – 2019, Compañia Cervecera Canarias’s compound annual growth rate
of revenue as reported stood at around 5%, while the figure for AB InBev and Carlsberg was
about 4% and 1%, respectively (Graph 37). For all three companies, organic revenue growth
rate (CAGR) was the component that contributed the most to the growth. Specifically, while
Compañia Cervecera Canarias enjoyed annual organic growth of 4%, AB InBev and
Carlsberg saw a growth of 5% and 3%, respectively. Furthermore, acquisitions, currency
movements and other effects such as changes in accounting policy led to an annual decrease
of 1% and 2% of revenue reported for AB InBev and Carlsberg, respectively, while those
effects added an increase of approximately 1% to Compañia Cervecera Canarias’s reported
revenue.

Graph 37: Compound annual growth rate (CAGR) of reported revenue and its
breakdown over the period 2010 – 2019
6%
5%
1%
4%
3%
2% 5%
4% 3%
1%
0% -1%
-1% -2%
-2%
-3%
Compañia Cervecera AB InBev Carlsberg
Canarias
Acquisition, currency and other effects
Organic revenue growth rate
 145

A further investigation into the breakdown of organic revenue growth reveals interesting
insights into Compañia Cervecera Canarias’s organic volume growth and revenue per
hectoliter growth in comparisons with its peers. Specifically, with regard to organic volume
growth, Compañia Cervecera Canarias fairly consistently outperformed AB InBev and
Carlsberg over the period 2010 – 2019. While AB InBev and Carlsberg experienced near-
zero or negative growth rates over the period (with two exceptions for Carlsberg in 2011 and
2018 in which it enjoyed a growth of 2% and 4.8% respectively), Compañia Cervecera
Canarias enjoyed above-2% growth rates in most of the years. The only year in which the
company was outperformed by its peers was 2013 when its growth rate decreased to negative
3.5%, compared to only negative 2% and 1% for AB InBev and Carlsberg, respectively.

Graph 38: Organic sales volume growth rates over the period 2010 – 2019
6%
4%
2%
0%
-2%
-4%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Compañi AB InBev Carlsberg
a

By contrast, when it comes to revenue per hectoliter growth rate, Compañia Cervecera
Canarias was beaten by its peers in almost every year over the period 2010 – 2019. The best
performer is AB InBev, which managed to raise its price per hectoliter fruitfully in the first
half of the period, ranging from 5% to 7%. However, its pricing power decreased
considerably over the last five years, falling from nearly 7% growth in 2015 to only over 3%
in 2019. Although Carlsberg did not perform as well as AB InBev in this regard, it did a
fairly good job of raising its revenue per hectoliter. Its growth rate was roughly in the range
of 3% to 5%. By contrast, Compañia Cervecera Canarias seemed to find it quite difficult to
increase its price per hectoliter. Over the same period, the company could only raise its
prices modestly at around 2% annually. The only noticeable growth was in 2019 when it
managed to raise its revenue per hectoliter by 3.3%.
 146

Graph 39: Revenue per hectoliter growth rates over the period 2010 – 2019
8%

6%

4%

2%

0%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Compañi AB InBev Carlsberg
a

5.3.3. Summary of historical performance analysis

Exhibit 28 illustrates the most important insights gained from the historical performance
analysis of Compañia Cervecera Canarias.

Exhibit 28: Summary of historical performance analysis

% 2011 2012 2013 2014 2015 2016 2017 2018 2019
Profit margin
AB InBev 31.0% 31.0% 30.8% 30.1% 29.7% 28.0% 30.8% 31.4% 30.5%
Carlsberg 14.5% 14.6% 14.6% 13.2% 12.2% 12.4% 14.3% 14.7% 15.1%
Compañia Cervecera Canarias 14.1% 13.9% 15.1% 15.9% 15.3% 16.6% 17.2% 16.5% 16.5%
Molson Coors 14.3% 13.4% 12.2% 12.9% 12.1% 10.9% 16.9% 16.3% 16.5%

Capital turnover (times)

AB InBev 3.3 3.6 3.4 3.3 3.4 3.4 3.5 3.0 2.9
Carlsberg 2.5 2.7 2.6 2.8 3.4 3.7 4.0 4.8 5.1
Compañia Cervecera Canarias 2.1 2.1 2.1 2.1 2.2 2.1 2.0 1.9 1.9
Molson Coors 2.6 2.2 2.1 2.3 2.3 1.9 2.8 2.7 2.7

Return on invested capital

(ROIC),* excluding goodwill and
acquired 75.7% 82.1% 77.9% 74.1% 78.7% 75.5% 81.2% 71.8% 68.2%
AB InBev
Carlsberg 27.1% 29.1% 29.6% 25.7% 31.8% 37.0% 41.7% 57.4% 58.8%
Compañia Cervecera Canarias 21.5% 21.6% 22.9% 24.9% 24.0% 26.2% 25.5% 23.0% 23.7%
Molson Coors 36.2% 27.1% 25.6% 26.7% 24.7% 14.7% 35.1% 36.5% 35.8%
*
Average invested capitals are used

Organic growth rate of sales volume

AB InBev -0.2% 0.3% -2.0% 0.6% -0.6% -2.0% 0.2% 0.3% 1.1%
Carlsberg 2.0% -2.0% -1.0% -2.0% -3.0% -2.0% -2.0% 4.8% 0.1%
Compañia Cervecera Canarias 2.1% 1.5% -3.5% 1.8% 2.2% 2.6% 2.9% 4.0% 2.3%

Growth rate of revenue per hectolitre

AB InBev 4.8% 6.9% 5.3% 5.3% 6.8% 4.4% 4.8% 4.3% 3.2%
Carlsberg 3.8% 5.0% 2.0% 4.2% 5.3% 3.8% 3.0% 1.7% 3.1%
Compañia Cervecera Canarias 1.5% 2.4% 2.6% 1.2% 1.3% 2.2% 2.1% 2.1% 3.3%

Organic growth rate of revenue

AB InBev 4.6% 7.2% 3.3% 5.9% 6.2% 2.4% 5.0% 4.6% 4.3%
Carlsberg 5.8% 3.0% 1.0% 2.2% 2.3% 1.8% 1.0% 6.5% 3.2%
Compañia Cervecera Canarias 3.6% 3.9% -0.9% 3.0% 3.5% 4.8% 5.0% 6.1% 5.6%
 147

6. Compañia Cervecera Canarias’s Performance Forcasting

1. Strategic Analysis + 2. Financial Statement Analysis

3.

Performance Forecasting
+
5. Absolute Valuation + 6. Relative Valuation

7. Recommended Investing Actions

As outlined in chapter 3, the value of a company is determined based on its ability to

generate cash flows in the future. All else being equal, the greater the ability, the more
valuable the company is to investors. Built upon the strategic and historical financial
performance analysis outlined in chapter 4 and 5, this chapter aims to estimate Compañia
Cervecera Canarias’s core operation’s future performance in the form of free cash flows and
economic profits. The results in this chapter will be used as the vital foundation for the
determination of the company’s value and, ultimately, its intrinsic share price in chapter 8.
The chapter begins with the framework for forecasting where major guidelines are presented
and, subsequently, moves on to the forecast of Compañia Cervecera Canarias’s revenue and
its future financial statements, namely income statement and financial position. It ends with
the forecasts of free cash flows and economic profits that the company is predicted to
generate, which is the ultimate goal of this chapter.

6.1. Framework for forecasting

6.1.1. Length and details of forecasting

One of the most important aspects with regard to forecasting is to appropriately divide the
future into different forecasting periods in which the magnitude of the company’s key value
 148

drivers is expected to vary. Generally, there are two types of forecasting periods: an explicit
period and a continuing-value period. By definition, the company’s key value drivers are
expected to fluctuate in the explicit forecast period, while they are viewed as steady in the
continuing-value forecast period. Thus, the explicit forecast period has to be long enough for
the company to reach its steady stage. The company is considered to reach its steady stage if
a) it grows at a constant rate by reinvesting a constant proportion of its operating profits into
the business each year and b) it earns a constant rate of return on both existing capital and
new capital invested (Koller et al., 2015). For instance, while the length of the explicit
forecast period for companies that are new to their industries or whose industries are still
young may be considerably longer in order for these companies to reach their steady stages,
that of companies which are mature is relatively short since they have already reached or will
soon reach steadiness.

Another important aspect is how detailed the forecasts should be in each forecast period.
While forecasting each aspect of the company for the next five years may be feasible and
reliable, it may be extremely hard and imprecise to forecast them for the next 10 or 20 years.
When the explicit forecast period is considerably long, Koller et al. (2015) suggest breaking
it into short- term and long-term periods. In the short-term forecast period, which usually
lasts for 5 – 7 years, the company’s complete income statements and financial position
should be forecasted in detail, with as many links to real variables such as sales volume,
price, cost per unit, as possible. By contrast, only such important variables as revenue
growth, profit margins, return on invested capital, and capital turnover should be focused on
in the long-term forecast period. This approach not only helps simplify intermediate forecast
but also forces the focus to shift to the business’s long-term fundamental economics, rather
than each individual line items. Koller et al., 2015 argues that “You can do much more to
improve your valuation through a careful analysis of whether your forecast of future return
on invested capital (ROIC) is consistent with the company’s ability to compete than by
precisely (but perhaps inaccurately) forecasting accounts receivable ten years out.”

Based on the guidelines above, this paper divides the future forecast for Compañia Cervecera
Canarias into short- term, long- term, and continuing-value periods. In the short-term
forecast period (2020 – 2027), the impact of the coronavirus, attractive growths in emerging
markets and how Compañia Cervecera Canarias is expected to perform in its markets will be
shed light on by forecasting the company’s performance in the next eight years, including
detailed forecasts of its income statement and financial position. By contrast, only key
variables including revenue growth,
 149

profit margin, return on invested capital and capital turnover are forecasted in the long-term
period (2028 – 2037) in order to capture changes in fundamental economics during the
period, such as lower growths in emerging markets and the relatively stable market shares of
Compañia Cervecera Canarias in its markets. Finally, the company is expected to reach its
steady stage after the long-term period, beginning in 2038.

6.1.2. Guidelines for forecasting revenue

There are two approaches to revenue forecasting: top-down and bottom-up (Koller et al.,
2015). In the top-down approach, sales of the entire market in which the company operates
are first forecasted. Then, the forecast of the company’s market share is carried out. Finally,
the company’s future revenue is the direct result of the two forecasts. This approach is most
suitable for companies that are in mature industries since the development of the industries is
relatively predictable, and there are numerous available forecasts from industry experts. In
comparison, the bottom-up approach looks at the projections of the customer demand for the
company’s products. The company forecasts future demand of each of its customers and then
add them up to derive forecasts of its future revenue. On top of it, the company has to also
forecast new demand from new customers and lost demand from its existing customer base.
This approach works best for companies in industries that are relatively new.

Regardless of the method, forecasting revenues over long time periods may be inaccurate
due to possible disruptive changes in customer preferences, technologies, and corporate
strategies in the industry. Therefore, a constant re-evaluation of whether the current forecast
is still consistent with the industry dynamics and the company’s competitive position should
be periodically carried out (Koller et al, 2015).

In this paper, Compañia Cervecera Canarias’s future revenue will be forecasted based on the
top-down approach for at least three reasons. Firstly, the beer industry is relatively old and
mature and not expected to experience any major shocks in the future. Secondly, there are
various industry forecasts from experts that are available and can be used to predict how the
beer industry will behave in the future. Thirdly, Compañia Cervecera Canarias accounts
for considerable shares of the markets where it operates, making the forecast much
easier than the bottom-up approach.
 150

6.1.3. Guidelines for forecasting financial statements

As outlined previously, the company’s financial statements should be forecasted in detail in

the short-term part of the explicit forecast period. The purpose of this practice is to help
produce reliable insights into how the company’s financial statements may look like in the
near future (e.g., 5 – 7 years), which in turn can be used as the foundation to better forecast
its performance in the long-term part and value-continuing forecast period. Usually, the
company’s income statement and financial position are the most important information that
needs to be forecasted.

In order to forecast each item in the company’s income statement or financial position, a
three- step process is used. The first step involves the identification of the economic
relationship that drives the item being forecasted in the form of a ratio. Although most items
are economically tied to revenue, some items have economic relationships with certain assets
or liabilities. For instance, while account receivable item links to revenue (account
receivable to revenue ratio), it is more appropriate to link depreciation and amortization to
“Property, Plant and Equipment” and intangible assets. Once the economic-relationship ratio
is identified, the next step involves the forecast of this ratio in the future. Finally, in the last
step, this forecasted ratio is applied to the forecast of the item’s driver to derive the forecast
of the item. For instance, the forecast of the company’s account receivable in a given year
can be obtained by multiplying the forecasted account receivable-to-revenue ratio by the
company’s forecasted revenue for the year. In the following sub-sections, some typical
economic-relationship ratios will be examined for different line items in both the income
statement and financial position statement.

6.1.3.1. Guidelines for forecasting the income statement

Table 3 illustrates the most common items in the income statement and their forecast drivers.
Since the cost of goods sold, including raw materials, transport expenses, repair and
maintenance expenses, and selling, general and administrative costs, such as marketing,
research and development, and employee expenses, are variable costs and tend to fluctuate
with the company’s revenue, their forecast driver should be revenue. By contrast,
depreciation is based on the company’s prior-year property, plant, and equipment (PP&E).
Ideally, gross PP&E should be used to forecast depreciation because, according to
accounting rules, depreciation is just the practice of allocating the purchase cost of PP&E.
Nevertheless, given the complexity of accounting, the usage of gross PP&E may lead to
an overestimate of
 151

depreciation, specifically when assets that have already fully depreciated but still show up in
the gross PP&E accounting figures. Thus, depreciation-to-net PP&E can be used as a proxy
to circumvent this problem.

Table 3: Typical forecast drivers for various items in the income statement
Typical forecast
Type Line item Typical forecast ration
driver
Cost of goods sold
Revenue COGS/Revenue
(COGS)
Operating Selling, general and
administrative Revenue SG&A/Revenue
(SG&A)

Depreciation Prior-year PP&E Depreciation/Net PP&Et-1

Non-operating income/Non-
Appropriate non-
Non-operating income operating asset or growth in
operating asset
non-operating income
Non- Prior-year total
operating Interest expense Interest expenset/Total debtt-1
debt
Prior-year excess
Interest income Interest income/Excess casht-1
cash

(Source: Koller et al., 2015)

Moreover, non-operating incomes and expenses should also be forecasted. However, since
these line items do not show up in the calculation of NOPLAT and, consequently, do not run
through free cash flows, their forecasts do not affect the valuation of the company’s core
operation. Instead, their forecasts serve two purposes. Firstly, they help managers grasp all
possible aspects of the company’s operation in the near future and plan the strategies and
operation for the company accordingly. Secondly, together with the forecast of the financial
position, they can work as a check on whether any mistakes have been made during the
forecasting process for operating line items, which would not have been spotted if only
operating items were forecasted.

The most common non-operating items are non-operating incomes and interest expenses and
incomes. Non-operating incomes are generated by non-operating assets such as non-
consolidated subsidiaries, customer financing, and other equity investment. Thus, the
appropriate forecast drivers for them are their respective non-operating assets. By contrast,
interest expenses (incomes) should be tied to the liabilities (assets) that give rise to them.
 152

6.1.3.2. Guidelines for forecasting the financial position

Table 4 illustrates the most common items in the financial position statement and their
forecast drivers. Most of the items that make up operating working capital, such as account
receivable and accrued expenses, tend to fluctuate with the company’s revenue, indicating
that their appropriate forecast driver should be revenue. The two exceptions are inventories
and accounts payable. Since they are tied to input prices, their forecast driver should be the
company’s cost of goods sold (COGS). However, when input prices do not deviate
significantly from the company’s cost per unit, revenue can be used as their forecast driver
as similar to other components of working capital (Koller et al., 2015).

Table 4: Typical forecast drivers for the financial position statement

Typical forecast
Type Line item Typical forecast ration
driver

Accounts receivable Revenue Accounts receivable/Revenue

Inventories Cost of goods sold Inventories/COGS

Operating Accounts payable Cost of goods sold Accounts payable/ COGS

Accrued expenses Revenue Accrued expenses/Revenue

Net PP&E Revenue Net PP&E/Revenue

Growth in non-operating
Non-operating assets None
assets
Pension assets or
Non- None Trend toward zero
liabilities
Operating
Change in operating deferred
Operating taxes or
taxes/Operating taxes, or
Deferred taxes corresponding
deferred taxes/corresponding
balance sheet item
balance sheet item
(Source: Koller et al., 2015)

When a company is enjoying its growth, it has to invest a certain amount of capital in its
property, plant, and equipment in order to maintain and expand its businesses. Thus, the
most appropriate forecast driver for net PP&E year should be the company’s revenue. Koller
et al., 2015 argues that, over time, the ratio of net PP&E for a given year to revenue
generated in that year is quite stable. Moreover, when net PP&E is forecasted based on
revenue, net capital
 153

expenditure should also be calculated based on the forecast in order to ensure the soundness
of the forecast. For instance, forecasted net PP&E may result in negative capital expenditure
for companies with low growth rates and fairly good improvements in capital efficiency,
which implies asset sales. Although this scenario could be possible, check on whether the
situation is likely to occur needs to be carried out.

Similar to the forecast of the income statement, non-operating assets and liabilities should
also be forecasted in the financial position statement. Since these assets and liabilities do not
run through free cash flows, their forecasts do not have any effect on the valuation of the
company’s core operation. Instead, their values are assessed separately at the valuation date
and added to the estimated value of the core operation to derive the total fair value of the
company as a whole. Nevertheless, the forecasts of them are necessary for the sense that a)
they help managers better understand and plan the company’s operation in the near future,
and
b) they work as a check on whether any mistakes haven occurred during the forecasting
process for operating assets and liabilities. Most of non-operating assets and liabilities do not
have their corresponding forecasts drivers. Instead, their historical growth rates work as the
foundation for estimating their growths into the future.

6.2. Compañia Cervecera Canarias’s revenue forecasting

As outlined before, the top-down approach is used in this paper to forecast Compañia
Cervecera Canarias’s revenue in the future. Specifically, in the following sub-sections, the
sales volume of the beer industry will be first forecasted, followed by the forecast of
Compañia Cervecera Canarias’s market shares in regions where it has main operations. Once
those two inputs are already in place, it is ready to finally make forecasts of the company’s
revenue in the future.

6.2.1. Beer industry’s sales volume forecasting

6.2.1.1. Compañia Cervecera Canarias’s definition of regional markets

Being one of the largest beer companies in the world, Compañia Cervecera Canarias has its
products served globally. In its annual reports, the company identifies four different regions
where it operates, namely a) Africa, the Middle East and Eastern Europe; b) Americas; c)
the Asia Pacific; and
d) Europe. Nevertheless, a further investigation reveals that in each aforementioned region,
the company has main operations through its own subsidiaries and breweries in only a
 154

certain number of countries, and the rest of the countries (markets) are served by its export
or joint
 155

ventures activities. It is the markets where Compañia Cervecera Canarias has main
operations and competes directly that generate the majority of the company’s consolidated
revenue. By contrast, according to accounting rules, revenue generated by its joint ventures
are not recognized in the company’s consolidated results, but instead recognized with the
joint ventures, with appropriate portions of their net incomes are shown on Compañia
Cervecera Canarias’s income statement. Thus, it is more relevant to focus on the behaviors
of the markets where the company has main operations instead of those of the entire regions
as defined by geography. Table 5 illustrates the countries where Compañia Cervecera
Canarias has the main operation as of December 31 st, 2019. In the following sections, the
terms “Africa, Middle East, and Eastern Europe,” “Americas,” “Asia Pacific” and “Europe”
only refer to groups of countries shown in the table.

Table 5: Markets where Compañia Cervecera Canarias has main operations as of December
31st, 2019

Africa, the Middle

East, and Eastern Americas Asia Pacific Europe
Europe
Algeria Argentina Cambodia Central
Democratic Republic Brazil Indonesia Eastern
of Congo
Canada Laos Southern
Egypt
Costa Rica Malaysia Western
Ethiopia
Mexico Myanmar
Nigeria
Panama New Caledonia
Guinea
United States New Zealand
Mozambique
Papua New Guinea
Republic of Congo
Philippines
South Africa
Singapore
Tanzania
Solomon Island
Zambia
South Korea
Zimbabwe
Sri Lanka
Belarus
Taiwan
Russia
Timor Leste
Vietnam

(Source: Compañia Cervecera Canarias’s

annual reports)
 156

6.2.1.2. Historical growth rate analysis of sales volume

Graph 40 illustrates the growth rates of sales volume of the regional beer markets where
Compañia Cervecera Canarias operates over the period 2011 – 2019. The company has
exposure to both fast- growing and saturated markets. Although the growth rate of Americas
steadily decreased from the level of about 1.5% in 2011 to negative 0.7% in 2017, caused by
the stagnation in the three largest markets in the region, namely the United States, Canada,
and Brazil, it managed to bounce back to just above 0% in 2019, mainly driven by stable
growth (roughly 2.5% annually) of the Mexican beer market. Mexico has increasingly grown
in importance in the region, accounting for 16.5% of the total sales volume in the region in
2019 compared to its share of 13.6% in 2011. This is due to the fact that while the largest
markets have been on a steady decline, it has constantly been growing over the same period.
By contrast, Europe’s growth rate hovered at around 0%, with the last three years enjoying
stable growth of roughly 0.5%.

Graph 40: Sales volume growth rate in different regions where Compañia Cervecera

8%
6%
4%
2%
0%
-2%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Europe Americas Asia Pacific Africa, Middle East and Eastern Europe

Canarias has operations

(Source: Statista, 2020a)

In comparison, Asia Pacific enjoyed relatively strong growth over the same period. Its
growth increased impressively to 6% in 2012, but, ever since, has been steadily slowing
down, reaching around 2.2% in 2019. Vietnam has been the main growth engine for the
region. The country accounted for about 36% of sales volume in the region in 2010 and
steadily increased its share to 43% in 2019. Its annual growth rate (CAGR) of sales volume
has been stable at about 6% over the period 2010 – 2019, an impressive growth compared to
how saturated beer markets in developed countries have been. The two other largest markets
in the region are the Philippines and South Korea, which together accounted for 34% of the
regional sales volume in 2019. While the South Korean market has been stagnant over
the last ten years, the
 157

Philippines’ annual growth rate (CAGR) has been about 2% over the same period. Together,
Vietnam and the Philippines have been the driving forces behind the region’s relatively
strong growth over the last ten years.

At first glance, Africa, the Middle East, and Eastern Europe (AMEEE) region seem to share
a similar pattern with the Americas, implying that the region may already have been mature.
However, a further investigation into the break-down of the region reveals valuable insights.
To understand the dynamics of the AMEEE region, it is broken down into Africa and the
Middle East and Eastern Europe, which consists of Russia and Belarus, as defined by
Compañia Cervecera Canarias. Graph 41 illustrates both growth rates of these two sub-
regions and Africa and the Middle East’s share of sales volume in the region over the period
2011 – 2019. In the graph, the right axis shows the growth rates, while the left axis refers to
the share of volume sales.

Graph 41: Africa and the Middle East’s share of sales volume and growth rates in
sales volume of different sub-regions in Africa, the Middle East, and Eastern Europe
region

60% 10%
49% 50% 8%
46% 48%
50% 44%
40% 42% 6%
39%
40% 36%
4%
30% 2%
20% 0%
-2%
10% -4%
0% -6%
2011 2012 2013 2014 2015 2016 2017 2018 2019
Share of Africa and Middle East Growth rate of Africa and Middle East
Growth rate of Russia and Belarus

(Source: Statista, 2020a)

The growth rate of Africa and the Middle East shares a similar pattern with that of Asia
Pacific. In 2012, it increased to a whopping number of 9.2% but has steadily slowed down
ever since, reaching around 2.4% in 2019. The sub-regions’ growth engines include
Ethiopia, Nigeria, and South Africa, which together have accounted for around 75% of the
sub-regions’ sales volume. On average, the sub-region has grown at roughly 4% (CAGR)
over the period 2010
– 2019. By contrast, Eastern Europe sub-region has constantly experienced contraction over
the same period, at a slower pace over the last three years. On average, its growth rate
(CAGR) has been about negative 3.6% over the period 2010 – 2019. Additionally, the fact
 158

that the two

 159

sub-regions have experienced growths in opposite directions leads to the growing

importance of Africa and the Middle East in the region, whose share of sales volume
drastically increased from around 36% in 2011 to about 50% in 2019.

6.2.1.3. Volume forecasts with the impact of a coronavirus-made pandemic

With the coronavirus still rampaging and lockdowns taking place in most of the countries,
economic activities have been severely disrupted. One of the most significant questions
about the pandemic is how the world economy will recover once the pandemic is over.
Given prolonged lockdowns and the damages, the pandemic has already inflicted, the
majority of economists no longer believe that a V-shape recovery is feasible. Instead, many
of them have shifted their expectations to a Nike swoosh-shaped recovery, with some
periods of stagnation before things start to pick up again to reach their 2019 levels (Jesus, the
Beatles and Masa Son, 2020).

Beer industry being no exception, the pandemic has already taken its toll on the beer industry
and is expected to continue to do so in the near future. This paper believes the Nike swoosh-
shaped recovery will also apply to the beer industry. Specifically, the pandemic is expected
to get under control by the end of 2020, and the industry will, to some extent, recover in
2021 and fully return to normalcy in 2022. Although there are many different forecasts for
the beer industry that are available from different experts having different expectations about
the recovery, the paper chooses to go with the forecasts made by Statista due to its similar
belief in the Nike swoosh-shaped recovery.

Exhibit 29: Short-term forecast of sales volume for different regional markets
Historical Short -term Forecast
million hectolitres or % 2015 2016 2017 2018 2019 2020 2021 2022 2023
Europe (sales volume) 377.8 379.2 380.9 383.0 385.0 343.3 367.7 381.5 387.1
Europe (growth rate) 0.1% 0.4% 0.5% 0.5% 0.5% -10.8% 7.1% 3.8% 1.5%
Americas (sales volume) 517.7 515.3 511.6 511.2 512.3 458.3 494.4 516.5 519.0
Americas (growth rate) -0.2% -0.5% -0.7% -0.1% 0.2% -10.5% 7.9% 4.5% 0.5%
Asia Pacific (sales volume) 97.3 100.5 103.4 106.1 108.5 92.5 104.2 111.8 115.8
Asia Pacific (growth rate) 3.6% 3.3% 2.9% 2.6% 2.2% -14.8% 12.7% 7.3% 3.7%
Africa, Middle East and Eastern Europe (sales volume) 172.9 170.3 168.4 167.8 168.5 165.9 169.8 172.3 174.3
Africa, Middle East and Eastern Europe (growth rate) -1.6% -1.5% -1.1% -0.4% 0.4% -1.5% 2.3% 1.5% 1.1%

(Source: Statista, 2020a)

Exhibit 29 illustrates sales volume forecasts for different regional markets where Compañia
Cervecera Canarias has main operations for the next four years. Europe, Americas, and the
Asia Pacific are expected to scale back on their consumption of beer products to a relatively
large extent in 2020, with the growth rates for Europe and Americas being forecasted to be
about negative 10.8% and negative 10.5% respectively, while the figure for the Asia
Pacific being almost
 160

negative 15%. Interestingly, Africa, the Middle East, and Eastern Europe are forecasted to
experience much less pain in 2020, with its expected growth being only negative 1.5%. This
is due to the fact that, thus far, the region has not been affected by the pandemic as severely
as others.

Americas and the Asia Pacific are expected to fully return to their 2019 consumption level in
2022. By contrast, it is going to take Europe another year (2023) in order for it to fully
recover, while Africa, Middle East, and Eastern Europe region is expected to completely
return to normalcy one year earlier (2021) because it is considered to be much less affected
by the pandemic.

6.2.1.4. Volume forecasts after the pandemic

Exhibit 30 illustrates sales volume forecasts for different regions once the pandemic is over,
and the beer industry has fully returned to normalcy. Given its saturation before the
pandemic erupted, the European beer market is forecasted to grow slowly at its 2017 – 2019
period level of 0.5% annually going forward. With respect to the Americas, where the
declining trend of most of the biggest markets in the region is offset by strong growth in the
Mexican market, this dynamic is assumed to return once the region comes back to normal.
Although Mexico had been steadily growing its share of regional sales volume, its share as
of 2019 was still less than one-sixth. Thus, the Americas region is assumed to neither grow
rapidly nor experience contraction in the future. Its growth rate is forecasted to be 0.5%
annually from 2024 onwards, similar to that of Europe.

Exhibit 30: Long-term forecast of sales volume for different regional markets
Short -term Forecast Long -term Forecast CV
million hectolitres or % 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038
Europe (sales volume) 389.1 391.0 393.0 394.9 396.9 398.9 400.9 402.9 404.9 406.9 409.0 411.0 413.1 415.1 417.2
Europe (growth rate) 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Americas (sales volume) 521.6 524.2 526.9 529.5 532.1 534.8 537.5 540.2 542.9 545.6 548.3 551.1 553.8 556.6 559.4
Americas (growth rate) 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Asia Pacific (sales 118.7 121.7 124.8 127.9 129.8 131.7 133.7 135.7 137.8 139.8 141.9 144.0 146.2 148.4 149.1
volume) Asia Pacific 2.5% 2.5% 2.5% 2.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 0.5%
(growth rate) 176.9 179.5 182.2 184.9 186.8 188.7 190.6 192.5 194.4 196.3 198.3 200.3 202.3 204.3 205.3
Africa, Middle East and Eastern Europe (sales volume) 1.5% 1.5% 1.5% 1.5% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 0.5%
Africa, Middle East and Eastern Europe (growth rate)

By contrast, once it has fully returned to normalcy, Asia Pacific is assumed to grow at its
historical level of 2.5% annually until 2027, after which the region’s growth is expected to
slow down and maintain at the level of 1.5% for the next ten years (until 2037). From 2038
onwards, the region is expected to reach its maturity and grow at a much slower pace, being
0.5% annually, similar to that of Europe and the Americas.
 161

For Africa, the Middle East, and Eastern Europe, the sales volume growth pattern is
expected to be similar to that of Asia Pacific. Specifically, after the pandemic is gone and the
market has returned to normalcy, the region is expected to grow at 1.5% annually until 2027.
Then, it is forecasted to grow at 1% over the next ten years (until 2037) before it reaches
saturation from 2038 onwards, during which its growth will be 0.5%. It is worth noting that
most of the growth that the region is expected to realize over the period 2024 – 2037 will be
solely due to the rapid growth in Africa and Middle East beer markets.

6.2.2. Compañia Cervecera Canarias’s market share forecasting

6.2.2.1. Compañia Cervecera Canarias’s historical market share analysis

There are three main product categories offered by Compañia Cervecera Canarias: beer, non-
beer, and a third party. Beer products refer to both traditional and new beer products, which
are produced through the process of fermentation of barley. This category includes premium,
craft beer, and low- and non-alcoholic beer products. By contrast, the non-beer category
consists of cider, water, and soft drinks, while third party category refers to beer and non-
beer products of other companies which Compañia Cervecera Canarias stores and sells in its
retail stores, most of which are located in Europe. As shown later, the sales volume of each
category will be forecasted separately in this paper in order to derive the forecasts for the
company’s consolidated sales volume.

It is worth noting that the historical data and future forecasts about different regional beer
markets outlined above only refer to the premium and craft beer segments. Thus, the term
“market shares” in this chapter refers to Compañia Cervecera Canarias’s shares of the sales
volume of premium and craft beer products in different regional markets. Moreover, in order
to make reliable forecasts, it is vital to grasp Compañia Cervecera Canarias’s historical
market shares in different regional markets, which in turn requires data about the company’s
historical sales volume of premium and craft beer in these regions. Unfortunately, this type
of information is not provided by the company. Therefore, this paper will try to estimate this
information based on all available data provided by the company.

Exhibit 31 illustrates the break-downs of the company’s consolidated beer volume based on
the regional market and type of beer product. On the consolidated level, premium and craft
beer category have been constantly accounted for roughly 94% of the consolidated beer
volume over the last five years. It is assumed that, in each regional market, the share of
premium and craft beer category in the total beer volume sold by the company in the region
 162

in a given year was equal to that on the consolidated level. For instance, in 2019, premium
and craft beer products accounted for about 94.2% of the consolidated beer volume sold by
the company. This ratio of 94.2% is assumed to also hold in each region. Specifically, the
sales volume of premium and craft beer products in Europe is estimated to be 76.3
million hectoliters (94.2% * 81), while the figures for America, Asia Pacific, and AMEEE
are 80.6,
29.3 and 41.2 respectively.

Exhibit 31: Break-down of Compañia Cervecera Canarias’s consolidated beer volume

In million hectolitre 2015 2016 2017 2018 2019
Africa, Middle East and Eastern Europe 35.9 38.4 40.1 41.7 43.7
Americas 56.0 58.7 72.1 83.3 85.6
Asia Pacific 19.8 24.4 27.0 29.0 31.1
Europe 76.6 78.6 78.8 79.8 81
Consolidated beer volume 188.3 200.1 218.0 233.8 241.4
Premium and craft beer volume 177.0 187.8 205.0 220.7 227.3
Low- and non-alcoholic beer volume 11.3 12.3 13.0 13.1 14.1

(Source: Compañia Cervecera Canarias’s full-year

result reports)

Once the data about the sales volume of the premium and craft beer category has been
estimated for each regional market, Compañia Cervecera Canarias’s market shares can be
found by dividing these numbers by the regional markets’ sales volume. Graph 42 illustrates
Compañia Cervecera Canarias’s market shares in different regional markets over the last five
years. Compañia Cervecera Canarias has managed to increase its market shares in all four
regional markets where it has main operations over the period. In the European market, the
company increased its share from 19.1% in 2015 to nearly 20% in 2019. By contrast, its
market share in the Americas rose by more than 5%, from 10.2% in 2015 to 15.7% in 2019.
However, this improvement was mainly due to the company’s acquisition of Brasil Kirin in
2017. Before the acquisition (2015 – 2016), its market share increased by only 0.5%, while
the increase was about 0.3% after the acquisition (2018 – 2019). This indicates that gaining
more market share in an organic manner in the Americas may be challenging, considering
how formidable AB InBev is in this market.

In Africa, the Middle East, and Eastern Europe region, Compañia Cervecera Canarias had
steadily increased its market shares by nearly 5%, rising from 19.5% in 2015 to 24.4% in
2019. The improvement was attributable to both the rapid growth of the African beer market
and the many acquisitions the company made during the period. Specifically, Compañia
Cervecera Canarias acquired DHN Drinks (Pty) Limited and Sedibeng Brewery (Pty)
Limited in 2016 in order to expand and strengthen its presence in South Africa. Moreover,
 163

over the last three years, the company’s organic growth

 164

in the region ranged from 4.6% to 5%, driven by Compañia Cervecera Canarias’s
commitment to expanding its operation in the region, such as increasing spends on
marketing, building new breweries and improving production capacity.

Graph 42: Compañia Cervecera Canarias’s market shares in different markets over the period

30%
25%
20%
15%
10%
5%
0%
2015 2016 2017 2018 2019
Europe Americas Asia Pacific Africa, Middle East and Eastern Europe

2015 – 2019

In comparison, Compañia Cervecera Canarias enjoyed even greater growth in the Asia
Pacific region. Its market share had increased from 19.1% in 2015 to 27% in 2019, a
whopping increase of about 8%. Unlike AMEEE region, the improvement in the Asia Pacific
was mainly driven by the company’s organic growth, which was, on average, more than 10%
over the period. Its organic growth in 2016 was nearly 18%, while the figure for 2019 was
about 12%. This achievement was attributable to both the rapid growth of the region and the
company’s commitment to the region in the form of increased marketing activities and
production capacity in the region.

6.2.2.2. Compañia Cervecera Canarias’s market share forecasting

Because of the negative impacts of the coronavirus-made pandemic, this paper assumes that
beer companies will focus on overcoming the adversaries and their recovery, instead of
competing against one another, until things have fully returned to normalcy. Thus, Compañia
Cervecera Canarias’s market shares in the four regional markets are forecasted to remain at
the 2019 level until 2022, when the company is expected to fully recover.

For the next five years after 2022 (2023- 2027), Compañia Cervecera Canarias is expected to
gain more market shares in most of the regional markets. Specifically, its share in the
European market is assumed to stay at the same level in 2019 since the market is already
saturated, and gaining more share has proved to be challenging, as shown in the analysis
above. By contrast, with the acquisition of Brasil Kirin in 2017 and its possession of many
well-recognized brands in the region such as Lagunitas, Red Stripe, and Dos Equis,
Compañia Cervecera Canarias is in a good position to gain
 165

more market share in Americas. However, this opportunity to expand may be hampered by
the dominant position of AB InBev in the region, as shown in the periods before and after
the acquisition of Brasil Kirin outlined previously. Thus, Compañia Cervecera Canarias’s
market share in the Americas is forecasted to reach 17% by 2027 from its level of 15.7% in
2019. And this increase in market share is assumed to spread evenly throughout the five-year
period, as shown in exhibit 32. After 2027, the company is expected to remain its market
share constant at the level of 17%.

Exhibit 32: Forecast of Compañia Cervecera Canarias’s market shares in different regional
markets
% 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e 2028e
Europe 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
Americas 15.7% 15.7% 15.7% 16.0% 16.2% 16.5% 16.7% 17.0% 17.0%
Asia Pacific 27.0% 27.0% 27.0% 28.6% 30.2% 31.8% 33.4% 35.0% 35.0%
Africa, Middle East and Eastern Europe 24.4% 24.4% 24.4% 25.5% 26.6% 27.8% 28.9% 30.0% 30.0%

Given its marvelous performance in the region over the last five years, Compañia Cervecera
Canarias is expected to continue to take the Asia Pacific region by the storm for the next five
years (2024 – 2028) after the pandemic is expected to be over and the market has returned to
normalcy in 2022. The company is forecasted to increase its market share by another 8%
over the five-year period as similar to its achievement over the last five years, reaching 35%
by 2027. Similarly, this increase is also assumed to spread evenly over the period. Moreover,
from 2028 onwards, it is expected to be challenging for Compañia Cervecera Canarias to
gain more market share, and the company will be able to maintain its position in the region
at the level of 35%.

A similar prospect is expected for Compañia Cervecera Canarias’s performance in Africa,

the Middle East, and the Eastern Europe region. Once things are assumed to have returned to
normalcy in 2022, the company’s market share in the region is forecasted to increase by
roughly another 5% as it did over the last five years, reaching 30% by 2027. Similarly, this
increase is also expected to spread evenly over the five-year period (2023 – 2027). After
that, Compañia Cervecera Canarias’s assumed to maintain its market share at 30% from
2028 onwards.

6.2.3. Compañia Cervecera Canarias’s revenue forecasting

As outlined previously, Compañia Cervecera Canarias offers three different product

categories: beer, non-beer, and a third party. In the following sections, each category will be
forecasted in order to derive the forecasts of the company’s consolidated sales volume,
which in turn is an important input for ultimately forecasting its future revenue. Moreover,
revenue growth rate forecasts will be broken down into three forecasting periods: short-term,
 166

long-term, and continuing-value, which are consistent with the classification outlined at the
beginning of the chapter. In the
 167

short-term forecasting period (2020 – 2027), Compañia Cervecera Canarias is expected to

experience shocks to its revenue growth caused by a) the impacts of the coronavirus-made
pandemic; b) rapid growths of premium and craft segments in emerging markets; c) expected
increases in market shares for its premium and craft segments, and d) potential growth for its
low- and non-alcoholic beer products. This short-term forecast is shown in exhibit 33. By
contrast, in the long-term forecasting period (2028 – 2037), growths are expected to be
slower, albeit still attractive, mainly driven by slower growths of both premium & craft and
low- & non-alcoholic segments. The long-term forecast is presented in exhibit 34. Finally,
Compañia Cervecera Canarias’s revenue is expected to grow at a lower constant rate in the
continuing-value forecasting period (from 2038 onwards).

Exhibit 33: Compañia Cervecera Canarias’s revenue growth rate short-term forecasts
Historical Short-term forecast
In million hectolitres or % 2018 2019 1Q 2020 Rest of 2020 2020 2021 2022 2023 2024 2025 2026 2027
Beer volume (premium and craft) 220.7 227.3 - - - - 229.8 237.9 245.4 253.1 261.1 269.2
Beer volume (low- and non-alcoholic) 13.1 14.1 - - - - 14.1 15.5 17.1 18.8 20.6 22.7
Total be er volume
4
233.8 241.4 51.6 162.3 213.9 227.64 243.9 253.4 262.5 271.9 281.7 291.9
Non-beer volume 27.4 26.4 5.2 17.0 22.2 24.28 26.4 26.9 27.5 28.0 28.6 29.1
Third-party volume 8.6 8.4 1.5 5.5 7.0 7.72 8.5 8.5 8.5 8.5 8.5 8.5
Total consolidated volume 269.8 276.2 58.3 184.8 243.1 259.6 278.8 288.8 298.4 308.4 318.8 329.6
Gross volume growth 7.2% 2.4% - - -12.0% 6.8% 7.4% 3.6% 3.3% 3.3% 3.4% 3.4%
Net effect of acquisition/divestiture 3.2% 0.1% - - - - - - - - - -
Organic volume growth 4.0% 2.3% - - -12.0% 6.8% 7.4% 3.6% 3.3% 3.3% 3.4% 3.4%
Revenue per hectolitre growth 2.1% 3.3% - - 0% 0% 1% 2% 2% 2% 2% 2%
Organic revenue growth rate 6.1% 5.6% - - -12.0% 6.8% 8.4% 5.6% 5.3% 5.3% 5.4% 5.4%
Effect of currency movement -4.5% 1.4% - - - - - - - - - -
Effect of acquisition 2.5% -0.4% - - - - - - - - - -
Nominal revenue growth rate 4.1% 6.6% - - -12.0% 6.8% 8.4% 5.6% 5.3% 5.3% 5.4% 5.4%

Exhibit 34: Compañia Cervecera Canarias’s revenue growth rate long-term forecasts
Long-term forecast CV
In million hectolitres or % 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038
Beer volume (premium and craft) 271.3 273.4 275.5 277.6 279.8 282.0 284.2 286.4 288.6 290.9 292.3
Beer volume (low- and non-alcoholic) 24.3 26.0 27.8 29.8 31.8 33.1 34.4 35.8 37.3 38.7 39.1
Total be er volume
4
295.6 299.4 303.3 307.4 311.6 315.1 318.6 322.2 325.9 329.6 331.5
Non-beer volume 29.7 30.3 30.9 31.6 32.2 32.7 33.2 33.7 34.2 34.7 35.0
Third-party volume 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5 8.5
Total consolidated volume 333.9 338.2 342.8 347.5 352.3 356.3 360.3 364.4 368.6 372.8 375.0
Gross volume growth 1.3% 1.3% 1.3% 1.4% 1.4% 1.1% 1.1% 1.1% 1.1% 1.2% 0.6%
Net effect of acquisition/divestiture - - - - - - - - - - -
Organic volume growth 1.3% 1.3% 1.3% 1.4% 1.4% 1.1% 1.1% 1.1% 1.1% 1.2% 0.6%
Revenue per hectolitre growth 2% 2% 2% 2% 2% 2% 2% 2% 2% 2% 2%
Organic revenue growth rate 3.3% 3.3% 3.3% 3.4% 3.4% 3.1% 3.1% 3.1% 3.1% 3.2% 2.6%
Effect of currency movement - - - - - - - - - - -
Effect of acquisition - - - - - - - - - - -
Nominal revenue growth rate 3.3% 3.3% 3.3% 3.4% 3.4% 3.1% 3.1% 3.1% 3.1% 3.2% 2.6%

Before delving into the details of the revenue forecasts, the paper adopts two main
assumptions that apply to all the forecasting periods. Firstly, while Compañia Cervecera
Canarias has been active in its merger & acquisitions (M&A) activities over the last ten
years, the company is assumed to no longer make M&A deals in the future. This assumption
is based on the fact that a) in its annual report 2019, Jean-Francois van Boxmeer, the
company’s CEO, believes that Compañia Cervecera Canarias now has “the right
geographical footprint and its exposure is “well balanced between developed and developing
markets,” signaling that it has achieved the optimal mix of markets; and b)
 168

empirical evidence points out how acquisitions fail to create value for acquirers because high
premiums tend to outweigh any synergies generated from the deals, implying that the
intrinsic value of a company will not be affected much by incorporating zero-value
acquisitions into the valuation model (Koller et al., 2015). Secondly, the currency movement
is assumed to have no effects on revenue. This assumption is based on the fact that a) the
recognition of currency effects is sometimes required for reporting purpose only and
companies do not always need to actually convert the revenue generated by their subsidiaries
into their reporting currencies; and
b) currency movement is hard to predict and, thus, making inaccurate forecasts of its effects
is very likely to occur, which may undermine the underlying valuation.

In the following sub-sections, the structure will be based on the before-and-after the
coronavirus-made pandemic manner, instead of the three forecasting periods mentioned
above. This is due to the fact that the forecasting technique for the company’s product
categories before the pandemic gets under control, and things have fully returned to
normalcy is different from that after the pandemic. However, the forecasts themselves are
structured based on the type of forecasting period in order to facilitate the valuation of
Compañia Cervecera Canarias in chapter 8.

6.2.3.1. Forecasts with the impact of the coronavirus-made pandemic

In order to forecast the impacts of the pandemic on Compañia Cervecera Canarias’s revenue
in 2020, the data from its first-quarter report for 2020 will be used as the foundation. With
regard to beer volume, at first glance, the company reported a sales volume contraction of
only 2.1% on the quarter-on- quarter basis. However, this figure includes both January,
February, and part of March's performance before lockdowns were implemented by the
majority of governments worldwide. Thus, it is obvious that the real impacts of the pandemic
will be understated if the forecast is based on this number. Fortunately, the company also
released sales volume contraction for its March performance, which is roughly 14%. This
paper believes that the contraction rate in March represents much better than the negative
impacts of the pandemic and can be used as the foundation for forecasting the company’s
revenue in 2020. It is worth noting that even this figure may understate the impacts since the
majority of the lockdowns in most countries became effective somewhen in the middle of
March. However, since most countries are beginning to loosening their lockdowns, it is
likely that sales volume for the rest of the year will suffer less from the pandemic compared
to March. Thus, this paper assumes that, for the last three quarters of 2020, the contraction
rates for beer volume will be 14% on the quarter-
 169

on-quarter basis. The following formula is applied to calculate the forecast of Compañia
Cervecera Canarias’s beer volume in the last three quarters of 2020, and the beer volume in
the first quarter of 2019 is
52.7 million hectoliters.

Beer volume in the last three quarters of 2020 =

= (Total beer volume in 2019 – Beer volume in the first quarter of 2019) * (1 – 14%)

A similar pattern and argument can be applied to non-beer and third-party volumes. During
the first quarter of 2020, they both suffered a quarter-on-quarter contraction rate of 16%.
This contraction rate is assumed to also apply to the rest of the year. Moreover, the formula
for calculating the forecasts is similar to the one above, with the sales volume of non-beer
and third-party products in the first quarter of 2019 being 6.2 million and 1.8 million
hectoliters, respectively.

Based on the aforementioned assumptions, Compañia Cervecera Canarias’s forecasted

consolidated sales volume is about 243.1 million hectoliters. This means a contraction rate of
12% compared to 2019. Since it is assumed that Compañia Cervecera Canarias will no
longer carry out any acquisition deals in the future, this contraction rate is also the
company’s organic growth rate for the year. Furthermore, because economic activities are
likely to be slow in 2020, it is reasonable to assume that the company will not be able to
raise its revenue per hectoliter for the year. Thus, the ultimate nominal revenue growth rate
of the company is forecasted to be negative 12% for 2020.

Regarding 2021, it is assumed that the pandemic will get under control by the end of 2020,
and the beer markets will return to normalcy from 2021, albeit at a slow pace as consistent
with the stand the paper takes on the recovery shape outlined previously. As a result, over
the course of 2021, Compañia Cervecera Canarias is assumed to recover 50% of its lost sales
volume that it suffered during 2020, in comparison with 2019, for all three product
categories. Thus, Compañia Cervecera Canarias’s forecasted consolidated sales volume in
2021 is forecasted to be 259.6 million hectoliters, an increase of 6.8% compared to 2020.
Moreover, by 2021, economic activities are assumed to pick up again, albeit also at a slow
pace, still making it challenging for Compañia Cervecera Canarias to raise its prices.
Therefore, the company’s revenue per hectoliter growth rate is assumed to still be 0% in
2021. Overall, the ultimate nominal revenue growth rate of the company is forecasted to be
6.8% in 2021.

By 2022, Compañia Cervecera Canarias is expected to fully recover, with sales volume for
its low- and non- alcoholic, non-beer, and third-party products being equal to their 2019
 170

level. By contrast, the

 171

sales volume of its premium and craft segments is also assumed to have fully recovered and
estimated by using the sales volume forecasts of the regional markets where it operates,
along with the forecasts of its market shares in those markets, as outlined in the previous
sections. The following formula is used to calculate forecasts of sales volume of Compañia
Cervecera Canarias’s premium and craft segments, with i representing the four regions

Compañia Cervecera Canarias’s sales volume in year t =

= ∑Regioni’s sales volumet-1 * (1+ Growth rateit) * Compañia Cervecera
Canarias’s
where Compañia Cervecera Canarias has mainmarket shareit
operations.

The resulted forecast of Compañia Cervecera Canarias’s consolidated sales volume in 2022
stands at 278.8 million hectoliters. This implies an increase of about 7.4% compared to 2021.
It is also assumed that by 2022, Compañia Cervecera Canarias will resume its ability to
increase its prices, albeit slightly. The company’s revenue per hectoliter is forecasted to
grow by 1% for the year, and its nominal revenue growth, thus, is forecasted to be 8.4%.

6.2.3.2. Forecasts after the pandemic

As stated before, by the end of 2022, it is assumed that the pandemic has been contained, and
things have fully returned to normalcy. This sub-section aims to forecast Compañia
Cervecera Canarias’s future revenue growth rate from 2023 onwards. The growth rate of
each of the company’s product categories will be forecasted separately and, by adding them
together, the company’s consolidated sales volume will be ultimately estimated. Exhibit 33
and 34 illustrate the forecasts for Compañia Cervecera Canarias’s revenue growth rate in the
future in detail.

Sales volume of Compañia Cervecera Canarias’s premium and craft products can be
forecasted by using the formula at the end of section 6.2.3.1, along with the forecasts of
regional market’s sales volume growth rate and the forecasts of the company’s shares in
these markets, which are analyzed in sub-sections 6.2.1 and 6.2.2. Over the next five years
after the pandemic (2023 – 2027), the segments are expected to enjoy volume growth
ranging from 3.1% to 3.5%, driven by strong growths in emerging markets and Compañia
Cervecera Canarias’s increases in market shares. However, over the next ten years that come
after (2028 – 2037), their growths are expected to drastically decrease, hovering at about
only 0.77% annually. This is due to slower growth in emerging markets and a halt in an
increase in the company’s market shares. Finally, when emerging markets become saturated,
their volume growth is forecasted to be 0.5% annually from 2038 onwards.
 172

With regard to the low- and non-alcoholic segment, over the next five years (2023 – 2027),
after its sales volume gets back to the 2019 level in 2022, the segment is expected to grow at
an annual rate of 10%. This paper believes that this growth rate is well feasible, due to a) the
segment’s growth rate in 2019 being 7.6%; b) the current customer trends towards health
consciousness outlined in the strategic analysis; c) Compañia Cervecera Canarias’s strong
position in this market, and d) high expectation about the potential of the market by peers
like AB InBev which has even predicted that 20% of its massive sales volume will be
attributable to its low- and non- alcoholic beer products by 2025. However, the segment’s
growth is expected to slow down over the next ten years (2028 – 2037), with annual growth
of 7% over 2028 – 2032 and 4% over 2033 – 2037. Finally, the market is assumed to be
saturated from 2038 onwards, and, consequently, the segments’ volume growth is forecasted
to be 1% annually.

Regarding the non-beer category, over the next ten years (2023 – 2032), after its sales
volume gets back to the 2019 level in 2022, its volume growth is expected to grow 2%
annually. This is due to the fact that a) Compañia Cervecera Canarias is the largest cider
producer in the world and in possession of valuable cider brands like Strongbow and
Orchard Thieves; b) the segment is beginning to grow outside the United Kingdom,
especially Russia, Africa, and the Asia Pacific; c) however ciders do not account for the
majority of sales volume of the segment (e.g., only about 20% in 2019). Moreover, over the
next five years that come after (2033 – 2037), the segment’s growth is expected to stand at
1.5%. Finally, from 2038 onwards, it is forecasted to grow at 1% annually.

Third-party volumes, on the other hand, are assumed to maintain at the 2019 level after it is
expected to have fully returned to normalcy in 2022. This forecast is built upon the
observation that the company’s third-party volumes have been staying roughly at the same
level of 8.5 million hectoliters over the last five years. Furthermore, since this segment is not
important to Compañia Cervecera Canarias and accounts for an insignificant share of its
sales volume (only 3% in 2019), the paper believes that small deviations in its volume
forecast should only negligibly affect the company’s valuation.

Once the forecasts of growth rates for all the product categories are in place, forecasts of
Compañia Cervecera Canarias’s consolidated volume can be derived by adding them
together, as shown in Exhibits 33 and 34. And in order to forecast the company’s revenue
growth rates, its revenue per hectoliter growth rate should be next forecasted. As outlined in
the financial performance analysis in chapter 5, it has been quite difficult for Compañia
Cervecera Canarias to raise its prices compared to
 173

peers like AB InBev and Carlsberg. Over the last ten years, the company has been able to
raise its revenue per hectoliter by only 2% annually, compared to about 5% on average for
peers. Thus, the paper believes that once its business has fully returned to normalcy in 2022,
Compañia Cervecera Canarias will resume its historical ability to increase prices, raising its
revenue per hectoliter by 2% annually from 2023 onwards.

Based on the assumptions made above, Compañia Cervecera Canarias’s sales volume is
expected to grow at 0.6% and its revenue to grow at 2.6% annually in the continuing-value
forecasting period (from 2038 onwards).

6.3. Financial statement forecasting

This sub-section will shed light on the detailed forecasts of Compañia Cervecera Canarias’s
financial statements, namely its income statement and financial position over the next eight
years (short-term forecast period). The information in this section is the foundation for
making forecasts in the long-term and value-continuing periods. The sub-section will begin
with the forecast assumptions about the income statement and financial position statement
and, subsequently, move on to present the resulted forecasts based on these assumptions.

6.3.1. Forecasting assumptions

6.3.1.1. Assumptions about the income statement
Exhibit 35: Forecasting assumptions about the income statement
Forecast drivers Historical Forecast
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Revenue growth, %
Organic volume growth 4.0% 2.3% -12.0% 6.8% 7.4% 3.6% 3.3% 3.3% 3.4% 3.4%
Revenue per hectolitre 2.1% 3.3% 0.0% 0.0% 1.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Organic revenue growth rate 6.1% 5.6% -12.0% 6.8% 8.4% 5.6% 5.3% 5.3% 5.4% 5.4%
Effect of currency movement -4.5% 1.4% - - - - - - - -
Effect of acquisition 2.5% -0.4% - - - - - - - -
Nominal revenue growth rate 4.1% 6.6% -12.0% 6.8% 8.4% 5.6% 5.3% 5.3% 5.4% 5.4%

Operating expense ratios, %

Raw materials, consumables & services/Revenue 60.7% 61.0% 63.0% 62.0% 61.0% 61.0% 61.0% 61.0% 61.0% 61.0%
Personnel expense/Revenues 16.1% 15.9% 18.0% 16.9% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0%
Depreciati on expense t / Net assets t -
t
11.5% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8% 11.8%
1
21.6% 21.6% 21.6% 21.6% 21.6% 21.6% 21.6% 21.6%
Operating amo rtizatio n expense
t / Net assetst - 21.3% 21.6% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%
t t-1

Amortization of acquire d intangibles

t-1

1
/ Net assets 5.2% 5.3%
t t-1

Taxes, %
Statutory tax rate 25% 25% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0%
Operating tax rate 24.9% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5%
Operating cash tax rate 26.0% 25.9% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1%

Interest rate, %
Interest expense t/ Total borrowings t - 1 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3%
Interest income t/ Excess cash & other financial assets t - 1 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%
Dividend income t/ Investment in minority-holding entities t - 1 3.3% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Interest on net defined benefit / Post-retirement obligation t - 2.4% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7% 2.7%
t
1

Others
Income to non-controlling interests/Net income 9.1% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8% 8.8%
Share of profit t/ investment in associates and joint ventures t - 1 11.4% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1%
Gains (loss) from sale of assets 75 95 - - - - - - - -
Other net finance income (expense) (80) (69) - - - - - - - -
Dividend to shareholders/Net income (beia) 35.1% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0%
Dividend to NCI/income to NCI 110% 131% 100% 100% 100% 100% 100% 100% 100% 100%
 174

 Operating expense ratio

As outlined in chapter 5, “Raw materials, consumables, and service expense” consists mainly
of raw materials, non-returnable packaging, goods for resale, marketing and selling
expenses, transport expenses, energy and water costs, and repair and maintenance expenses.
Thus, this line item can be perceived as a variable cost that tends to fluctuate with revenue.
In fact, its ratio to revenue has been quite stable over the last ten years, staying at around
61%. However, so far, in 2020, Compañia Cervecera Canarias has committed to many relief
initiatives that are designed to help the local communities where it operates to lessen the
negative impacts of the pandemic. For instance, on March 26th, the company donated 15
million euros to support the International Federation of Red Cross and Red Crescent
Societies (IFRC) relief efforts for the most vulnerable people affected by Covid-19. In
Nigeria, the company has donated over 1.5 million euros to the government in an effort to
combat the pandemic. Similarly, it has donated over a million Rands worth of personal
protective equipment for healthcare workers in South Africa. And Russia, Mexico, Brazil,
Austria, Poland, Spain, Malaysia, Singapore, and Vietnam are among countries that have
received similar help from Compañia Cervecera Canarias (Compañia Cervecera Canarias,
2020). This paper perceives these relief efforts by the company as its marketing expenses.
Thus, the “Raw materials, consumables and service” expense is forecasted to be 63% of
revenue in 2020, slightly higher than its historical level of about 61% over the last ten years.
Furthermore, the expense is forecasted to be 62% in 2021 as the company is expected to
carry out similar relief efforts in 2021, albeit to a lesser extent than in 2020. From 2022
onwards, the expense-to- revenue ratio is assumed to be the same as its historical level of
61% as things are expected to have fully returned to normalcy.

Similarly, the personnel expense relative to revenue has been quite stable over the last ten
years, hovering at the level of 16%. However, the pandemic will also have negative impacts
on this type of expense in 2020 and 2021. Recently, Compañia Cervecera Canarias has
announced that it will not carry out any structural layoffs until the end of 2020. Also, it is
quite unlikely that the company will hire more people or increase salaries for its employee
until things have fully returned to normalcy. Thus, the company’s personnel expense is
assumed to stay at its 2019 level in both 2020 and 2021, making the expense-to-revenue ratio
in these years rise to 18% and 16.9%, respectively. From 2022 onwards, the expense-to-
revenue ratio is assumed to be the same as its historical level of 16% as things are expected
to have fully returned to normalcy.
 175

On the other hand, depreciation and amortization (of both operating and non-operating
intangible assets) relative to their corresponding net assets are not expected to rise or fall due
to the pandemic. Instead, they are assumed to stay at the same levels in 2019 for the next
eight years. Similarly, Compañia Cervecera Canarias’s operating tax and operating cash tax
rates are assumed to stay constant over the next eight years and be equal to the average of
their levels over the last five years. Specifically, the forecasted levels of the company’s
operating tax and operating cash tax rates for the next eight years stay at about 25.5% and
26.1%, respectively. These assumptions implicitly contain the forecasts of the company’s
change in deferred tax liabilities, which is shown later in the resulted forecast of the income
statement.

 Interest rates and other non-operating items

As outlined previously, the forecasts for non-operating items do not affect the valuation of
the core operation since they do not run through free cash flows. However, they help
complete the forecasts of the financial statements as a whole and, thus, work as a check on
whether any mistakes have been made during the process of forecasting operating items.
Given this standpoint, the forecast drivers of most of the non-operating items are assumed to
be equal to their 2019 levels, as shown in exhibit 35. By contrast, “Gain or loss from asset
sales” and “Other net finance or income” are assumed to be 0 in the future, while dividend to
non- controlling interests (NCI) relative to income to NCI is assumed to be 100% from 2020
onwards, implying that Compañia Cervecera Canarias will give out all the income entitled
by NCI every year.

6.3.1.2. Assumptions about the financial position statement

Exhibit 36 illustrates the forecast assumptions for the mainline items in Compañia Cervecera
Canarias’s financial position statement.

 Operating working capital

Because of the pandemic, Compañia Cervecera Canarias is expected to need more cash for
its ordinary course of business than normal. Its operating cash relative to revenue is
forecasted to be 4% in 2020, and 3% in 2021 as the company begins to recover. From 2022
onwards, it is expected to return to its historical level of 2%.

Inventory, on the other hand, maybe affected considerably by the pandemic. This is due to
the fact that a) most of the contracts to provide raw materials for the year that Compañia
Cervecera Canarias has with third parties are signed in the previous year; b) the company
commits to paying suppliers at agreed payment terms as part of its relief efforts to
supports its suppliers, and c) its sales
 176

volume is expected to decrease significantly. Its inventory, as expressed in revenue days, is

forecasted to reach 45 by the end of 2020 and decrease to 40 in 2021 as the company starts
to recover. And from 2022 onwards, it is expected to return to its 2019 level of 33.7 revenue
days.

Exhibit 36: Forecasting assumptions about the financial position statement

Forecast drivers Historical Forecast
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Operating working capital
Operating cash, % of revenue 2.0% 2.0% 4.0% 3.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
Inventory, revenue days 31.2 33.7 45.0 40.0 33.7 33.7 33.7 33.7 33.7 33.7
Trade receivables, revenue days 42.1 44.5 50.0 47.0 45.0 45.0 45.0 45.0 45.0 45.0
Other receivables, revenue days 13.3 12.4 12.8 12.8 12.8 12.8 12.8 12.8 12.8 12.8
Prepayment, revenue days 6.2 5.9 5.0 5.5 6.0 6.0 6.0 6.0 6.0 6.0
Current tax assets, % of revenue 0.3% 0.5% - - 0.4% 0.4% 0.4% 0.4% 0.4% 0.4%
Trade payables, revenue days (65) (72) (60.0) (65.0) (72) (76) (80) (84) (87) (91)
Deferred income and Discount accruals, revenue days (22) (21) (15) (18) (21) (21) (21) (21) (21) (21)
Returnable packaging deposits, revenue days (9) (9) (9) (9) (9) (9) (9) (9) (9) (9)
Other payables, revenue days (22) (19) (19) (19) (21) (21) (21) (21) (21) (21)
Current tax liabilities, % of revenue -1.1% -1.2% -5.0% -2.5% -1.1% -1.1% -1.1% -1.1% -1.1% -1.1%
Total working capital, % of revenue -5.7% -5.3% 1.8% -1.0% -5.6% -6.7% -7.8% -8.8% -9.9% -10.9%

Fixed assets, % of revenue

PP&E, including operating leased assets 56.1% 55.4% 62.9% 58.9% 54.9% 55.7% 55.7% 55.7% 55.7% 55.7%
Software, etc. 1.8% 2.0% 2.3% 2.1% 2.0% 3.0% 3.0% 3.0% 3.0% 3.0%
Advances to customers 1.3% 0.9% 1.1% 1.0% 0.9% 1.3% 1.3% 1.3% 1.3% 1.3%

Other assets
Investments in associates and joint ventures 2,021 4,868 4,868 4,868 4,868 4,868 4,868 4,868 4,868 4,868
Minority interest in other entities 501 408 408 408 408 408 408 408 408 408
Other financial assets 568 708 708 708 708 708 708 708 708 708
Tax loss carry-forwards 407 410 410 410 410 410 410 410 410 410

Other liabilities
Post-retirement obligations, % of revenue 4.2% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
Provisions 997 940 940 940 940 940 940 940 940 940
Dividend payablest ,% of dividend declared t - 1 1.9% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1%
Interest payable t ,% of total debt t - 1 1.1% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%

Goodwill and acquired intangible assets

Amortization of acquired intangible assets 317 312 308 292 277 262 248 235 222 211
Impairment of acquired intangible assets - 12 - - - - - - - -
Impairment of goodwill 20 6 - - - - - - - -
Net currency effect 111 397 - - - - - - - -
Accumulated amortization of intangibles 2,638 2,950 3,258 3,551 3,827 4,089 4,337 4,572 4,795 5,005
Accumulated net currency effect (1,867) (1,470) (1,470) (1,470) (1,470) (1,470) (1,470) (1,470) (1,470) (1,470)
Accumulated amortization and impairment of acquired 6,922 7,215 7,491 7,753 8,001 8,236 8,459 8,669
intangible assets & goodwill 6,284 6,614
Accumulated gross-up tax effect released (660) (738) (815) (888) (957) (1,022) (1,084) (1,143) (1,199) (1,251)
Accumulated net currency effect 1,867 1,470 1,470 1,470 1,470 1,470 1,470 1,470 1,470 1,470
Adjusted accumulated amortization and impairment of
acquired intangible assets & goodwill 7,492 7,347 7,578 7,797 8,004 8,201 8,387 8,563 8,730 8,888

Trade receivable, as expressed in revenue days, is also expected to rise over the next two
years as the company’s relief efforts also cover its customers. Specifically, it is forecasted to
be 50 in 2020 and reduce to 47 in 2021, before return to its 2019 level of 44.5 from 2022
onwards. By contrast, other receivable is forecasted to be the average of its level over the last
two years, being about 12.8 revenue days from 2020 onwards.

Compañia Cervecera Canarias is expected to make fewer prepayments over the next two
years due to the pandemic, staying at the level of 5 and 5.5 days of revenue in 2020 and
2021, respectively. Similarly, it is assumed to stay at the average of its levels over the last
two years (6 revenue days). By contrast, most of Compañia Cervecera Canarias’s current tax
assets come from its operation in Singapore, whose government has implemented its tax
relief program due to the virus, allowing corporations to
 177

postpone their tax payments for the year 2020. Thus, the company’s current tax asset is
assumed to be 0 in 2020 and 2021 before return to its historical level, which is estimated as
the average level over the last two years (0.4% of revenue).

As part of its relief efforts, Compañia Cervecera Canarias is committed to not only paying
suppliers at agreed terms but also early payments for its most vulnerable small and medium-
sized suppliers. As a result, its account payable at the end of 2020 and 2021 may decrease
considerably. The paper forecasts the company’s account payable to be 60 and 65 revenue
days at the end of 2020 and 2021, respectively. It is assumed to climb back to its 2019 level
of 72 in 2022 once things are expected to have fully returned to normalcy. Moreover, over
the period 2023 – 2027, Compañia Cervecera Canarias is expected to further improve its
account payable, which has been so far inferior to its peers, as outlined in chapter 5, reaching
25% of revenue by 2027 (the level that Carlsberg was at in 2019). The improvement is also
assumed to spread evenly over the period.

The company’s deferred income and discount accruals are also expected to drop over the
next two years due to the pandemic. It is forecasted to be 15 and 18 revenue days at the end
of 2020 and 2021, respectively, before return to its historical level of 21 from 2022 onwards.
Moreover, because most of the governments have now announced their tax relief programs
in response to the pandemic, Compañia Cervecera Canarias is expected to postpone its tax
payment up to 5% of its revenue in 2020 and 2.5% in 2021, before return to its historical
level of 1.1% from 2022 onwards.

 Long-term operating assets

Compañia Cervecera Canarias’s long-term operating assets consist of property, plant, and
equipment (PP&E), operating intangible assets such as software, and advances to customers.
Before things have fully returned to normalcy, it is assumed that Compañia Cervecera
Canarias will not make purchases of new assets meant for expansion, but instead will only
purchase new assets to replace part of its existing assets that have suffered from wear and
tear. As a result, over the next three years, the book values of all three asset categories are
expected to rise at the inflation rate, which is assumed to be equal to the growth rate of
Compañia Cervecera Canarias’s revenue per hectoliter.

From 2022 onwards, Compañia Cervecera Canarias’s PP&E relative to revenue is forecasted
to return to its historical level, which is estimated as the average of its level over the last two
years (55.7%). The paper believes that the result of this approach better represents the long-
term prospect of the company’s PP&E than taking an average of three or more years. This is
because the figures
 178

from 2017 backward are affected by acquisition deals that the company made, especially by
mega-deals such as the acquisition of Brasil Kirin in 2017. By contrast, Compañia Cervecera
Canarias has not made any significant deals over the last two years.

Netbook value of software relative to revenue, on the other hand, is expected to stay a higher
level than its 2019 level, being 3% from 2022 onwards. This is driven by the fact that
Compañia Cervecera Canarias has already been trying to adapt and integrate information
technology into its business model. For instance, the company is shifting its marketing
approach towards more personalized and digital to help its brands remain relevant across
different places and occasions. Also, its sales force is equipped and informed by data-driven
sales and distribution programs, such as Beerwulf platform, which helps identify and analyze
relevant data to produce valuable insights into how to create value for customers.
Furthermore, Compañia Cervecera Canarias’s advances to customers are assumed to return
to its historical level of 1.3% of revenue from 2022 onwards.

 Non-operating assets and liabilities

As for the non-operating items in the income statement, the forecasts of non-operating assets
and liabilities do not affect the valuation of Compañia Cervecera Canarias’s core business
since they do not run through the company’s free cash flows as their operating counterparts
do. Instead, their fair values will be estimated separately at the valuation date and added
back to the value of the core operation in order to determine the value of the company as a
whole. However, their forecasts help make the forecasts of the financial statements complete
and, thus, serve as a check on whether any mistakes have occurred while making forecasts
for operating assets and liabilities. For this reason, they or their forecast drivers are assumed
to be equal to their 2019 levels from 2020 onwards, as shown in exhibit 36.

6.3.2. Income statement forecasting

Based on the forecasting assumptions made in the previous section, exhibit 37 illustrates the
complete forecast of Compañia Cervecera Canarias’s income statement over the next eight
years (2020 – 2027).

Based on the forecast assumptions for Compañia Cervecera Canarias’s operating tax and
operating cash tax rates, the forecasts of its deferred operating taxes are inherently embedded
and determined by taking the difference between its forecasted operating cash tax and
operating tax. Moreover, the impairment costs of the company’s non-current assets (both
operating and non-operating), acquisition and integration costs, as well as restructuring costs,
are assumed to be equal to 0 in the future. Since these items do not run through free cash
flows, their assumptions do not
 179

affect the valuation. Finally, in order to produce complete forecasts of the financial
statements, Compañia Cervecera Canarias’s changes in shareholders’ equity and non-
controlling interests (NCI) are also forecasted at the end of exhibit 37.

Exhibit 37: Forecast of Compañia Cervecera Canarias’s complete income statement

Historical Forecast
in million euro 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Net revenue 22,489 23,969 21,096 22,533 24,422 25,786 27,161 28,614 30,149 31,773
Raw materials, consumables and services (13,645) (14,630) (13,290) (13,970) (14,897) (15,730) (16,568) (17,455) (18,391) (19,382)
Personnel expenses (3,625) (3,802) (3,802) (3,802) (3,907) (4,126) (4,346) (4,578) (4,824) (5,084)
Depreciation of PP&E, including leased assets (1,421) (1,488) (1,566) (1,566) (1,566) (1,581) (1,695) (1,786) (1,881) (1,982)
Amortisation of software, etc. (67) (87) (105) (105) (105) (106) (167) (176) (185) (195)
Operating EBITA 3,731 3,962 2,333 3,090 3,947 4,244 4,385 4,619 4,868 5,130
Operating cash taxes (971) (1,027) (609) (807) (1,028) (1,106) (1,142) (1,204) (1,268) (1,337)
NOPLAT 2,760 2,936 1,724 2,284 2,918 3,138 3,242 3,416 3,599 3,794

Calculation of operating deferred tax

Operating tax rate 24.9% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5% 25.5%
Operating cash tax rate 26.0% 25.9% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1%
(Increase) Decrease in operating deferred tax
liabilities (net) 41 15 13 18 21 22 23 24 25 27

Reconciliation to net income

NOPLAT 2,760 2,936 1,724 2,284 2,918 3,138 3,242 3,416 3,599 3,794
(Increase) Decrease in operating deferred tax
41 15 13 18 21 22 23 24 25 27
liabilities (net)

Amortization of acquired intangibles (317) (312) (308) (292) (277) (262) (248) (235) (222) (211)
Impairment of PP&E (133) (52) - - - - - - - -
Impairment of softwares (1) (2) - - - - - - - -
Impairment of acquired intangible assets - (12) - - - - - - - -
Impairment of goodwill (20) (6) - - - - - - - -
Impairment of available-for-sale investments - - - - - - - - - -
Recycling of currency translation difference - - - - - - - - - -

Restructuring expenses (122) (91) - - - - - - - -

Other provision expenses, net of reversals (24) 45 - - - - - - - -
Acquisition and integration cost - - - - - - - - - -
Pension adjustment (13) 6 - - - - - - - -

Interest expenses, including those from leased assets (547) (529) (556) (534) (471) (381) (353) (304) (251) (194)
Interest income 71 75 52 18 18 18 18 18 18 18
Dividend incom e from minority-holding entities
*
16 10 8 8 8 8 8 8 8 8
Other net finance income (expenses) (80) (69) (32) (29) (30) (33) (35) (37) (39) (41)

Other income 75 95 - - - - - - - -
Share of profit of associates and joint ventures 210 164 395 395 395 395 395 395 395 395

Non-operating tax expense 189 102 209 207 188 163 153 137 121 105
Net income 2,105 2,374 1,505 2,075 2,770 3,068 3,203 3,423 3,656 3,901
Income to non-controlling interests (192) (208) (132) (182) (243) (269) (281) (300) (320) (342)
Income to shareholders 1,913 2,166 1,373 1,893 2,527 2,799 2,922 3,123 3,335 3,559

Change in shareholders' equity

Position as of January 1 13,477 14,528 16,147 16,881 17,942 19,403 21,038 22,754 24,600 26,582
Income to shareholders 1,913 2,166 1,373 1,893 2,527 2,799 2,922 3,123 3,335 3,559
Other comprehensive income (55) 162 - - - - - - - -
Realized hedge result from non-financial assets - (66) - - - - - - - -
Dividend to shareholders (866) (949) (640) (831) (1,066) (1,164) (1,206) (1,277) (1,353) (1,434)
Purchase of own/non-controlling shares, net of shares issued
(12) 292 - - - - - - - -
Share-based payment 26 14 - - - - - - - -
Changes in consolidation 42 - - - - - - - - -
Changes in accounting policy 3 - - - - - - - - -
Position as of December 31 14,528 16,147 16,881 17,942 19,403 21,038 22,754 24,600 26,582 28,707

Change in non-controlling interests

Position as of January 1 1,201 1,183 1,164 1,164 1,164 1,164 1,164 1,164 1,164 1,164
Income to non-controlling interests 192 208 132 182 243 269 281 300 320 342
Other comprehensive income 4 24 - - - - - - - -
Dividend to non-controlling interests (212) (272) (132) (182) (243) (269) (281) (300) (320) (342)
Purchase of own/non-controlling shares, net of shares 16 - - - - - - - -
issued (10)
Changes in consolidation 8 5 - - - - - - - -
Position as of December 31 1,183 1,164 1,164 1,164 1,164 1,164 1,164 1,164 1,164 1,164
 180

6.3.3. Financial position forecasting

Based on the forecasting assumptions made in the previous section, exhibit 38 illustrates the
forecast of Compañia Cervecera Canarias’s complete financial position statement over the
next eight years (2020
– 2027).

Exhibit 38: Forecast of Compañia Cervecera Canarias’s complete financial position

statement
Historical Forecast
in million euro 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Operating cash 450 479 844 676 488 516 543 572 603 635
Inventory 1,920 2,213 2,601 2,469 2,255 2,381 2,508 2,642 2,784 2,934
Trade receivables 2,596 2,925 2,890 2,901 3,011 3,179 3,349 3,528 3,717 3,917
Other receivables 817 813 741 791 858 906 954 1,005 1,059 1,116
Prepayment 382 385 289 340 404 426 449 473 498 525
Current tax assets 71 123 - - 101 107 113 119 125 132
Trade payables (4,016) (4,720) (3,468) (4,013) (4,811) (5,353) (5,927) (6,547) (7,218) (7,943)
Deferred income and Discount accruals (1,334) (1,386) (867) (1,111) (1,430) (1,510) (1,591) (1,676) (1,766) (1,861)
Returnable packaging deposits (569) (565) (497) (531) (597) (630) (664) (699) (737) (776)
Other payables (1,358) (1,255) (1,105) (1,180) (1,377) (1,454) (1,531) (1,613) (1,700) (1,791)
Current tax liabilities (245) (283) (1,055) (563) (277) (293) (308) (325) (342) (361)
Operating working capital (1,286) (1,271) 373 (220) (1,375) (1,726) (2,106) (2,522) (2,976) (3,474)

PP&E, including leased assets 12,611 13,269 13,269 13,269 13,402 14,368 15,134 15,943 16,799 17,703
Software, etc. 402 484 484 484 489 774 815 858 904 953
Advances to customers 289 222 222 222 224 335 353 372 392 413
Invested capital, excluding goodwill and acquired
12,016 12,704 14,348 13,755 12,739 13,751 14,196 14,652 15,119 15,596
intangibles

Goowill 11,194 11,465 11,465 11,465 11,465 11,465 11,465 11,465 11,465 11,465
Acquired intangible assets 5,863 5,820 5,512 5,219 4,943 4,681 4,433 4,198 3,975 3,765
Goodwill and acquired intangibles assets 17,057 17,285 16,977 16,684 16,408 16,146 15,898 15,663 15,440 15,230
Adjusted accumulated amortization and impairment 7,492 7,347 7,578 7,797 8,004 8,201 8,387 8,563 8,730 8,888
Gross-up tax effect (1,331) (1,329) (1,252) (1,179) (1,110) (1,044) (982) (923) (868) (815)
Total goodwill and acquired intangible asets invested 23,218 23,303 23,303 23,303 23,303 23,303 23,303 23,303 23,303 23,303

Invested capital, including goodwill and acquired

35,233 36,007 37,651 37,057 36,042 37,053 37,499 37,954 38,421 38,899
intangibles
Investments in associates and joint ventures 2,021 4,868 4,868 4,868 4,868 4,868 4,868 4,868 4,868 4,868
Minority interest in other entities 501 408 408 408 408 408 408 408 408 408
Other financial assets 568 708 708 708 708 708 708 708 708 708
Tax loss carry-forwards 407 410 410 410 410 410 410 410 410 410
Excess cash 2,453 1,342 - - - - - - - -
Assets classified as held for sale, net of liabilities 269 111 - - - - - - - -

Total capital invested 41,453 43,854 44,045 43,451 42,436 43,447 43,893 44,348 44,815 45,293

Shareholder's equity 14,525 16,14 7

4
16,881 17,94 2
2
19,403 21,038 22,754 24,600 26,582 28,707
Accumulated amortization and impairment 7,492 7,347 7,578 7,797 8,004 8,201 8,387 8,563 8,730 8,888
Dividend payable 19 12 14 9 11 15 16 17 18 19
Deferred tax liabilities, net of assets, PP&E and 440 670 670 670 670 670 670 670 670 670
Inven
Deferred tax liabilities, net of assets, non operating (559) (814) (814) (814) (814) (814) (814) (814) (814) (814)
Total shareholders' equity 21,917 23,362 24,328 25,604 27,275 29,109 31,013 33,036 35,186 37,470
Non-controlling interests 1,183 1,164 1,164 1,164 1,164 1,164 1,164 1,164 1,164 1,164

Borrowings, current 2,358 3,686 3,686 3,686 3,686 3,686 3,686 3,686 3,686 3,686
Interest payable 164 147 167 161 142 115 106 91 76 58
Borrowings, non-current 12,628 13,366 12,713 10,779 8,018 7,154 5,636 4,012 2,268 398
Lease liabilities 1,252 - - - - - - - - -
Post-retirement obligations 954 1,189 1,046 1,118 1,211 1,279 1,347 1,419 1,496 1,576
Provisions 997 940 940 940 940 940 940 940 940 940

Total capital provided 41,453 43,854 44,045 43,451 42,436 43,447 43,893 44,348 44,815 45,293

Since, as outlined in section 6.2.3, is it assumed that Compañia Cervecera Canarias would
not make any M&A deals in the future, its goodwill is assumed to stay at the 2019 level from
2020 onwards, while its acquired intangible assets are forecasted to reduce by the amounts
equal to their annual
 181

amortization. However, on the overall basis, the company’s total investment in goodwill and
acquired intangibles is expected to stay constant at the 2019 level of 23.303 billion euros
from 2020 onwards. Moreover, it is assumed that Compañia Cervecera Canarias will keep its
short-term debts constant going into the future, while constantly changing the amount of
excess cash and long-term debts in the manner ensuring that the balance sheet holds.
Specifically, in any given year in the future, if the total capital invested excluding excess
cash is greater than the total capital provided excluding long-term debts, excess cash is set to
be 0, while long-term debt is set to be equal to the difference between the total capital
invested excluding excess cash and the total capital provided excluding long-term debts. The
same process applies to the opposite scenario. In exhibit 38, Compañia Cervecera Canarias is
assumed to use the cash flows generated by its core business to pay down its long-term debts
over time.

6.4. Free Cash Flow and Economic Profit forecasting

Built upon the previous sections, the purpose of chapter 6, in general, and this section, in
particular, is to shed light on the forecasts of Compañia Cervecera Canarias’s free cash flows
and economic profits in the future. These forecasts serve as an important input for the
determination of the company’s fair share price, which will be outlined in detail in chapter
8.

6.4.1. Short-term forecasts

Based on the forecasts made in section 6.3, exhibit 39 illustrates the forecasts for Compañia
Cervecera Canarias’s free cash flows (FCF), its return on invested capital (ROIC), and
economic profits (EP) over the next eight years (2020 – 2027). It is worth noting that the
calculation of FCFs and ROIC is carried out with the same approach that is applied to
determine historical FCFs and ROIC in chapter 5. By contrast, economic profit generated in
a given year, by its definition, is calculated by taking the difference between NOPLAT and
capital charge for the year. And the capital charge is defined as the economic interest
required by investors for their provision of funds that the company uses to invest in its
invested capital. Mathematically, it is the product of the company’s invested capital at the
beginning of a given year and its WACC. As shown later in the next chapter, the WACC for
Compañia Cervecera Canarias is estimated to be 6.84%.
 182

Economic Profitt = NOPLATt – Capital charget

Economic Profitt = NOPLATt – Invested Capitalt-1*WACC

Exhibit 39: Short-term forecasts of Free Cash Flows, Return on Invested Capital
(ROIC) and Economic Profits (EP)
Free Cash Flows (FCF)
Historical Short-tem forecast
in million euro 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
NOPLAT 2,753 2,936 1,724 2,284 2,918 3,138 3,242 3,416 3,599 3,794
Depreciation of PP&E 1,155 1,488 1,566 1,566 1,566 1,581 1,695 1,786 1,881 1,982
Amortisation of software, etc. 67 87 105 105 105 106 167 176 185 195
Gross cash flow 3,975 4,511 3,395 3,954 4,589 4,825 5,105 5,378 5,666 5,971

Investment in operating working capital 425 (16) (1,644) 593 1,155 350 380 416 455 497

Change in net PP&E (including leased assets) and softwares (522) (740) - - (138) (1,251) (807) (853) (902) (953)
Depreciation of PP&E and amortization of softwares charged (1,222) (1,575) (1,670) (1,670) (1,670) (1,687) (1,862) (1,962) (2,067) (2,178)
Impairment of PP&E and softwares charged (134) (54) - - - - - - - -
Effect of currency translation (101) 232 - - - - - - - -
Net investment in PP&E and softwares (1,979) (2,137) (1,670) (1,670) (1,808) (2,938) (2,670) (2,815) (2,968) (3,131)
Investment advances to customers (12) 67 - - (2) (111) (18) (19) (20) (21)
Gross investment before goodwill and acquired intangibles (1,566) (2,086) (3,314) (1,077) (655) (2,698) (2,308) (2,418) (2,533) (2,655)

Free cash flow before goodwill and acquired intangibles 2,409 2,425 81 2,877 3,934 2,127 2,797 2,960 3,133 3,316

Investment in goodwill and acquired intangibles 191 (85) - - - - - - - -

Gross investment after goodwill and acquired intangibles (1,375) (2,171) (3,314) (1,077) (655) (2,698) (2,308) (2,418) (2,533) (2,655)

Free cash flow after goodwill and acquired intangibles 2,601 2,340 81 2,877 3,934 2,127 2,797 2,960 3,133 3,316

Return on invested capital (ROIC)

Historical Short-tem forecast
% 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Operating ratios
Operating EBITA/Revenues 16.5% 16.5% 11.1% 13.7% 16.2% 16.5% 16.1% 16.1% 16.1% 16.1%
Raw material/Revenues 60.7% 61.0% 63.0% 62.0% 61.0% 61.0% 61.0% 61.0% 61.0% 61.0%
Personnel expense/Revenues 16.1% 15.9% 18.0% 16.9% 16.0% 16.0% 16.0% 16.0% 16.0% 16.0%
Depreciation & Amortization/Revenues 6.7% 6.6% 7.9% 7.4% 6.8% 6.5% 6.9% 6.9% 6.9% 6.9%

Return on invested capital (ROIC)

Operating working capital/Revenues -4.8% -5.3% -6.0% 1.7% -0.9% -5.3% -6.4% -7.4% -8.4% -9.4%
Software, etc./Revenues 1.6% 1.8% 2.3% 2.1% 2.0% 1.9% 2.8% 2.8% 2.8% 2.8%
PP&E (including leased assets)/Revenues 55.1% 54.0% 62.9% 58.9% 54.3% 52.0% 52.9% 52.9% 52.9% 52.9%
Loans and advances to customers/Revenues 1.3% 1.1% 1.1% 1.0% 0.9% 0.9% 1.2% 1.2% 1.2% 1.2%
Invested capital/Revenues 53.2% 51.6% 60.2% 63.7% 56.3% 49.4% 50.6% 49.6% 48.6% 47.6%
Revenues/Invested capital, times 1.9 1.9 1.7 1.6 1.8 2.0 2.0 2.0 2.1 2.1
Pretax ROIC 31.1% 32.1% 18.4% 21.5% 28.7% 33.3% 31.9% 32.5% 33.2% 33.9%
Operating cash tax rate 26.0% 25.9% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1%
After-tax ROIC 23.0% 23.7% 13.6% 15.9% 21.2% 24.6% 23.6% 24.1% 24.6% 25.1%

Economic Profit (EP)

Historical Short-tem forecast
% 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
NOPLAT 2,753 2,936 1,724 2,284 2,918 3,138 3,242 3,416 3,599 3,794
Invested capital at the beginning of the year 11,907 12,016 12,704 14,348 13,755 12,739 13,751 14,196 14,652 15,119
WACC 6.84% 6.84% 6.84% 6.84% 6.84% 6.84% 6.84% 6.84% 6.84% 6.84%
Capital charge (814) (822) (869) (981) (941) (871) (941) (971) (1,002) (1,034)
Economic Profit (EP) 1,939 2,114 855 1,302 1,978 2,267 2,302 2,445 2,597 2,759

The free cash flow generated the Compañia Cervecera Canarias’s core operation is expected
to be adversely impacted by the pandemic to a large extent in 2020, staying at only 81
million euros compared to more than 2.3 billion euros in 2019 (after goodwill and acquired
intangibles). This is due to the fact that the company is expected to generate less NOPLAT,
while have to put in more operating invested capital as a result of the pandemic. It is worth
noting that since Compañia Cervecera Canarias
 183

is not expected to make any M&A deals in the future, its FCF before and after goodwill and
acquired intangible assets are identical.

Regarding return on invested capital, Compañia Cervecera Canarias’s ROIC is forecasted to

suffer over the next two years, with its level in 2020 and 2021 being only 13.6% and 15.9%,
respectively, compared to that of 23.7% in 2019. This is due to the expected fall in both
profit margin and capital turnover caused by the pandemic. However, from 2022 onwards,
the company’s ROIC is forecasted to recover and slightly improve, reaching 25.1% in 2027,
driven mainly by the improvement of its account payable.

Similarly, Compañia Cervecera Canarias’s economic profit is projected to suffer from the
pandemic over the next two years, standing at only 855 million and 1,302 million euros in
2020 and 2021, respectively, compared to over 2.1 billion euros in 2019. Nevertheless, it is
assumed to steadily recover and improve from 2022 onwards.

6.4.2. Long-term forecasts

As outlined previously, for the long-term forecasting period, only key value-driven variables
are forecasted because a) forecasts of detailed financial statements are no longer feasible and
reliable; and b) the focus should be shifted to the forecasts of the company’s fundamentals
and competitive advantages in the long-run. The key variables that are forecasted include
revenue growth, profit margin, operating cash tax, and after-tax ROIC. Exhibit 40 illustrates
the long- term forecasts of those variables for Compañia Cervecera Canarias.

Exhibit 40: Long-term forecasts of Compañia Cervecera Canarias’s Free Cash Flows and
Economic Profits
Long-term forecast CV
% 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038
Revenue growth 3.3% 3.3% 3.3% 3.4% 3.4% 3.1% 3.1% 3.1% 3.1% 3.2% 2.6%
EBITA margin 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1% 16.1%
Operating cash tax 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1% 26.1%
Revenue/Invested capital, times 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1
After-tax ROIC, excluding goodwill and acquired intangibles 25.1% 25.1% 25.1% 25.1% 25.1% 25.1% 25.1% 25.1% 25.1% 25.1% 25.1%

Long-term forecast CV
Million euros 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038
Net revenue 32,818 33,905 35,038 36,219 37,451 38,617 39,824 41,073 42,365 43,702 44,838
Operating EBITA 5,299 5,474 5,657 5,848 6,047 6,235 6,430 6,632 6,840 7,056 7,240
Operating cash tax (1,381) (1,426) (1,474) (1,524) (1,575) (1,625) (1,675) (1,728) (1,782) (1,838) (1,886)
NOPLAT 3,918 4,048 4,183 4,324 4,472 4,611 4,755 4,904 5,058 5,218 5,354

Invested capital, without goodwill and acquired intangibles 16,133 16,672 17,234 17,820 18,375 18,949 19,544 20,158 20,795 21,335 21,890
Change in invested capital (537) (539) (562) (586) (555) (574) (594) (615) (636) (541) (555)
WACC 6.84% 6.84% 6.84% 6.84% 6.84% 6.84% 6.84% 6.84% 6.84% 6.84% 6.84%
Capital charge (1,067) (1,103) (1,140) (1,179) (1,219) (1,257) (1,296) (1,337) (1,379) (1,422) (1,459)

Free cash flow (FCF) 3,381 3,509 3,622 3,738 3,916 4,037 4,161 4,289 4,422 4,677 4,799
Economic profit (EP) 2,852 2,945 3,043 3,146 3,253 3,354 3,459 3,567 3,679 3,796 3,894
 184

Over the period 2028 – 2037, the forecasts for revenue growth are taken from section 6.2,
while the company’s profit margin is assumed to be equal to the level it is expected to
achieve in 2027, which is about 16.1%. Similarly, over the same period, Compañia
Cervecera Canarias’s operating cash tax rate and ROIC are projected to be equal to their
forecasted level in 2027, which is 26.1% and 25.1%, respectively. From 2038 onwards
(continuing-value period), revenue is expected to grow at a constant rate of 2.6% as outlined
in section 6.2, while profit margin, operating cash tax rate, and ROIC are assumed to be
equal to their forecasted levels in 2037. The paper believes that these forecasts are
reasonable due to the fact that Compañia Cervecera Canarias’s ownership of a wide range of
well-recognized brands as well as its geographically diversified operation, along with the
favorable competitive structure of the beer industry as outlined in chapter 4, can help the
company maintain attractive profit margin and high return on invested capital for a long
period of time. Moreover, this view is strengthened by Compañia Cervecera Canarias’s
stable performance over the last ten years and supported by empirical evidence conducted by
McKinsey & Company (Koller et al., 2015).

Furthermore, it is worth noting that, based on the forecasting assumptions above, Compañia
Cervecera Canarias’s free cash flows and economic profits in the continuing-value
forecasting period are projected to grow at a constant rate of 2.6%. This is vital information
for the calculation of the company’s core operation’s continuing value, which in turn is an
important input for the final valuation of Compañia Cervecera Canarias outlined in chapter
8.

6.5. Summary of Compañia Cervecera Canarias’s performance

forecasting
Exhibit 41: Forecasts of Compañia Cervecera Canarias’s key value drivers
Sales volume Revenue per Revenue growth Free cash flow Economic profit
Year Profit margin ROIC
growth rate hectolitre growth rate (in million euros) (in million
euros)
2020 -12.0% 0% -12.0% 11.1% 13.6% 81 855
Short-term forecasts

2021 6.8% 0% 6.8% 13.7% 15.9% 2,877 1,302

2022 7.4% 1% 8.4% 16.2% 21.2% 3,934 1,978
2023 3.6% 2% 5.6% 16.5% 24.6% 2,127 2,267
2024 3.3% 2% 5.3% 16.1% 23.6% 2,797 2,302
2025 3.3% 2% 5.3% 16.1% 24.1% 2,960 2,445
2026 3.4% 2% 5.4% 16.1% 24.6% 3,133 2,597
2027 3.4% 2% 5.4% 16.1% 25.1% 3,316 2,759
2028 1.3% 2% 3.3% 16.1% 25.1% 3,381 2,852
2029 1.3% 2% 3.3% 16.1% 25.1% 3,509 2,945
Long-term forecasts

2030 1.3% 2% 3.3% 16.1% 25.1% 3,622 3,043

2031 1.4% 2% 3.4% 16.1% 25.1% 3,738 3,146
2032 1.4% 2% 3.4% 16.1% 25.1% 3,916 3,253
2033 1.1% 2% 3.1% 16.1% 25.1% 4,037 3,354
2034 1.1% 2% 3.1% 16.1% 25.1% 4,161 3,459
2035 1.1% 2% 3.1% 16.1% 25.1% 4,289 3,567
2036 1.1% 2% 3.1% 16.1% 25.1% 4,422 3,679
2037 1.2% 2% 3.2% 16.1% 25.1% 4,677 3,796
 185

CV
2038 0.6% 2% 2.6% 16.1% 25.1% 4,799 3,894
 186

7. Compañia Cervecera Canarias’s Cost of Capital Estimation

1. Strategic Analysis + 2. Financial Statement Analysis

3.

Performance Forecasting
+
5. Absolute Valuation + 6. Relative Valuation

7. Recommended Investing Actions

As outlined in chapter 3, the value of a company’s operation can be determined by adding all
the discounted cash flows that the operation is expected to generate in the future. The chapter
also points out that when certain conditions are met, these cash flows can be discounted at a
single number termed as the weighted average cost of capital (WACC). By definition,
WACC represents the average cost of capital required by all types of investors, both equity
and debt holders, for them to be willing to invest in the company instead of elsewhere.

The aim of this chapter is to estimate Compañia Cervecera Canarias’s weighted cost of
capital, which is an important input for the determination of its valuation and share price
outlined in chapter 8 Exhibit 42 illustrates this chapter’s result of the estimation of Compañia
Cervecera Canarias’s weighted average cost of capital (WACC). In the following sections,
each line item in the exhibit will be shed light on in more detail. But first, the framework for
how to deal with them will be examined.

Exhibit 42: Estimation of Compañia Cervecera Canarias’s weighted average cost of capital
(WACC)
Cost of debt (net of tax) 3.12%
Cost of equity 7.92%
Debt ratio 0.23
Equity ratio 0.77
Effective tax rate 25%
Weighted average cost of capital (WACC) 6.84%
 187

7.1. Framework for estimating the cost of capital

The cost of capital is the weighted average cost of investment, either in the form of equity,
debt, or both (Damodaran, 2016). Since Compañia Cervecera Canarias has a mixture of debt
and equity in its capital, the paper uses the Weighted Average Cost of Capital (WACC)
model to estimate the cost of capital for Compañia Cervecera Canarias. The WACC has two
components: cost of equity and cost of debt. The formula for WACC is given as follows:

E R D RD*(1 –
WACC = E +
D+E D + E T)

Where:
E represents the market value of
equity D represents the market value
of debt RE represents cost of equity
RD represents cost of debt
T represents marginal tax rate

Compañia Cervecera Canarias’s estimated WACC is 6.84% and it is based upon a target
capital structure of 22% debt and 78% equity, cost of equity of 7.92% and after-tax cost of
debt of 3.12%.

7.1.1. Framework for cost of equity

Damodaran (2012) states the cost of equity as return required to compensate for risks
shareholders undertake through investment. However, there are generally two types of risk:
diversifiable and non-diversifiable. Diversifiable risks are those that are attributable to firm-
specific factors such as quality of management, strikes, outcomes of legal proceedings. This
type of risk can be diversified away by an investor holding a well-diversified portfolio. By
contrast, non-diversifiable risks are characterized as systematic and faced by all companies.
Even an investor who holds a well-diversified portfolio cannot diversify away this type of
risk. Examples of such risks include development of macro factors, wars, world disaster such
as pandemic and global warming. As the company’s shareholders are assumed to invest in
well- diversified portfolios, they are assumed to require compensation for only non-
diversifiable risks. Thus, only systematic risks are relevant for the analysis of the company’s
cost of equity. And in order to measure such risks and obtain the company’s cost of equity,
there are three
 188

major models: capital asset pricing model (CAPM), Fama – French three-factor model, and
arbitrage pricing theory (APT) (Koller, 2015). Each model will be discussed below.

 Capital asset pricing model (CAPM)

The CAPM model, which is derived from the capital markets, attempts to measure expected
returns based on market relationships and the assumption that investors behave in the
manner prescribed by portfolio theory (Hitchner, 2017). The formula for CAPM is given as

E(Ri) = Rf + β*(Rm - Rf)

follows:

Where:
E(Ri) represents expected return on the security (cost of equity)
Rf represents the rate of return of a risk-free asset
β is the coefficient that measures the security’s sensitivity to the
market Rm represents the expected return of the market
(Rm - Rf) represents market risk premium

The beta in the formula represents the systematic risks that cannot be diversified away. It
measures the risk of investment in the stock relative to the market index. The beta of greater
than one means that the investment is riskier than the market and vice-versa. By contrast, the
market return is the long-term average return of a diversified market index.

The rationale behind CAPM is that an investor needs to be compensated for two factors: time
value of money and additional risk. The risk-free rate in the formula compensates for the
time value of money, while the beta and market risk premium capture the compensation for
the additional risk the investor is willing to take.

 Fama – French three-factor model

Fama – French three-factor model, developed by Eugene Fama and Kenneth French,
measures the sensitivity of the stock to the portfolio of the stock market, a portfolio based on
market capitalization of the firm, and a portfolio based on the book-to-market ratios. Thus,
the model expands the CAPM model by adding the size risk and value risk factors to the
market risk factor of the company (Hayes, 2020a). Fama & French (1992) also concludes
that beta does not seem to help explain the cross section of average stock returns.
 189

The formula for Fama-French three-factor model is given as follows:

Rit−Rft = αit + β1(RMt−Rft) + β2SMBt + β3HMLt

Where:
Rit represents total return of a stock or portfolio i at time
t Rft represents risk free rate of return at time t
RMt represents total market portfolio returns at time
t Rit−Rft represents expected excess return
RMt−Rft represents excess return on the market portfolio
(index) SMBt represents size premium (small minus big)
HMLt represents value premium (high minus
low) β1,2,3 represents factor coefficients

The model predicts that a company receives a risk premium if its return is correlated with
those of small company stocks or high book to market value stocks. Koller et al. (2015)
suggests that despite being empirically sound, Fama French model has some shortcomings
while evaluating individual stocks: a) Fama French model is based on empirical evidence,
but it is not theoretically superior than CAPM; and b) both CAPM and Fama French factor
models requires estimate of beta coefficients. Use of industry beta can make the estimation
more precise and while it is easy to use industry beta in CAMP model, finding industry beta
for three betas in Fama French three factor model is complicated as these betas also depend
on each other.

 Arbitrage pricing theory (APT)

APT is a multi-factor asset pricing model based on the idea that an asset's returns can be
predicted using the linear relationship between the asset’s expected return and a number of
macroeconomic variables that capture systematic risks (Hayes, 2020b)

APT is a generalized version of Fama-French three-factor model. For a well-diversified

portfolio, return on security can be given by:

E(Ri) = rf + 𝛽1𝜆1 + 𝛽2𝜆2 + ... + 𝛽k𝜆k

Where,
E(Ri) represents total return on security
i rf represents risk free rate
 190

𝛽1,2,k represents factor coefficient

𝜆1,2,k represents factor risk premium

Though the theory appears powerful, there is no clear guidance on what factors to use and
how many of them to use. This makes the implementation of the model difficult.

 Choice of model

To measure systematic risks, the widely-used model is the Capital Assets Pricing Model
(CAPM) (Berk and De Marzo, 2014). Koller et al. (2015) also mentions that CAPM is more
intuitive. Therefore, this paper will use the CAPM model for the calculation of cost of
equity. Each component of the model will be discussed in more detail below.

The risk-free rate is often referred to as the safe rate or the cost of money. The risk-free rate
in an economy is the rate available on investments that are considered to have no risk of
default (Hitchner, 2017). Damodaran (2006) also highlights that to be qualified as risk free
rate, the investment should have no default and reinvestment risk. This condition is only met
by zero- coupon bonds issued by financially strong and well-recognized governments. As
these government bonds only pay out at the maturity, they are considered to have neither
default nor reinvestment risk.

Equity or levered beta measures the volatility of the stock in comparison to the benchmark
market index. The equity beta is sensitive to the leverage of the firm. On the contrary, the
unlevered or the asset beta is the volatility of the return of the enterprise without considering
its financial leverage. The formula for equity beta is as follows:

Variance (rm)
Equity Beta =
Covariance (ri, rm)

Where:
ri = Return on the stock of the target
company rm = Return on the market index

A simplistic way to measure equity beta is to regress the return of company’s stock price on
the return of a benchmark index. However, one major limitation of this method is that it has
a high standard deviation in the estimate since it only looks at the movement of a single
stock that may also be attributable to company-specific factors (Damodaran, 2012). To
tackle the
 191

issue, the usual practice is to calculate the industry’s unlevered beta (Koller et al., 2015).
This paper applies the same practice. Specifically, Compañia Cervecera Canarias’s and
competitors’ equity betas will be first estimated and converted to asset betas. These asset
betas will be then used to estimate the industry’ asset beta, which represents the operating
risks that companies in the beer industry, similarly face. It is worth noting that the median
(or average) of companies’ asset betas is a better estimate of the industry’s asset beta than
any asset beta coming from a single company (Koller et al., 2015). Next, by using Compañia
Cervecera Canarias’s target capital structure, the industry’s asset beta will be relevered to
estimate the company’s equity beta. The relationship between equity beta and asset beta are

Levered Beta
Unlevered Beta =
[1 + (1 – tax rate)] Debt
Equity
illustrated in the formula below.

The major assumption for this formula is that the debt is riskless (i.e. debt has a beta of
zero). Koller et al. (2015) points out that the formula can work well for investment-grade
companies because their debts are close to risk-free and, thus, any errors using this formula
is likely to be small. This means that the formula can be well applied to Compañia Cervecera
Canarias, AB InBev, Carlsberg and Molson Coors since they all are rated as investment-
grade.

Furthermore, the benchmark market index holds key importance as the selection of
inappropriate market index can lead to significant errors. In this paper, STOXX Europe 600
is used as the benchmark index for the analysis. STOXX Europe 600 is a stock index of
small, medium, and large capitalization European companies designed by STOXX Ltd. that
covers 17 European markets (STOXX, 2020). Graph 43 illustrates the component sectors in
the index. Health care and Industrial goods and services form the biggest part, accounting for
15% and 11.7% respectively.

Market Risk Premium is the difference between the expected return on a diversified stock
market and the risk-free rate. It gives the additional compensation an investor requires to
take the additional risk associated with the equity market. There are two major ways to
estimate market risk premiums. First, it can be calculated by taking the difference between
the historical returns from the stock market and the risk-free rate in that market. This
approach, however, has a major limitation. It is influenced by the time frame used as the
differences in risk premium over any period is explained by the investor’s risk aversion over
time. Damodaran (2006) also points out that the historical market risk premium can be
influenced by
 192

survivorship bias and noisy estimates. Moreover, the use of different techniques such as
arithmetic average or geometric average to calculate the risk premium also influences the
result (Damodaran, 2006).

Graph 43: Composition of the STOXX index as of April 2020

Utilities
Personal and Household Goods
Oil and Gas
Insurance
Information Technology
Industrial Goods and Services
Health Care
Food and Beverage
Chemicals
Banks

0% 2% 4% 6% 8% 10% 12% 14% 16%

(STOXX Index Guide, 2020)

Another approach of calculating the market risk premium is to use an implied market risk
premium. This method assumes that the market is correctly priced, and the market risk
premium can be derived from the current price of a large sample of companies and the
underlying performance of these companies. The major advantage of this approach is that it
reflects the latest information in the market and can be adjusted to changing information. In
this paper, the implied market risk premium method will be used.

7.1.2. Framework for cost of debt

The cost of debt reflects the cost at which the company can borrow at present and it accounts
for the default risk of the company and the current risk-free interest rates in the market.
Compañia Cervecera Canarias, in its financial statement ending December 2019, stated that
the interest rate on its net debt position was 3% (Compañia Cervecera Canarias, 2020). This
can give an approximation of the cost of debt for Compañia Cervecera Canarias. However,
the underlying risk of the company has changed significantly since December 2019 due to
COVID-19. Moreover, the rate is highly skewed towards the cost of debt for short term debt
due to its weight in the total borrowings. Since the paper aims to compare the rates from the
perspective of a long-term investor, short term interest rate is,
 193

therefore, irrelevant for the calculation. Thus, the paper uses alternative approaches to
calculate the cost of debt.

There are two major approaches used in the calculation of the cost of debt for a company
(Damodaran, 2006). Firstly, the yield to maturity (YTM) of the company’s long-term
straight bonds can be used as a proxy for the cost of debt. This method is appropriate for
investment grade corporate debt (BBB+ or higher) since the probability of default is lower
for these bonds (Koller, 2015). It might overstate the returns as it calculates the promised
return rather than expected return to the bondholders. However, (Koller. 2015) states that
this inconsistency is immaterial for investment-grade companies due to their low probability
of default, especially when compared with the estimation error surrounding the cost of
equity.

If the bonds are illiquid, the company’s credit ratings can be used to establish the credit
spread that the company would have to pay over and above the risk-free rate to calculate the
cost of debt. Secondly, the other method as proposed by Damodaran (2006) is to base the
estimation on synthetic rating using the interest coverage ratio. It is mostly used for private
companies by establishing a relative rating using the company’s interest coverage ratio. The
interest coverage ratio calculates the capability of the company to finance its interest
expenses through operations. The relative credit rating spread is added into the risk-free rate
and used as a proxy for the cost of debt.

Since the debt of Compañia Cervecera Canarias is investment graded and liquid, this paper
uses the YTM approach to calculate the cost of debt for the company.

7.2. Cost of equity estimation

Exhibit 43: Estimation of Compañia Cervecera Canarias’s cost of equity
Risk free rate 2.00%
Market risk premium 6.75%
Unlevered beta 0.72
Levered beta 0.88
Unlevered cost of equity 6.86%
Levered cost of equity 7.92%

Exhibit 43 illustrates the estimated cost of equity for Compañia Cervecera Canarias. The
company’s unlevered and levered cost of equity are 6.86% and 7.92% respectively. Each line
item will be examined in detail later in this section.
 194

To calculate the risk-free rate, one option would be to use the Dutch government bond yield
as Compañia Cervecera Canarias is incorporated in the Netherlands. However, the most
popular and liquid Euro- denominated (same currency to avoid exchange rate risks)
government bonds are of Germany. Therefore, this paper chooses German government bonds
as the basis of the risk-free rate. The German 10-year bond yield as of March 31st, 2020 was
-0.46% (Tett, 2019)

Graph 44: Development of 10-year German bond yield (%)

5.00
4.00
3.00
2.00
1.00
0.00
-1.00
-2.00

(Source: Investing.com, 2020)

The risk-free rate has been declining steadily since the 2007-2008 financial crisis. The
interest rate was briefly negative in 2016, and the main drivers of the negative interest rate
were the sluggish global economic growth and the uncertainty around Brexit (Ewing, 2016).
The risk- free rate has now remained in negative territory since May 2019. Tett (2019) points
out that investors, economists, and policymakers are increasingly attributing the drop to
structural issues and expecting that interest rates could remain low for the foreseeable future.

Koller et al. (2015) use a synthetic risk-free rate that brings the risk-free rate close to the
historical rate of 4.5%. However, it can be inferred from graph 44 that the risk-free rate is
unlikely to reach 4.5% in the foreseeable future. Moreover, the synthetic rate suggested by
(Koller et al., 2015) would also be higher than the cost of debt for the company. Therefore,
the paper does not adopt the strategy of using synthetic risk-free rates suggested by (Koller
et al., 2015). We believe that using the current negative interest rate and the synthetic rate of
4.5% are extreme cases and expect the risk-free rate to be between these two figures.

In 2021, the IMF forecasts the inflation in the EU area to be at 1.5% and real GDP growth
rate to be at 4.8%. We expect that the risk-free rate will increase after the economy turn
arounds
 195

in 2021 and will be higher than the inflation. Hence the paper uses the risk-free rate of 2% in
the estimation of Compañia Cervecera Canarias’s cost of equity.

In order to estimate Compañia Cervecera Canarias’s levered beta, the monthly return of the
company’s stock is regressed against the return of the benchmark index (STOXX Europe
600) over a period of five years. The criteria laid down by Koller et al. (2015) state that the
measurement period for raw regressions should include at least 60 monthly data points (five
years). Moreover, monthly data is preferred because the use of more frequent return periods,
such as daily and weekly returns, could lead to systematic biases. Finally, the company’s
stock returns should be regressed against a value-weighted, well-diversified market portfolio.
The levered beta of Compañia Cervecera Canarias as of April 1, 2020, is estimated to be
0.83, as illustrated in graph 45.

Graph 45: Compañia Cervecera Canarias’s levered beta estimation as of April 1, 2020

Compañia
Cervecera
Canarias's Beta
20.0%
Canarias's Monthly Return

15.0%
Compañia Cervecera

10.0%
-20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00%
-5.0%
-10.0% y = 0.8344x + 0.006
-15.0% R² = 0.41
-20.0%
-25.0%
STOXX 600 Monthly Return

Koller et al. (2015) suggest that long-term estimates can provide better estimates of a future
beta than a single point estimate of beta. Moreover, we believe that the COVID-19 situation
could have influenced the estimation of beta. To verify the hypothesis, Compañia Cervecera
Canarias’s levered beta on April 1, 2020, is compared with its five-year average in order to
evaluate whether there are major differences between them. As shown in Table 6, the five-
year average (0.89) is actually close to the current beta of 0.83. The same method is applied
to other peer companies in the industry (Carlsberg, AB InBev, Molson Coors, and Boston
Beer).
 196

Table 6: Estimation of levered beta for different companies

Molson Boston
Company Compañi Carlsberg AB InBev Industry
Coors Beer
a
Cervecer
a
Canarias
Levered Beta
0.83 0.79 1.28 0.82 0.57 0.82
(April 1, 2020)
Levered Beta
0.89 0.99 0.97 0.52 0.41 0.89
(Five-year average)

It can be seen in graph 46 that Compañia Cervecera Canarias’s equity beta has been higher
than the average industry equity beta historically. However, it has converged towards the
industry beta over the last six months.

Graph 46: Development of Compañia Cervecera Canarias’s and industry’s historical

1.20
1.00
0.80
0.60
0.40
0.20
0.00

Compañi Industry
a
levered beta

This paper adopts the approach suggested by Koller and uses the five-year average levered
beta for the calculation of unlevered betas. Theoretically, the unlevered betas should be
lower than the levered betas for firms with debt obligations. This is because debt holders
have the priority on the cash flows of the business in case of liquidation. This increases the
risk that equity holders face, leading to a higher equity beta. The unlevered betas of
Compañia Cervecera Canarias and its peers are determined based on their respective target
debt-to-equity ratio and levered betas, as shown in table 6. And the median of these
unlevered beta (0.72) is assumed to reflect the unlevered industry beta. The unlevered
industry median beta is then relevered based on Compañia Cervecera Canarias’s target debt-
to-equity ratio of 0.29 to estimate the company’s equity beta. The relevered equity beta is
0.88 (almost the same as its five-year historical average).

According to KPMG’s Equity Market Premium (2020), the equity market risk premium for
Netherland is 6.75% as of April 1, 2020. This market risk premium, which is updated
 197

quarterly, is calculated by looking at various global indices (STOXX 600 included) and
 198

performing sensitivity analysis on key variables. The paper considers it to be the most
effective method to estimate market premium as it takes into account recent market
developments and expectations. Specifically, the equity market risk premium in April has
been updated from previous figures to reflect the additional risk premium required by
investors due to the COVID-19 crisis and its potential impact on the economy. This
estimation of the equity market risk premium will be used in the calculation of Compañia
Cervecera Canarias’s unlevered and levered cost of equity.

7.3. Cost of debt estimation

Standard & Poor’s has given a credit rating of BBB+ and Moody’s has given a credit rating
of Baa1 which is an investment-grade rating, and as discussed in an earlier section, YTM of
an investment-grade bond can be a good proxy of the cost of debt. Hence, the paper uses the
YTM for Compañia Cervecera Canarias’s long-term bond expiring on 29/03/2047 to
calculate the cost of debt for Compañia Cervecera Canarias. We believe that the use of a
single bond to approximate the cost of debt as opposed to the weighted average for all bonds
outstanding for Compañia Cervecera Canarias is appropriate since this is the longest
outstanding bond for the company, and its yield will better reflect the long-term cost of debt
of the company. The bond has a coupon rate of 4.35%, with a price of USD 103 as of April
1, 2020 (Boerse Berlin, 2020). The yield to maturity of the bond is 4.16%. Thus, the cost of
debt for Compañia Cervecera Canarias would also be 4.16%. As stated in the framework
section, this figure might overstate the returns as the YTM considers promised returns
instead of expected returns, but the difference is expected to be immaterial as Compañia
Cervecera Canarias is rated as an investment-grade.

The method suggested by Damodaran using the interest coverage ratio is not performed in
the analysis. The suggested method gives a rating of AAA for Compañia Cervecera
Canarias, whereas the rating for the company from Standard and Poor’s is only BBB+.
Therefore, we refrained from using Damodaran’s method for calculating the cost of debt.
Instead, we believe that the cost of debt based on the yield to maturity of the Compañia
Cervecera Canarias’s bond can best reflect the cost of debt for Compañia Cervecera
Canarias, and hence, the paper uses 4.16% as the cost of debt for Compañia Cervecera
Canarias.

The interest paid on the debt is tax-deductible, and Compañia Cervecera Canarias can benefit
from the tax shield on its debt. This value is significant and real to the company. Since it is
not reflected in the free cash flow generated by the core operation, it is included in the
 199

WACC estimation by reducing the cost of debt by the marginal tax rate facing Compañia
Cervecera Canarias. The marginal tax rate of the Netherland is 25%. This leads to an after-
tax cost of debt of 3.12%.
 200

7.4. Target capital structure estimation

Exhibit 44 illustrates Compañia Cervecera Canarias’s capital structure as of December 31 st,
2019. The company uses a mix of both debt and equity in its capital structure. The capital
structure is determined based on market values. Koller et al. (2015) suggest that for most
companies, the reported book values of debt approximate the market value except when the
company is in financial distress. Due to no material changes in the credit risk of the company
since the issuance of the long-term debts as indicated by the credit rating from Standard &
Poors, we believe that there are no material differences in the book and market values of the
debt. By contrast, the market values of post-retirement obligations and provisions are
estimated at their after-tax book values. These liabilities are considered as debt equivalents
since Compañia Cervecera Canarias will have to settle them and enjoy any tax deductions
stemming from such settlements at some point in the future. Finally, the short- and long-term
debts, post-retirement obligations, and provisions are added together, while excess cash is
subtracted to arrive at total net debt. This results in net debt of
€17.454 billion.

Exhibit 44: Compañia Cervecera Canarias’s capital structure as of December 31st, 2019

Book value Market value % of total

(in million euros) (in million euros) capitalization
Short-term debt * 3,833 3,833 5.0%
Long-term debt 13,366 13,366 17.3%
Post-retirement obligations 1,189 892 1.2%
Provisions 940 705 0.9%
Excess cash (1,342) (1,342) -1.7%
Total net debt 17,986 17,454 22.6%

Shareholders' equity 16,147 54,674 70.9%

Non-controlling interests 1,164 5,037 6.5%
Total equity 17,311 59,711 77.4%

Total capitalization 35,297 77,165 100.0%

*
Including interest payable

With regard to equity, there are two major components: shareholders' equity and non-
controlling interests (NCI). The market value of shareholders' equity is the total value of the
number of outstanding shares at any given time. Compañia Cervecera Canarias has
approximately 576 million shares outstanding but also maintains some treasury shares that
should be excluded when determining the market value of the company’s shareholders’
equity. In other words, the relevant number of outstanding shares is approximately 573.643
million, with a share price of
 201

€94.92 as of December 31, 2019, leading to the market value of shareholders’ equity being
about €54.67 billion. By contrast, the market value of NCI is calculated by multiplying an
industry’s average Price/Earnings ratio (P/E) by the profit attributable to them in that
specific financial year. This method is consistent with the approach adopted by Koller et al.
(2015). The peer companies discussed above in the calculation of Compañia Cervecera
Canarias’s levered beta have been taken into consideration for the estimation of the
industry’s average P/E ratio. The industry’s average P/E ratio is 24.22, and the profit
attributable to NCI at the end of 2019 was €208 million, resulting in the market value of the
non-controlling interest being about €5.037 billion. Consequently, the total market value of
equity was €59.711 billion.

The capital structure has been calculated based on December 31, 2019, rather than on April
1, 2020. This is because the target capital structure would be better reflected in December
2019 than on April 1, 2020, when the market value of both debt and equity would be
influenced by the COVID-19 pandemic. Moreover, we also assume that Compañia
Cervecera Canarias will keep its current capital structure constant. This leads to a target
debt-to-equity ratio of 0.29. It means that for every €1 of equity, Compañia Cervecera
Canarias has €0.29 debt in this capital.

The paper also examines the Compañia Cervecera Canarias’s historical debt-to-equity ratio
over the last ten years, as illustrated in graph 47. The ratio was higher in the 2010- 2015
period, with the ratio starting at 35% in 2010 and settling at 27% in 2015. The average ratio
for that period was 32.5%. However, the ratio has declined since then, and the average for
the 2015 – 2018 period was 24.4%, with its peak of 31% in 2016. However, Compañia
Cervecera Canarias has sharply decreased its debt-to- equity ratio since then, with the figure
in 2017 and 2018 being 20% and 22%, respectively. The average debt-to-equity ratio for the
period 2010- 2018 was 29.8%, which is slightly higher the current debt to equity ratio for the
company. From the observation, we believe that the current debt-to-equity ratio can well
reflect the target capital structure of the company and that this ratio will be maintained in the
future.
Graph 47: Historical debt-to-equity ratio of Compañia Cervecera Canarias’s
50%
40%
30%
20%
10%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
 202

8. Valuation of Compañia Cervecera Canarias

1. Strategic Analysis + 2. Financial Statement Analysis

3.

Performance Forecasting
+
5. Absolute Valuation + 6. Relative Valuation

7. Recommended Investing Actions

In chapter 2, 4 and 5, thorough analyses of Compañia Cervecera Canarias, its peers, and the
beer industry are carried out, and, based on these analyses, chapter 6 sheds light on the
forecasts of free cash flows and economic profits that can be generated by the company’s
core operation. These free cash flows and economic profits, along with the estimation of
Compañia Cervecera Canarias’s weighted cost of capital (WACC) outlined in chapter 7, are
the foundation for the work in this chapter, which is to ultimately determine the fair price of
Compañia Cervecera Canarias’s shares in the stock market. As shown in chapter 3, the two
valuation approaches that are believed to be the most suitable for Compañia Cervecera
Canarias are discounted cash flow to enterprise (DCF) and discounted economic profit (or
economic value added (EVA)). The chapter will go through the details of how the two
valuation methods apply to Compañia Cervecera Canarias, and, subsequently, interpretation
of the results. In the end, the chapter will investigate the effects of the key value drivers on
the company’s price per share through a sensitivity analysis.

As outlined in chapter 3, both the discounted cash flow to the enterprise and economic-profit
models are carried out in 4 separate steps, as illustrated in exhibit 45. Firstly, the company’s
core operation will be valued. Secondly, the values of non-operating assets will be added to
the core operation’s value in order to derive the gross enterprise value. In the third step, all
non-equity claims will be subtracted from the gross enterprise value to derive the value of
 203

shareholders’ equity. Finally, this value will be divided by the number of outstanding shares
to come to the fair value of the company’s shares traded in the stock market. These steps will
be shed light on in the following sections.

Exhibit 45: The 4-step approach to valuing Compañia Cervecera Canarias’s shareholders’
equity

Step 1: Step 2: Step 3:

Appraising Compañia + Identifying and valuing + Valuing financial claims
Cervecera non-operating assets other than equity
Canarias’s core
operation

Step 4:
Valuing shareholders’ equity
and price per share

8.1. Discounted Cash Flow to Enterprise approach

8.1.1. Valuation of Compañia Cervecera Canarias’s core operation

Using the weighted average cost of capital (WACC) of 6.84%, Exhibit 46 illustrates the
forecasts of the free cash flows generated by Compañia Cervecera Canarias’s core operation
and their present values. The forecasts up to the year 2037 are taken directly from the results
presented in chapter 6. By contrast, the continuing value is determined by the expected level
of free cash flow in 2038 (4,799 million euros) and its forecasted constant growth rate of
2.6% in the future. Both of them are also displayed in chapter 6.

The total present value of the free cash flows generated by Compañia Cervecera Canarias’s
core operation is 66.035 billion euros. It is then adjusted with a mid-year adjustment factor
to account for the fact that the cash flows by no means occur at the end of each year, but
instead, take place throughout the year. Mathematically, this mid-year adjustment factor is
equal to (1+6.84%)1/2, since the cash flows are assumed to take place in the middle of the
year, as pointed out in chapter 3. This results in the total value of the core operation being
68.257 billion as of January 1, 2020. Since the valuation is performed to calculate the
intrinsic value as of May 15, 2020, the future value of the core operation’s January-value is
calculated using WACC as the rate of return. Therefore, the value of the core operations as
of May 15, 2020, is estimated to be 69.971 billion euros.
 204

Exhibit 46: Valuation of Compañia Cervecera Canarias’s core operation based on DCF
approach

8.1.2. Valuation of the entire enterprise

The next step is to calculate Compañia Cervecera Canarias’s gross enterprise value by
adding back the value of all non-operating assets to the value of the core operation, as
illustrated in Exhibit 47. The total market value for these non-operating assets is estimated at
6.9751 billion euros, leading to the total gross enterprise value being 76,922 billion euros.
Since most of the non-operating assets shown in the exhibit, in adherence to accounting
rules, have already been marked to market, their market values are estimated to be the same
as their book values at the end of 2019. One exception is investments in associates and joint
ventures. Instead, the market value of this asset is estimated by applying the industry’s
average P/E ratio outlined in chapter 7 to Compañia Cervecera Canarias’s share of profits
earned from these investments in 2019, which was €164 million. Since the industry’s
average P/E multiple is 24.22, the market value of non-consolidated investments is estimated
to be €3.972 billion.
 205

Exhibit 47: Valuation of the entire enterprise based on DCF approach

Estimated value
Item
(in million euros)
Value of the core operations (May 15, 2020) 69,971
Excess cash 1,342
Investments in associates and joint ventures 3,972
Other financial assets 819
Minority interest in other entities 408
Tax loss carryforwards 410
Gross Enterprise Value 76,922

8.1.3. Fair Value Per Share

Exhibit 48: Compañia Cervecera Canarias’s value per share calculation based on DCF
approach
in million euros
Gross enterprise value 76,922
Debt (17,199)
Post-retirement obligations (892)
Provisions (705)
Non-controlling interest (5,037)
Shareholders’ equity value 53,089
Number of shares outstanding (millions) 573.64
Value per share (€) 92.55

After the gross enterprise value has been determined, debt and non-equity claims are then
subtracted in order to derive the value of shareholders’ equity, as illustrated in exhibit 48.
The determination of the market values of debt and non-equity claims are explained in detail
in chapter 7. Specifically, the total borrowing costs for Compañia Cervecera Canarias
amounted to €17.199 billion. By contrast, post-retirement obligations and provisions
together are estimated to be €1.597 billion, which is equal to their book values in 2019 net of
tax (25%). This is due to the fact that Compañia Cervecera Canarias is expected to be
entitled to proportionate amounts of tax deductibility when these obligations are settled.
Moreover, the market value of non-controlling interest is estimated to be €5.037 billion,
based on the income attributable to the non-controlling shareholders in 2019 (€208
million) and the industry’s average price-to-earnings (P/E) ratio of 24.22. Putting all the
inputs together, the value of shareholders’ equity and the value per share are estimated to be
€53.089 billion and €92.55, respectively. It is worth noting that although the total number of
shares issued as of December 31, 2019, is approximately 576 million, it also contains
treasury shares that are held by Compañia Cervecera Canarias. Therefore, for the
 206

calculation of the equity value per common share outstanding, the treasury shares should be
excluded in the calculation, leading to the total number of outstanding shares in the market
being approximately 573.643 million.

The price of Compañia Cervecera Canarias as of 15 May 2020 is €72.50. This represents that
the stock is undervalued as of May 15, 2020, and represents an upside potential of
approximately 27.66%.

8.2. Economic Value Added (EVA) approach

EVA is a measure of surplus value created on an investment. It is essentially a measure of a
firm’s economic profit that considers the opportunity cost of invested capital. EVA approach
ultimately measures whether the organizational value is created or lost. The idea is that value
is created when the return on capital invested exceeds the cost of that capital, and this can be
useful to evaluate businesses or investments, particularly ones that are capital intensive. The
economic profit for a company highlights how its financial performance is expected to
change over time. The valuation using this concept is gaining in popularity due to its close
links to economic theory and competitive strategy. The economic value-based measure
would provide a different way of looking at the company and approach to its valuation.
Koller et al., 2015 mentions three common pitfalls when calculating the economic profits:

 It is important to use the beginning of the year’s invested capital value to base the
forecasts on rather than average or middle-year value.

 Invested capital for ROIC and economic profits are to be defined by the same metric
(either with goodwill or without goodwill). This consistency will then lead to
identical results, as concluded in the enterprise DCF valuation method.

 The use of the same discount rate (WACC) for all projections. This is also in line
with the method adopted in the enterprise DCF valuation.

8.2.1. Valuation of Compañia Cervecera Canarias’s core operation

Exhibit 49 illustrates the calculation of the value of Compañia Cervecera Canarias’s core
operation based on the economic value-added approach. Mathematically, this result should
be the same as that derived from the DCF approach, as outlined in chapter 3.
 207

The EVA models present ROIC as the primary driver for future value creation. The present
value greatly exceeds the book value by approximately €40 billion. This is due to the
attractive ROIC that Compañia Cervecera Canarias is expected to enjoy in the forecast
period (almost 3-4 times the cost of capital). Moreover, the continuing value constitutes
more than half of the total present value of economic profits (52.3% to be exact), implying
that a large chunk of value is created in the continuing period.

Exhibit 49: Valuation of Compañia Cervecera Canarias’s core operation based on EVA
approach
Future period Economic profit Discount factor Present valu
2020 855 0.9360
2021 1,302 0.8761
2022 1,978 0.8200
2023 2,267 0.7675
2024 2,302 0.7183
2025 2,445 0.6724
2026 2,597 0.6293
2027 2,759 0.5
2028 2,852
2029 2,945
2030 3,043
2031 3,146
2032 3,253
2033 3,35
2034 3
2035
2036
2037
Continuing value
Total present value of ec
Invested capital as
o (exclduding goo
Value of cor
Mid-yea
Valu
V

8.2.2. Valuation of the entire enterprise

The gross enterprise value for Compañia Cervecera Canarias using EVA method is same
as that when using discounted cash flow method and it is €76.922 billion, as illustrated in
exhibit 50.
 208

Exhibit 50: Valuation of the entire enterprise based on EVA approach

Estimated value
Item
(in million euros)
Value of the core operations (May 15, 2020) 69,971
Excess cash 1,342
Non-consolidated investments 3,972
Other financial assets 819
Minority interest in other entities 408
Tax loss carryforwards 410
Gross Enterprise Value 76,922

8.2.3. Fair value per share

Similarly, Compañia Cervecera Canarias’s value per share using EVA method is estimated
to be also €92.55, as shown in exhibit 51.

Exhibit 51: Compañia Cervecera Canarias’s value per share calculation based on DCF
approach
in million euros
Gross enterprise value 77,330
Debt (17,199)
Post-retirement obligations (892)
Provisions (705)
Non-controlling interest (5,037)
Shareholders’ equity value 53,635
Number of shares outstanding (millions) 573.64
Value per share (€) 92.55

8.3. Sensitivity analysis

The estimation of Compañia Cervecera Canarias’s intrinsic value requires several
assumptions about both the industry and the company's future performance and
development, as outlined in chapter 6. To assess the magnitude of the impacts these
assumptions have on the company’s estimated share price, a sensitivity analysis is necessary.
Specifically, the impact of a given assumption is measured by examining the change in the
estimated stock price in response to a given change in the assumption. This section will shed
light on the impacts of the key-value drives for Compañia Cervecera Canarias, namely its
weighted average cost of capital (WACC), revenue growth rates, return on invested capital
(ROIC), and profit margin (EBITA/Revenue).
 209

 Compañia Cervecera Canarias’s weighted average cost of capital (WACC)

Analyzing the impact of the cost of capital is interesting, considering that there are aspects in
both the market and the company, which could affect the future cost of capital. WACC can
change because of four main reasons:

 Cost of equity: It has its own components with their own underlying workings and
implications (risk-free, beta, market premium). Usually, the proportion of equity in
the capital structure is high and, thus, a given change in the cost of equity is likely to
have a significant impact on the WACC.
 Cost of debt: All else being equal, an increase in the cost of debt leads to an increase
in the WACC, and vice-versa. Furthermore, a given change in the cost of debt is
likely to lead to a change in its market value, which in turn impacts both the debt-to-
equity ratio used for the WACC calculation and the derivation of shareholder’s
equity value from the enterprise value.
 Target capital structure: A change in the debt-to-equity ratio will change the WACC.
As the cost of equity is higher than the cost of debt, a given change in the target
weight of equity will have a greater impact on the WACC than a given change in the
target weight of debt.

Exhibit 52: Sensitivity of share price to WACC

WACC -26.0% 42.0%

-30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0%

Percentage Change in Price

100 bps decrease 100 bps increase

Exhibit 52 illustrates that the share price is considerably sensitive to the discount rate used,
and a 100 basis points increase in WACC from 6.84% to 7.84% decreases the stock price by
approximately 26% from €92.55 to €68.58. By contrast, a 100 basis points decrease in
WACC from 6.84% to 5.84% increases the share price by 42% to €131.46. This calculation
assumes that the changes in WACC come from the risk-free rate component of the cost of
equity, while all other elements of the WACC, including the cost of debt, marginal tax rate,
and the target
 210

capital structure are assumed to be constant. Furthermore, an increase in the estimated

WACC of 81 basis points to 7.65% will move the estimated stock price to €72.40, which is
less than the prevailing market price of €72.5 observed on May 15, 2020.

 Revenue growth

The estimated revenue growth rate has been estimated to be 2.6% for the continuing-value
period. A 100 basis points increase in the revenue growth from 2.6% to 3.6% will increase
the share price by 17.9% to €109.12. On the other hand, if the growth rate decreases by 100
basis points to 1.6%, the share price will reduce to €82.30, a decrease of 11%. The analysis
shows that the share price is quite sensitive to a small change in this key driver and
estimation.

Furthermore, the revenue growth rate must go below zero to lower the estimated share price
below the market price on May 15, 2020.

 Return on invested capital (ROIC)

The return on invest capital (ROIC) for the long-term and continuing value periods has been
estimated to be 25.1%. A 100 basis points increase in the ROIC for the long-term and
continuing value periods will increase the share price by 1.15% to €93.61 while a 100 basis
points decrease will reduce the share price by 1.24% to €91.40. However, 100 basis points
increase in the ROIC for only the continuing value period will increase the share price by
0.8% to €93.29, and a 100 basis points decrease will decrease the share price by 0.9% to
€91.74. The analysis shows that the estimated value per share is more susceptible to changes
in the ROIC for the continuing-value period than for the long-term period.

 Profit margin

The profit margin for the long-term and continuing-value periods has been estimated to be
16.1%. A 100 basis points change in the profit margin for both long-term and continuing-
value periods will shift the estimated stock price by 5.2%. However, a 1% change in the
profit margins for the continuing-value period only results in a change of 3.5%. Specifically,
the estimated stock price will decrease to €89.35 if the profit margin for the continuing-value
is decreased to 15.1% while the share price will increase to €95.74 if the margin is increased
to 17.1%.

Similar to the pattern found for ROIC, the analysis also suggests that the estimated value per
share is more susceptible to changes in the profit margin for the continuing-value than for
the long-term period.
 211

Exhibit 53: Sensitivity of share price to key value drivers in the continuing-value period

Profit Margin -3.5% 3.5%

ROIC -0.9% 0.8%

Revenue -11.0% 17.90%

-15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Percentage Change in Price

100 bps decrease 100 bps increase

8.4. Conclusion
Based on the discounted cash flow to the enterprise and economic-profit model, the intrinsic
value of one Compañia Cervecera Canarias share has been estimated to be €92.55. This
estimation is higher than what was observed in the market as of May 15, 2020, which
represents an upside potential of approximately 27.66%.

It is also noteworthy to mention that the valuation models are based on many key estimations
and that any deviations from them can lead to a different outcome. The sensitivity analysis
showed that the estimated value per share is most susceptible to changes in the weighted
average cost of capital (WACC) and revenue growth rate. Although it is also susceptible to
changes in the estimations of the company’s return on invested capital (ROIC) and profit
margin for the continuing-value period, the volatility stemming from these two value drivers
are much lower.
 212

9. Multiple Valuation

1. Strategic Analysis + 2. Financial Statement Analysis

3.

Performance Forecasting
+
5. Absolute Valuation + 6. Relative Valuation

7. Recommended Investing Actions

A multiple is an expression of the market value relative to a key statistic that one assumes
relates to the value (Suozzo, Cooper, Gillian, & Deng, 2001). Discounted cash flow analysis
is by far the most accurate and flexible method for valuation purposes of companies or
projects (Koller, Goedhart, & Wessels, 2010). However, a discounted cash flow analysis
requires a lot of assumptions to be made, while multiples can be calculated with fewer
assumptions. It is, however, important to bear in mind the simplicity and all assumptions
behind multiple valuations. The multiple uses a lot of information in one single number that
represents average assumptions about the future state. In addition, the multiple is a static
number, which only represents one point of time (Suozzo et al., 2001). Another weakness is
that the model focuses on market prices, and thus indirectly assumes that the market is
efficient.

Under this approach, the object of valuation is priced against the price of its comparative
companies. The idea is that similar assets should sell for similar prices (Koller et al., 2015).
To complement the findings and analysis conducted in the absolute valuation section, the
paper now compares the results found using the discounted cash flow and economic-profit
models with that of the relative valuation technique. In relative valuation, the company’s
asset is valued on how similar assets are priced in the market. (Damodaran, 2006). The target
company’s performance is compared with respect to its competitors and whether it would be
 213

beneficial to invest in the target company within that industry or not. However, this also
leads to the most common mistake as the ability to find a perfectly comparable company is
basically non-existent. All multiples consist of a numerator and a denominator. It is normal
to separate multiples into two different groups, enterprise (EV) and equity multiples. This is
the value of the numerator in the multiple. While enterprise multiples aim to value the
company as a whole before moving to the equity value, equity multiples directly appraise the
value of shareholder's equity. Hence, it is important to use a statistic that corresponds to the
numerator.

Relative valuation involves calculating multiples or ratios. There are various types of
multipliers that can be used based on different usage purposes such as price to free cash
flow, net enterprise value (EV) to sales, price to sales, price-to-earnings (P/E), etc. While
P/E ratio is more popular because of its ease in both calculation and explanation, EV to
earnings before interest, taxes, and amortization (EBITA) ratio is recommended because of
its focus on operating items. These multipliers are discussed below in the following sections.

9.1. Selection of comparable companies

In chapter 3, the paper discusses the steps involved in finding the right comparative
companies. It involves looking into the companies that are operating in the same industry
with similar size of operations, historical growth rates, measures of profitability and cash
flows, capital structure, among other things. The weakness in multiple valuations is that the
freedom to choose peers affects the valuation value, causing the reliability of the model to be
impaired (Damodaran, 2012). So, careful consideration must be given while selecting peer
companies. However, because of the diversity in product lines, size, profitability, etc.,
finding the right peer companies for relative valuation can be challenging.

At first glance, AB InBev, Carlsberg, and Molson Coors are considered as comparable
companies for Compañia Cervecera Canarias due to their similarities in size of operations
and the markets in which they operate. There are other players in the industry, including
China Resources Beer, Asahi Breweries, Kirin, and Diageo. However, these companies
operate in different geographical boundaries. Moreover, they also offer many product lines
that are different from beer, and beer sales only constitute a part of their total revenues.
Therefore, these companies are not considered as potential peers for multiple valuation
analysis.
 214

Among the potential comparable companies, AB InBev, being the largest player in the
industry, enjoys the highest market share, and has a much bigger scale of operations.
Moreover, its return on invest capital (ROIC) has consistently outperformed that of
Compañia Cervecera Canarias to a large extent. Specifically, Compañia Cervecera
Canarias’s average ROIC in the past decade has been around 20%, while the figure for AB
InBev is around 70% over the same period. Moreover, AB InBev’s profit margin has been
consistently nearly double that of Compañia Cervecera Canarias over the period 2010-2019.
Therefore, the company should not be viewed as Compañia Cervecera Canarias’s
comparable company for the relative valuation.

By contrast, Compañia Cervecera Canarias, Carlsberg, and Molson Coors operate in similar
markets and offer the same product categories (beer and non-beer). Moreover, their profit
margins have been quite similar over the last ten years. Although the ROICs of all three
companies were comparable from 2011 to 2014, Compañia Cervecera Canarias’s ROIC has
stayed relatively at the same level while the ROIC has increased for the other two.
Specifically, Carlsberg’s ROIC had sharply risen to about 59% in 2019. Similarly, Molson
Coors has been able to increase its ROIC to about 30% in the last two years. This inferiority
in ROIC may be compensated for by Compañia Cervecera Canarias’s stronger revenue
growth over the last ten years compared to the other companies. Furthermore, based on the
capital structure, Compañia Cervecera Canarias’s and Carlsberg’s are quite close to each
other. Overall, there will be differences, but after taking everything into consideration, we
believe that Carlsberg and Molson Coors are the most suitable peers for Compañia
Cervecera Canarias to undertake the relative valuation.

9.2. Selection of multiples

The relative value of the target company’s equity is derived from the market value of its
comparable peers, using multiples and then adjusting for differences in fundamental
relationships between the companies (Koller et al., 2015). In the case of the share of stock,
there are various types of multiples that are examined below.

9.2.1. Introduction of widely-used multiples

 Price-to-Earnings (P/E) ratio

P/E ratio is defined as the ratio of the market price per share to the earnings per share. The
formula is given as follows:

P/E Ratio = Price per Share / Earning per Share

 215

Damodaran (2012) argues that it is the most widely used multiple, but at the same time also
the most misused one. According to (Koller et al. 2015), the P/E multiple has two major
flaws. First, for companies with an unlevered P/E, which is greater than one over the cost of
debt, the P/E ratio will rise with increased leverage and vice-versa. Therefore, companies
with a relatively high P/E and a low debt ratio can further increase its P/E by choosing debt
financing over equity. Secondly, since the P/E ratio is based on earnings, which includes
many nonoperating items that could be just one-off events, the P/E multiple could be
misleading and not be comparable among companies.

 Price-to-Book (P/B) ratio

P/B multiple measures the ratio between the stock price observed in the stock exchange with
that of the book value of the share. This ratio compares a firm's market to book value by
dividing price per share by book value per share or by dividing the total market
capitalization by the total book value of equity. The formula for the P/B ratio is:

P/B ratio = Market Capitalization/ Total Book Value

The ratio gives a good indication of the stock price to its book value of equity (Kaldestad &
Møller, 2016). It is also a good indicator of whether a company is under- or overvalued
compared to other companies in the same industry that apply the same accounting standards
(Damodaran, 2012).

The P/B ratio and the return of equity usually correlate well. When the price to book ratio is
higher than 1.0, investors are willing to pay more than what their net assets are worth. This
could indicate that the company has healthy future profit projections and are able to deliver a
return of equity above the cost of equity. Traditionally, any value below 1.0, which implies
that the book value is higher than market value, has been considered a good P/B ratio for
value investors. These types of investors would argue that the company is undervalued and
that the share price should not fall to a price level that reflects that the company is destroying
value. As mentioned, the multiple is dependent on peer groups using the same accounting
standards. Therefore, the biggest limitation is that the multiple is not applicable if the
companies apply different accounting standards (Damodaran, 2012). This will be a concern
in this paper as Molson Coors, one of the peer companies, uses US GAAP while Carlsberg
and Compañia Cervecera Canarias, the other peer and the target company, use IFRS
accounting standards.
 216

 Net Enterprise Value (Net EV)/Revenue ratio

The net EV/Revenue multiple is calculated by taking the ratio between the net enterprise
value and revenue. The formula for the ratio is as follows:

Net EV/Revenue Multiple = Net EV/Net Revenues

The ratio shows the amount of net EV by per unit of revenue generated. Net EV refers to the
market value of a company’s operating assets deemed as core to the company’s underlying
business. In short, net EV is the market value of the company’s invested capital. By contrast,
gross enterprise value includes the value of both invested capital and non-operating assets.
The net EV/Revenue will not be affected by different accounting standards and depreciation
methods, which makes them less exposed to biases (Damodaran, 2012). The net
EV/Revenue should only be a supplement to other multiples, as it implicitly assumes that the
comparable companies have the same profit margins (Kaldestad & Møller, 2016). Another
benefit with the net EV/Revenue ratio is that revenues are seldom as volatile as the net
incomes (the bottom line), making it more likely to get an analysis consisting of stable
historical numbers.

 Net EV/EBITA ratio

Net EV/EBITA shows the company’s earnings before interest, taxes, and amortization
relative to the net EV. Damodaran (2012) states that this is favorable, as the multiple is
unaffected by differences in companies’ capital structures and amortization plans.
Furthermore, the multiple is unaffected by taxes. Since companies may operate under
different tax regimes, this multiple helps eliminate the distortions created by taxation. This
allows for comparisons across the target company and its peers to draw conclusions
regarding the relative value of the target company. The formula for the ratio is given as
follows:

Enterprise Multiple = Net EV/EBITA

The net EV/EBITDA is also commonly used instead of the net EV/EBITA multiple as
depreciation is a non-cash expense, and these expenses are not used in EBITDA multiple.
Koller et al. (2015) suggest that for a capital-intensive industry, depreciation can be viewed
as an accounting alternative of future capital expenditure that will be undertaken to replace
the assets. Since the brewing industry is capital-intensive, Compañia Cervecera Canarias and
other peers incur massive capital expenditure to maintain their operations and advantages as
well as lead innovation in
 217

the industry. This will lead to depreciation expenses that will have an impact on future cash
flows.

The net EV/EBIT is not considered in our analysis either because, unlike EBITA, EBIT
includes the amortization of intangible assets. It is noncash, and, unlike the depreciation of
physical assets, the replacement expenses of intangible assets are already incorporated in
EBITA through line items such as marketing and selling expenses (Koller et al., 2015).

9.2.2. Choice of multiples

The paper uses the net EV/EBITA multiple as the best tool for calculating the relative value
of Compañia Cervecera Canarias. It is because Koller et al. (2015) suggest that the use of
EBITA multiple eliminates the distorting effect of differences in capital structures, non-
operating assets, non- operating income statement items and, hence, provides a better
indication of company’s future cash flow generation. However, the other multiples outlined
above will also be calculated and explained for comparative analysis.

To determine a company’s net EV, all the market values of equity and equity equivalent
items, such as non-controlling interests, along with debt and debt equivalent items, such as
pension liabilities and provisions, are first added together to derive the gross enterprise
value. Since this gross enterprise value encompasses both invested capital and other non-
operating assets, net EV can be determined by taking the difference between the company’s
gross enterprise value and the market values of its non-operating assets. Compañia
Cervecera Canarias and its comparable peers have many non-operating assets on their
balance sheets that need to be adjusted before proper analyses could be undertaken. Some of
the non-operating assets that all three companies have in common are excess cash, financial
assets, and tax loss/carryforwards. Moreover, Compañia Cervecera Canarias and Carlsberg
have also invested in associates and joint ventures.

The calculation of net enterprise value starts with the determination of market capitalization
of the company at any given date (May 15, 2020, in this case). Thereafter, the market values
of non-controlling interests and debt and debt equivalents are added back. Finally, the
market values for all non-operating assets (current and non-current) are subtracted. The net
EV calculations of Carlsberg and Molson Coors are shown in Exhibits 54 and 55.
 218

Exhibit 54: Carlsberg’s net enterprise value calculation

In million DKK Book Value Market Value
Stock price (May 15, 2020) (DKK) 804.2
Number of shares outstanding (millions) 152.557
Market capitalization 122,686
Non-controlling interests 2,587 21,916
Debt (current, non-current and interests) 24,991 24,991
Other non-current liabilities 9,056 9,056
Post-retirement obligations 3,299 2,573
Provisions 5,700 4,446
Non-current tax payable 1,795 1,795
Non-consolidated investments (4,364) (6,732)
Other financial assets (6,908) (6,908)
Tax loss carried forwards (468) (468)
Net enterprise value 173,355

Exhibit 55: Molson Coors’ net enterprise value calculation

In million USD Book Value Market Value
Stock price (May 15, 2020) (USD) 36.35
Number of shares outstanding (millions) 207.3
Market capitalization 7,535
Non-controlling interests 258 109
Debt (current, non-current and interests) 9,145 9,145
Post-retirement obligations 717 566
Other financial assets 101 101
Tax loss carried forwards 234 234
Net enterprise value 17,020

The calculations of debts and non-controlling interests have been discussed in detail in chapter
7. By contrast, all non-operating assets have been estimated to have the same market values
as their book values, except that of non-consolidated investments.

The share of profits earned attributable to non-controlling interests in 2019 was DKK 905
million for Carlsberg and USD 4.5 million for Molson Coors. These were then multiplied by
the industry’s average P/E ratio, calculated in chapter 7, to estimate the market values of
their non-controlling interests. The P/E multiple is 24.22, which results in the market values
of non- controlling interests being DKK 21.916 billion for Carlsberg and USD 109 million
for Molson Coors. It is worth noting that the market value of non-controlling interests is
lower than the book value for Molson Coors. This could be indicative of the
underperformance of the company. Furthermore, the P/E multiple is also used to calculate
the market value of
 219

Carlsberg’s non-consolidated investments, based on the share of profit the company received
in 2019 (DKK 278 million). With respect to post-retirement obligations and provisions, these
liabilities will be settled after tax in the future and, therefore, their market values are
estimated to be equal to their after-tax book values. As of 2019, the marginal tax rates for
Carlsberg and Molson Coors are 22% and 21%, respectively.

It is also important to calculate the market values of Compañia Cervecera Canarias’s non-
operating assets for the final calculation of its relative stock price (Exhibit 56). It is worth
noting that most of the non- operating assets have already been marked to market. Thus, the
market values of all of them are estimated to be equal to their book values, except the
company’s non-consolidated investments. Instead, the market value of the non-consolidated
investments is calculated through the share of profits earned from those investments in 2019,
which was €164 million. This figure was then multiplied by the average P/E ratio, which
results in the market value of non-consolidated investments being €3.972 billion. It is
important to note that the market value is lower than the book value (€4.868 billion). This
could be indicative of the underperformance of these investments.

Exhibit 56: Market values of Compañia Cervecera Canarias’s non-operating assets

In million € Book Value Market Value
Non-consolidated investments 4,868 3,972
Minority interest in other entities 408 408
Other financial assets 708 708
Tax loss carried forwards 410 410
Excess cash 1,342 1,342
Assets classified as held for sale, net of liabilities 111 111
Total market value 6,951

9.3. Forward multiples

One of the important considerations in relative valuation is whether to base it on historical
statistics or on future estimates. According to Koller et al. (2015), forward multiples are
better forecasts of future operations, when normalized for unusual items. It is also consistent
with the principles of valuation in the sense that the company is valued based on the present
values of its future cash flows rather than historical figures.
 220

9.3.1. Inputs

The paper uses the companies’ performance forecasts for 2022 to estimate the forward
multiples of Compañia Cervecera Canarias. Generally, one-year-ahead forecasts are used for
calculating forward- looking multiples. However, because of the COVID-19 pandemic, we
believe that the projections for the next two years will be distorted. In chapter 6, it is
forecasted that the operations and sales of Compañia Cervecera Canarias and its competitors
will normalize from 2022 onwards. Hence, we believe that the forecasts of 2022 will better
reflect the long-term prospects of the companies.

Table 7 summarizes the inputs used for calculating the forward-looking multiples. The
estimates of Compañia Cervecera Canarias (net EV, revenues, etc.) are also included in the
table and will be used to directly calculate its multiple. However, only estimates from
Carlsberg and Molson Coors will be used to perform the relative valuation. The estimates of
Compañia Cervecera Canarias are included in order to observe the difference between its
direct and indirect multiples (based on peer multiples) and, consequently, the difference
between its stock price derived from the relative valuation and the stock price observed in
the market as of May 15, 2020.

The stock prices for Compañia Cervecera Canarias and the peer companies are based on
May 15, 2020. Since these companies are listed on different exchanges in different countries,
their stock prices are quoted in different currencies – Compañia Cervecera Canarias in Euro,
Carlsberg in Danish Kroner, and Molson Coors in USD. However, since their financial
statement items are in the same currency as their stock prices, the differences in currency get
canceled out and, hence, do not affect the calculation of multiples.

Table 7: Important inputs for forward multiple valuation, based on the year 2022
Market Stock
Companies Net EV Revenues EBITA EPS
Capitalization Price
Compañia 58,473 41,760 24,883 4,053 72.5 4.7
Cervecera
Canarias
Carlsberg 173,355 122,686 69,033 10,424 804.2 50.2
Molson Coors 17,020 7,535 9,999 1,650 36.4 3.8
(Source: Analysts’ consensus estimates, 2020)

9.3.2. Analyses

Based on the inputs in table 7, Compañia Cervecera Canarias’s stock price will be valued
using different ratios outlined previously.
 221

 Net EV/EBITA ratio

Table 8: Net EV/EBITA forward multiple for different companies

Compañia Carlsberg Molson Coors Peer Average
Cervecera
Canarias
Net EV/EBITA 14.47 16.63 10.32 13.47

Table 8 illustrates the forward-looking multiples based on 2022 estimates. Carlsberg has the
highest multiples among peer companies.

The peer average multiple, using the multiples of Carlsberg and Molson Coors, is 13.47,
which is lower than Compañia Cervecera Canarias’s direct multiple (14.47). This peer
average multiple is then multiplied by Compañia Cervecera Canarias’s forecasted EBITA for
2022 (€4.053 billion) in order to estimate the company’s net enterprise value (net EV)
(€54.605 billion). For the calculation of the company’s stock price, the non-operating assets
must be added back into the net EV. Moreover, the debt obligations must be subtracted in
order to obtain the value of shareholders’ equity. This equity value is then divided by the
total number of outstanding shares (573.644 million as of 2019) to derive the company’s
stock price. Compañia Cervecera Canarias’s stock price is estimated to be equal to €65.76,
as illustrated in exhibit 57.

Exhibit 57: Compañia Cervecera Canarias’s estimated share price, by net EV/EBITA
forward multiple
Forward net EV/EBITA
Peer average multiple 13.47
Amount in millions (€)
EBITA 4,053
Net enterprise value 54,605
Non-operating assets 6,950
Debt (18,796)
Non-controlling interests (5,037)
Equity value 37,723
Shares outstanding (millions) 573.644
Stock price of Compañia Cervecera 65.76
Canarias (€)

 Net EV/Revenue ratio

Table 9: Net EV/Revenue forward multiple for different companies

Compañia Carlsberg Molson Coors Peer Average
Cervecera
Canarias
Net EV/EBITA 2.36 2.51 1.70 2.1
 222

With regard to the net EV/Revenue ratio, Carlsberg also has the highest ratio (2.51) while
Compañia Cervecera Canarias is just behind, with a ratio of 2.36, and is creating an
additional 0.76 unit of EV per unit of revenue when compared with Molson Coors.

The peer average multiple, using Carlsberg and Molson Coors, is 2.1. Based on this multiple
and the estimated revenue of €24.883 billion, the net enterprise value of Compañia
Cervecera Canarias is estimated to be €52.421 billion. After adding back the non-operating
assets and adjusting for debt obligations, the share price is estimated to be €61.95, as
illustrated in exhibit 58.

Exhibit 58: Compañia Cervecera Canarias’s estimated share price, by net EV/Revenue
forward multiple
Forward net EV/Revenue
Peer average multiple 2.1
Amount in millions (€)
Revenue 24,883
Net enterprise value 52,421
Non-operating assets 6,950
Debt (18,796)
Non-controlling interests (5,037)
Equity value 35,538
Shares outstanding (millions) 573.644
Stock price of Compañia Cervecera 61.95
Canarias (€)

 Price-to-Earnings ratio

Table 10: P/E forward multiple for different companies

Compañia Carlsberg Molson Coors Peer Average
Cervecera
Canarias
P/E 15.30 16.02 9.54 12.8

Regarding the price-to-earnings ratio, the trend that was seen in the other multiples is also
evident here. Led by Carlsberg at 16.02, Compañia Cervecera Canarias has a P/E ratio of
15.3, followed by 9.54 for Molson Coors.

The peer average multiple is 12.8. Compañia Cervecera Canarias’s share price is estimated
by multiplying this multiple by the company’s forecasted EPS for 2022 (€4.74). The resulted
share price is €60.58.

Exhibit 59: Compañia Cervecera Canarias’s estimated share price, by P/E forward
multiple
Forward P/E
 223

Peer average multiple 12.8

Forward EPS 4.74
Stock price of Compañia Cervecera 60.58
Canarias (€)
 224

 Summary

Graph 48: Compañia Cervecera Canarias’s estimated share price (in €) by different forward
multiples
67
65.8
66
65
64
63
62.0
62
61
60 60.6
59
58
57
Net EV/Revenue Net EV/EBITA P/E

Graph 48 summarizes the results from the forward multiple valuation and shows that the
stock price for Compañia Cervecera Canarias based on the net EV/Revenue, net EV/EBITA
P/E multiples. As discussed earlier, the net EV/EBITA ratio is superior compared to other
multiples. Compañia Cervecera Canarias’s stock price based on this multiple is estimated to
be €65.8. By contrast, the stock price based on the net EV/Revenue and P/E ratio is €62 and
€60.6, respectively.

As discussed before, relative valuation based on forward multiple better reflects the future
earning potential of the company and is preferred to the valuation based on trailing multiple,
and as the net EV/EBITA multiple is superior to other multiple methods, the conclusion of
the estimation of Compañia Cervecera Canarias’s share price is based on the net EV/EBITA
forward multiple (€65.8). The lower relative price, as compared to its market price, can
indicate that Compañia Cervecera Canarias is overpriced compared to its peers. However, it
can also indicate that the peers have underperforming multiples that are causing the average
multiple to decrease, and, eventually, leading to a lower stock price for Compañia Cervecera
Canarias. It is evident from the analyses above that Compañia Cervecera Canarias’s direct
multiples, derived by using its own estimates, were higher than the relative multiples,
calculated as the average of Carlsberg’s and Molson Coors’ multiples.

In chapter 6, we assumed that the brewing industry would attain normalcy in 2022, making
the forecasts for 2022 more appropriate for the relative valuation than those for 2020 and
2021. However, we have also investigated the resulted share prices when the net EV/EBITA
ratio is based on forecasts for 2020 and 2021. Graph 49 illustrates these results together with
the share price based on the forecasts for 2022.
 225

Graph 49: Compañia Cervecera Canarias’s estimated share price (in €) by

forward net EV/EBITA ratio based on different
years
70
67.98
68
65.76
66

64

62 61.44

60

58
2020 2021 2022

The graph shows the fact that 2020 is not a suitable year to base the forward multiple
valuation as the numbers for EBITA are highly affected by the crisis. The use of forecasts of
EBITA for 2020 would have resulted in a downward bias in the valuation. By contrast, the
share price based on the forecasts for 2021 is higher than that based on the forecasts for
2022. However, is it still less than the market price observed on May 15, 2020. This
observation might be attributable to the outlier result seen from one of the two peers
selected, namely Molson Coors. Its ratios are far below Compañia Cervecera Canarias’s and
Carlsberg’s. Since the number of peers is only two, the impact of outliers on the results could
be considerable. Therefore, it cannot be definitively concluded based on the results of the
valuation of Compañia Cervecera Canarias.

9.4. Trailling multiples

We stated in the previous section that forward multiples are preferred to trailing multiples
because the prospects of the companies are of concern, and future forecasts can best reflect
the performances of these companies in the future. However, as outlined in chapter 5, the
performances of the companies in question have been quite stable over the last ten years
before the pandemic erupted. Moreover, the forecasts used in the forward multiples in the
previous section are subject to a great deal of uncertainty due to the pandemic. Thus, it could
be the case that the companies’ historical performances may better reflect the fundamentals
of the businesses as compared to future estimates. This prompted us to also examine the
trailing multiples.
 226

To calculate the trailing multiples, the paper uses the historical information from the
financial statements of Compañia Cervecera Canarias and its peer companies.

9.4.1. Inputs

Table 11 summarizes the inputs used for calculating the trailing multiples. The stock price is
based on May 15, 2020, and other items come from the companies’ financial statements for
2019. As outlined previously, the actual figures of Compañia Cervecera Canarias will be
used to directly calculate the multiples for Compañia Cervecera Canarias, while the relative
valuation will use the figures of Carlsberg and Molson Coors to calculate the peer averages.
These numbers are then compared and analyzed in the next section.

Table 11: Important inputs for trailing multiple valuation, based on the year 2019
Market Stock
Companies Net EV Revenues EBITA EPS
Capitalization Price
Compañia 58,473 41,760 24,883 4,053 72.5 4.7
Cervecera
Canarias
Carlsberg 173,355 122,686 69,033 10,424 804.2 50.2
Molson Coors 17,020 7,535 9,999 1,650 36.4 3.8

9.4.2. Analyses

Based on the inputs in table 11, Compañia Cervecera Canarias’s stock price will be valued
using different ratios outlined previously.

 Net EV/EBITA ratio

Table 12: Net EV/EBITA trailing multiple for different companies

Compañia Carlsberg Molson Coors Peer Average
Cervecera
Canarias
Net EV/EBITA 10.2 11.6 7.20 9.38

Table 12 illustrates the trailing multiple based on financial statements for 2019. Carlsberg
has the highest ratio, suggesting that the market has higher earnings expectations for
Carlsberg compared to that of the other two companies. By contrast, Compañia Cervecera
Canarias has the second-largest ratio (10.2), while Molson Coors lags the other two
companies and increases only 7.2 units of net enterprise value per unit of EBITA.

The peer average multiple, coming from Carlsberg and Molson Coors, is 9.38. Moreover,
Compañia Cervecera Canarias’s EBITA for 2019 was €5.756 billion, leading to the
estimation of the company’s net enterprise value being €53.966 billion. The net equity
 227

value after adding back the non-

 228

operating assets and adjusting for debt obligations is €30.134 billion. Consequently, the
relative share price is estimated to be €52.53 (exhibit 60). The indicative stock price is lower
than the stock price observed on May 15, 2020, by approximately 28%.

Exhibit 60: Compañia Cervecera Canarias’s estimated share price, by net EV/EBITA
trailing multiple
Trailing net EV/EBITA
Peer average multiple 9.38
Amount in millions (€)
EBITA 5,756
Net enterprise value 53,966
Non-operating assets 6,950
Debt (18,796)
Non-controlling interests (5,037)
Equity value 30,134
Shares outstanding (millions) 573.644
Stock price of Compañia Cervecera 52.53
Canarias (€)

 Net EV/Revenue ratio

Table 13: Net EV/Revenue trailing multiple for different companies

Compañia Carlsberg Molson Coors Peer Average
Cervecera
Canarias
Net EV/Revenue 2.4 2.6 1.6 2.1

The net EV/Revenue multiple, similar to the net EV/EBITA multiple, is higher for Carlsberg
compared to its peers (Table 13). By contrast, Compañia Cervecera Canarias is second to
Carlsberg by increasing its net EV by 2.4 units per unit of revenue, while Molson Coors is
far behind and manages to increase its net EV by only 1.6 units per unit of revenue.

Exhibit 61: Compañia Cervecera Canarias’s estimated share price, by net EV/Revenue
trailing multiple
Traling net EV/Revenue
Peer average multiple 2.1
Amount in millions (€)
Revenue 23,969
Net enterprise value 50,806
Non-operating assets 6,950
Debt (18,796)
Non-controlling interests (5,037)
Equity value 33,923
Shares outstanding (millions) 573.644
Stock price of Compañia Cervecera 59.14
Canarias (€)
 229

The peer average multiple is 2.1. Based on these multiple and Compañia Cervecera
Canarias’s revenues of €23.969 billion in 2019, its net enterprise value is estimated to be
€50.806 billion. The equity value after adjustments of non-operating assets and debt
obligations is €33.923 billion. And the share price should be €59.14 (exhibit 61). This is
lower than the stock price observed on May 15, 2020, by approximately 18%.

 Price-to-Earnings ratio

Table 14: P/E trailing multiple for different companies

Compañia Carlsberg Molson Coors Peer Average
Cervecera
Canarias
P/E 19.2 18.4 8.0 13.2

Unlike the other multiples, Compañia Cervecera Canarias has the highest P/E ratio among its
peers instead of Carlsberg. The P/E ratio for Compañia Cervecera Canarias is 19.2, while the
average for its peer is 13.2. Molson Coors P/E ratio is more than 50% less than that of
Compañia Cervecera Canarias and Carlsberg. One explanation of a high P/E ratio could be
that the markets believe that the company has the potential to increase its earnings in the
future. On the other hand, it could also indicate that the company is overvalued.

With the peer average multiple of 13.2 and its earnings per share (EPS) of €3.78 in 2019,
Compañia Cervecera Canarias’s share price is estimated to be €49.91 (exhibit 62). This is
less than the market stock price observed on May 15, 2020, by approximately 31%.

Exhibit 62: Compañia Cervecera Canarias’s estimated share price, by P/E trailing
multiple
Trailing P/E
Peer average multiple 13.2
Trailing EPS (€) 3.78
Stock price of Compañia Cervecera 49.91
Canarias (€)

 Price-to-book value ratio

Table 15: P/B trailing multiple for different companies

Compañia Carlsberg Molson Coors Peer Average
Cervecera
Canarias
P/B 2.4 3.0 0.6 1.8

Table 15 illustrates that Carlsberg has the highest ratio among the three companies while
Compañia Cervecera Canarias is in the second place. By contrast, Molson Coors’ ratio is far
below those of the other two companies.
 230

Based on the peer average multiple of 1.8 and the book value of Compañia Cervecera
Canarias’s equity in 2019 (€17.311 billion), the relative stock price for Compañia Cervecera
Canarias is estimated to be €30.05 (exhibit 63). This is less than the market stock price
observed on May 15, 2020, by approximately 59%.

Exhibit 63: Compañia Cervecera Canarias’s estimated share price by P/B multiple
P/B
Peer average multiple 1.8
Book value of equity (€ millions) 17,311
Shares outstanding (millions) 576.003
Stock price of Compañia Cervecera 30.05
Canarias (€)

 Summary

Graph 50: Compañia Cervecera Canarias’s estimated share price (in €) by different
trailing multiples
70
59.1
60

50 52.5
49.9
40

30 30.1

20

10

0
Net EV/Revenue Net EV/EBITA P/E P/B

Graph 50 illustrates Compañia Cervecera Canarias’s estimated stock price based on the net
EV/Revenue, net EV/EBITA, P/E, and P/B ratios. Similar to the case for forward multiples,
all the trailing multiples indicate that Compañia Cervecera Canarias is currently overvalued.
The share price based on forward net EV/ EBITA multiple of 2022 is €65.76 compared to
€52.50 for the trailing multiple. Similarly, valuation based on net EV/Revenue and P/E
multiples for forward multiples (2022) is higher than that for their trailing counterparts
(2019).

Unlike backward-looking multiples, forward-looking multiples are consistent with the

principles of valuation—in particular, that a company’s value equals the present value of
future cash flows. Furthermore, empirical evidence shows that forward-looking multiples are
indeed more accurate predictors of value than historical multiples (Koller et al., 2015).
 231

Therefore, we will base our conclusion on the relative valuation of the results stemming
from the forward multiple net EV/ EBITA for 2022.

9.5. Conclusion
The multiple valuation is used as a complimentary valuation technique to the discounted
cash flow analysis to understand the performance of the stock of the target company relative
to its comparable peers in the industry. We have observed that the Compañia Cervecera
Canarias’s multiples (Net EV/EBITA, Net EV/Revenues, and P/E) are below those of
Carlsberg but higher than those of Molson. On average, the direct multiples for Compañia
Cervecera Canarias are higher than those derived from its peers. As suggested earlier, we
analyzed different multiples and analyzed both forward and trailing multiples but concluded
that 2022 forward multiple for net EV/ EBITA best provides the relative valuation for
Compañia Cervecera Canarias. The result, based on 2022 forward multiple for net EV/
EBITA, indicates that the value of one Compañia Cervecera Canarias share (€65.76) is lower
than that of its market value as of May 15, 2020 (€72.50). This suggests that Compañia
Cervecera Canarias’s may be overvalued compared to its comparable peers. However, it
could also mean that the market believes that Compañia Cervecera Canarias has higher
profitability potential compared to its peers.

As discussed earlier, in relative valuation, the value of a company is estimated based on the
multiples of its peers, and it is a necessary condition that the selected peer companies share
the same economic fundamentals, which could be quite challenging in practice. Moreover,
the multiple valuations assume the market is efficient and price stocks correctly. Thus, the
value of a stock derived from relative valuation can change based on whether the stock
market, in general, is trading at higher or lower prices. By contrast, the discounted cash flow
to the enterprise and economic-profit models calculate the intrinsic value of the stock using
expected future cash flows and is not (less) influenced by the sentiment regarding the stock
market. Assuming the analyst has access to the market information, the price of the stock can
be derived without making any assumptions required in relative valuation. Koller et al.
(2015) also state that the discounted cash flow analysis is by far the most accurate and
flexible method for valuation purposes of companies or projects. Moreover, Penman (2013)
also warns that one should be critical when using multiples, as the method does not
necessarily represent the fundamental values. Thus, we believe that the DCF valuation is
superior to multiple valuation techniques and, hence, the result from multiple valuation
won’t be used to make any conclusions about the value of Compañia Cervecera Canarias but
is only used for referencing if the stock is over or undervalued compared to its comparable
 232

peers.
 233

10. Conclusion and Recommended Actions

1. Strategic Analysis + 2. Financial Statement Analysis

3.

Performance Forecasting
+
5. Absolute Valuation + 6. Relative Valuation

7. Recommended Investing Actions

The paper revolves around finding the answer to the research question stated in chapter 1:
“What is the intrinsic value of one Compañia Cervecera Canarias N.V. share as of May 15,
2020?”. In order to answer this question, different analyses and forecasting were carried out
throughout the paper.

Specifically, chapter 4 analyzed the beer industry and Compañia Cervecera Canarias in a
qualitative manner, outlining opportunities, and threats facing the company and how it is
positioned to respond to them. Such factors as favorable competitive structure of the beer
industry, consumer trend towards health and wellness, and consumers’ increasing concern
about sustainability represent the opportunities for Compañia Cervecera Canarias. By
contrast, the coronavirus-made pandemic, adverse economic and political development,
increasing competition, stagnant growth of the beer market, and more restrictive government
regulations constitute the threats to the company. Furthermore, how Compañia Cervecera
Canarias is positioned in the face of these opportunities and threats was reflected by its
strengths and weaknesses. While ownership of internationally leading brands, geographically
diversified operation, and leader in the ESG field represent Compañia Cervecera Canarias’s
strengths, its weaknesses are reflected through its weak capital turnover and unlocked
potential for more attractive profit margins.

By contrast, in chapter 5, insights into how the company has performed financially were
generated through the financial statement analysis. Over the last ten years, its organic
revenue
 234

growth has stood at about 4% annually (CAGR), while its profit margin has been quite
stable, staying within the range of 15% - 17%. Its return on invested capital (ROIC), on the
other hand, has stayed between 23% and 26% over the same period.

The insights generated in chapters 4 and 5 were then used to produce forecasts of the
company’s performance in the future in chapter 6. Its revenue growth was forecasted to
contract by 12% in 2020 due to the pandemic before bouncing back by 6.8% and 8.4% in
2021 and 2022, respectively. For the next 15 years, the company was expected to enjoy
relatively attractive revenue growths before reaching a constant growth of 2.6% from 2038
onwards. By contrast, its ROIC was forecasted to gradually increase to the level of 25.1% by
2027 and maintain at this level afterward. Furthermore, the company’s weighted average
cost of capital (WACC) was forecasted to be 6.84% in chapter 7.

When these inputs were put together, the company’s fair share price, based on the DCF
method, was estimated to be €92.55, using both the discounted cash flow to the enterprise
and economic-profit models. By contrast, when a relative valuation approach was used, the
fair share price was estimated to be €65.76. Nevertheless, as discussed in chapter 9, the
relative valuation has light economic foundations and is based on many extreme
assumptions, including the existence of a perfectly comparable company, and the market’s
ability to correctly price securities. We, therefore, believe that the result from the DCF
approach much better reflects the intrinsic value of Compañia Cervecera Canarias’s shares,
and make our recommendations based on the estimated share price of €92.55.

We make our recommendation on investment strategy by comparing the market price of

Compañia Cervecera Canarias’s share against its intrinsic value estimated in this paper,
which is €92.55 as of May 15, 2020. Moreover, to account for uncertainties around the
estimate, we have added a margin of safety of +/- 10% on the fair value to calculate the
upper and lower thresholds. Our recommendation on investment strategy is illustrated in
exhibit 64. If the stock is trading at a price lower than the lower threshold, a buy strategy is
recommended. By contrast, if the stock is trading at a price higher than the upper threshold, a
sell strategy is recommended. Finally, if the stock price is between the lower and the upper
thresholds, a hold strategy is recommended.

The market price of one Compañia Cervecera Canarias share as of 15 May 2020 is €72.50.
This is lower than the estimated fair value of €92.55 by approximately 21.66%.
Furthermore, since the stock price
 235

of €72.50 is lower than the lower threshold of €83.30, we recommend a buy strategy as of
May 15, 2020.

Exhibit 64: Recommended investment strategy

Lower threshold: €83.30 Upper threshold: €101.81

BUY HOLD SELL

Intrinsic Value: €92.55

 236

References
Anheuser-Busch InBev (2010 – 2019). Annual reports. Retrieved from: https://www.ab-
inbev.com/investors/annual-reports.html

Analysts’ consensus estimates. (2020). Retrieved May 5, 2020 from Compañia

Cervecera Canarias: https://www.theCompañia Cervecera
Canariascompany.com/investors/share-information/analyst-and- consensus-
estimates; Carlsberg: https://www.carlsberggroup.com/investor-
relations/analysts-estimates/consensus-estimates/; Market Screener:
https://www.marketscreener.com/MOLSON-COORS-BEVERAGE-COM-
14548/financials/

A quick guide to the US-China trade war. (2020, January 16). Retrieved April 13, 2020 from
BBC: https://www.bbc.com/news/business-45899310

Bandoim, L. (2019, July 24). Brewery uses AI and IoT technology to improve the quality
of beer. Forbes. Retrieved April 15, 2020 from :
https://www.forbes.com/sites/lanabandoim/2019/07/24/brewery-uses-ai-and-iot-
technology-to-improve-the-quality-of-beer/#7183b7ec4a98

Barney, J. (1991). Firm resources and sustained competitive advantages. Journal of

Management, Vol. 17, No. 1, 99-120.

Berk, J.B., & DeMarzo, P.M. (2017). Corporate Finance: 4th edition, global edition. Pearson
Education Limited.

Berk, J. B., & DeMarzo, P. M. (2014). Corporate finance. Boston, MA: Pearson Education
Limited.

Brexit: All you need to know about the UK leaving the EU. (2020, February 17). Retrieved
April 13, 2020 from BBC: https://www.bbc.com/news/uk-politics-32810887

Canada Revenue Agency. (2020. February). Adjusted rates of excise duty on beer. Retrieved
April 03, 2020 from: https://www.canada.ca/en/revenue-agency/services/forms-
publications/publications/edbn27/adjusted-rates-excise-duty-beer.html

Carlsberg (2020) Product categories. Retrieved April 01, 2020 from:

https://www.carlsberggroup.com/products/?term=&beerType=1371

Carlsberg. (2010 – 2019). Annual reports. Carlsberg A/S Retreived:

https://www.carlsberggroup.com/reports-downloads/

Carlsberg. (2019). Sustainability Report 2019. Retrieved from:

https://www.carlsberggroup.com/media/35965/carlsberg-as-sustainability-report-
2019.pdf Carlsberg. (2020).

Central Board of indirect taxes & customs, Government of India. (2019). Central Excise
tax. Retrieved April 01, 2020 from:
http://cbic.gov.in/resources//htdocs-cbec/excise/cxt- 2017-18/Chap%2022.pdf
 237

China’s Ministry of Finance. (2001). Notice on adjusting the consumption tax policy for
alcoholic products. Ministry of Finance State Administration of Taxation Retrieved
April 01, 2020: http://www.gov.cn/gongbao/content/2002/content_61971.htm

Colbert, R. (2019, August 12). 5 trends transforming the beverage industry. KPMG.
Retrieved April 01, 2020 from:
https://home.kpmg/xx/en/blogs/home/posts/2019/08/five-trends-transforming-the-
beverage-industry.html

Coronavirus: US 'wants 3M to end mask exports to Canada and Latin America'. (2020, April
3). BBC. Retrieved April 13, 2020, from: https://www.bbc.com/news/world-us-
canada-52161032

Cyndi. (2019, July 29). Getting to Know Beer’s Key Ingredients: Barley growers say, if
there is no barley then there is no beer. Beverage Master: craft spirit & brew
magazine. Retrieved April 01, 2020, from: https://beverage-
master.com/2019/07/getting-to-know-beers-key-ingredients-barley-growers-say-if-
there-is-no-barley-then-there-is-no-beer/

Damodaran, A. (2006). Estimating Risk Free Rates. Retrieved from

http://people.stern.nyu.edu/adamodar/pdfiles/papers/riskfree.pdf

Damodaran, A. (2011). The little book of valuation: How to value a company, pick a stock
and profit. United States: Wiley, John & Sons.

Damodaran, A. (2012). Investment Valuation (3rd Edition ed.). Wiley Finance.

Damodaran, A. (2012). Investment Valuation (Vol. Third Edition). New Jersey: Wiley.

Damodaran, A. (2016). The Cost of Capital: The Swiss Army Knife of Finance.
Retrieved April 15,2020 from
http://people.stern.nyu.edu/adamodar/pdfiles/papers/costofcapital.pdf

Deloitte. (2020). Global power of retailing: 23rd edition. Deloitte.

Didora, P., L. (2018, October 30). The evolution of of Brewing Tech: Innovations that have
redefined beer in the modern age. The Growler. Retrieved April 2020, Retrieved
from: https://growlermag.com/the-evolution-of-of-brewing-tech-innovations-that-
have-redefined-beer-in-the-modern-age/

Draft landscape of COVID-19 candidate vaccines. (2020, May 15). Retrieved May 15, 2020
from World Health Organization: https://www.who.int/publications/m/item/draft-
landscape-of-covid-19-candidate-vaccines

Drinks Industry Sustainability Index - Trends Report 2020 (2020). C&C Group plc.
Retrieved April 01, 2020 from: https://candcgroupplc.com/wp-
content/uploads/2020/02/CC.FootprintDrinksReport.2020.pdf

Ernst and Young. (2019). International GAAP 2019. John Wiley & Sons Ltd.
 238

European Commission. (2019a). Alcoholic Beverages. European Commission. Retrieved

April 01, 2020 from: https://ec.europa.eu/jrc/en/health-knowledge-
gateway/promotion-prevention/alcohol

European Commission. (2019b, May 13). Antitrust: Commission fines AB InBev €200
million for restricting cross-border sales of beer. European Commission. Retrieved
April 01, 2020 from:
https://ec.europa.eu/commission/presscorner/detail/en/IP_19_2488

European Commission. (2019c). Paris Agreement. European Commission. Retrieved April

01, 2020 from :
https://ec.europa.eu/clima/policies/international/negotiations/paris_en

Ewing, J. (2016, June 14). German Bond Yield Goes Negative on ‘Brexit’ Fears and Central
Bank Policies. The New York Times. Retrieved April 13, 2020 from:
https://www.nytimes.com/2016/06/15/business/dealbook/germany-bonds-negative-
ecb.html

Ewing, J. (2016, June 14). German Bond Yield Goes Negative on 'Brexit' Fears and Central
Bank Policies. Retrieved from
https://www.nytimes.com/2016/06/15/business/dealbook/germany-bonds-negative-
ecb.html

Fama, E. F., & French, K. R. (1992). The cross‐section of expected stock returns. The
Journal of Finance, 47(2), 427-465.

FMI. (2020). Supermarket facts. The food industry association. Retrieved April 2020:
https://www.fmi.org/our-research/supermarket-facts

Foley, A. (2019, September). Excise tax rate in Europe: How Ireland compares. The drinks
industry group of Ireland (DIGI).

Forgrieve, J. (2020, January 27). How the beer industry is taking on climate change. Smart
Brief. Retrieved April 05, 2020 from:
https://www.smartbrief.com/original/2020/01/how-beer-industry-taking-climate-
change-0

Gaiziunas, A. (2019). The Numbers Game: Understanding Financial Strategy for Your
Brewery. Brewers Association. Retrieved April 1, 2020 from:
https://www.brewersassociation.org/resource-hub/small-production/

Global Wellness Institute. (2018, October). Global wellness economy monitor. Global
Wellness Institute.

Globe Scan. (2019). A global consumer insights project: Healthy & Sustainable living.
Globe Scan.

Hayes, A. (2020a, March 5). Fama and French Three Factor Model Definition. Retrieved
from https://www.investopedia.com/terms/f/famaandfrenchthreefactormodel.asp
 239

Hayes, A. (2020b, January 29). Understanding Arbitrage Pricing Theory. Retrieved from
https://www.investopedia.com/terms/a/apt.asp

Compañia Cervecera Canarias N.V. (2020). 2019 Annual report of

Compañia Cervecera Canarias N.V. Retrieved from Compañia Cervecera

Canarias N.V. (2047). (n.d.). Retrieved from https://www.boerse-

berlin.com/index.php/Bonds?isin=USN39427FW99

Compañia Cervecera Canarias N.V. (n.d.). Retrieved from

https://www.theCompañia Cervecera
Canariascompany.com/investors/bondholder-information

Compañia Cervecera Canarias. (2010a – 2019a). Annual reports. Compañia Cervecera

Canarias N.V: https://www.theCompañia Cervecera
Canariascompany.com/investors/results-reports-webcasts-and- presentations

Compañia Cervecera Canarias. (2010b – 2019b). Full-year result reports. Compañia

Cervecera Canarias N.V: https://www.theCompañia Cervecera
Canariascompany.com/investors/results-reports-webcasts-and- presentations

Compañia Cervecera Canarias. (2020). Our response to Covid-19.

Retrieved May 10, 2020 from: https://www.theCompañia Cervecera
Canariascompany.com/our-response-covid-19

Hitchner, J. R. (2017). Financial valuation: applications and models. Hoboken, NJ: Wiley.

Hitchner, J.R. (2017). Financial valuation: applications and models: 4th edition. John Wiley
& Sons, Inc, 117-342.

Hubbell, D. (2019, May 17). Yes, Even Beer Is Contributing to Climate Change. October.
Retrieved April 01,2020, from: https://oct.co/essays/beer-industry-climate-change

IMF Data Mapper. (2020). Retrieved April 15, 2020 from IMF:
https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/ADVEC/OEMDC/
WEOWORLD

IMF (2020). World Economic Outlook. Washington D.C.: International Monetary Fund.

Incfile. (2019). How to Start a Brewery Business. Retrieved April 01 2020 from:
https://www.incfile.com/start-a-business/brewery-business/

Jesus, the Beatles and Masa Son? (2020, May 19). The New York Times. Retrieved May 01,
2020 from: https://www.nytimes.com/2020/05/19/business/dealbook/masa-son-
softbank.html

Kaldestad, Y., & Møller, B. (2015). Verdivurdering: teoretiske modeller og praktiske

teknikker for verdsette selskaper (1. utgave), Bergen: Fagbokforlaget.

Kaur, H., Kim, A., & Sherman, I. (2020, January 11). The US-Iran conflict: A timeline of
how we got here. Retrieved April 14, 2020 from CNN:
https://edition.cnn.com/interactive/2020/01/world/us-iran-conflict-timeline-trnd/
 240

Kim, Tae. (2018, May 7). Warren Buffett believes this is the most important thing to find in
a business. CNBC. Retrieved April 03, 2020, from :
https://www.cnbc.com/2018/05/07/warren-buffett-believes-this-is-the-most-
important-thing-to-find-in-a-business.html

Koller, T., GoedHart, M. & Wessels D. (2015). Valuation: Measuring and Managing the
Value of Companies: 6th edition. Wiley Finance.

Koller, T., Goedhart, M., and Wessels, D. (McKinsey & Company). 2012. Valuation:
Measuring and Managing the Value of Companies, University Edition. 5th Ed.
Hoboken, NJ: Wiley.

KPMG Advisory N.V. (2020). Equity Market Risk Premium – Research Summary.
Retrieved April 13, 2020 from

Larkin, P. (2020, February 24). Link liquor excise tax increase to inflation
Independent Online (IOL). Retrieved April 01, 2020, from:
https://www.iol.co.za/personal- finance/tax/link-liquor-excise-tax-increase-to-
inflation-43351176

Market Line. (2015, April). MarketLine Industry profile: Global Beer. Market Line.

Market Line. (2020a, February). MarketLine Industry profile: beer & cider in Europe.
Market Line

Market Line. (2020b, March). Company profile: Compañia Cervecera Canarias N.V.
Retrieved May 01,2020 from:

Marr, B. (2017, November 20). The Incredible ways Compañia Cervecera Canarias uses Big
Data, The Internet of Things and Artificial Intelligence (AI). Forbes. Retrieved April
05, 2020 from: https://www.forbes.com/sites/bernardmarr/2017/11/20/the-incredible-
ways-Compañia Cervecera Canarias- uses-big-data-the-internet-of-things-and-
artificial-intelligence-ai/#21b7624e480e

Massoudi, A., & Abboud, L. (2019, July 24). How deal for SABMiller left AB InBev with
lasting hangover. Financial Times. Retrieved April 1 ,2020, from :
https://www.ft.com/content/bb048b10-ad66-11e9-8030-530adfa879c2

McCoy, M., K. (2020, March 2). From Farm to Pint, How Will Beer Weather Climate
Change? Wisconsin Public Radio. Retrieved April 05, 2020
from:https://www.wpr.org/farm-pint-how-will-beer-weather-climate-change

McKinsey, Company, Koller, T., Goedhart, M., & Wessels, D. (2015). Valuation: Measuring
and Managing the Value of Companies, Website, 6th Ed. John Wiley & Sons.

MDPI. (2019a). Worldwide Research Trends on Wheat and Barley: A Bibliometric

Comparative Analysis. Multidisciplinary Digital Publishing Institute.

MDPI. (2019b). Water Governance in Cities: Current Trends and Future Challenges.
Multidisciplinary Digital Publishing Institute.
 241

Milcallef, J. V. (2020, April 4). How The COVID-19 Pandemic Is Upending The Alcoholic
Beverage Industry. Retrieved April 15, 2020 from Forbes:
https://www.forbes.com/sites/joemicallef/2020/04/04/how-the-covid-19-pandemic-
is-upending-the-alcoholic-beverage-industry/#2d7652d04b0b

Miles, J., A., & Ezzell J.R. (1980, September). The Weighted Average Cost of Capital,
Perfect Capital Markets, and Project Life: A Clarification. The Journal of Financial
and Quantitative Analysis, Vol. 15, No. 3, pp. 719-730.

Molson Coors. (2010 – 2019). Annual reports. Molson Coors beverage company:
https://ir.molsoncoors.com/financials/sec-filings/default.aspx

Mulier, T. (2020, May 14). Novartis CEO Says Covid-19 Vaccine May Take Until End of
2021. Retrieved May 15, 2020 from Bloomberg:
https://www.bloomberg.com/news/articles/2020-05-14/novartis-ceo-says-covid-19-
vaccine-may-take-until-end-of-2021

National Beer Sales & Production Data. (2020). Brewers Association. Retrieved April 01,
2020 from: https://www.brewersassociation.org/statistics-and-data/national-beer-
stats/

Nature Plants. (2018, November). Decreases in global beer supply due to extreme drought
and heat. Nature Plants.

Nicolle, W. (2019, October 1). Could an upcoming climate summit become the next Paris
agreement? Prospect Magazine. Retrieved April 01, 2020, from :
https://www.prospectmagazine.co.uk/other/climate-change-news-uk-glasgow-2020-
summit

OECD. (2020). Climate change: Consequences of inaction. OECD. Retrieved April 05, 2020
from: https://www.oecd.org/environment/climate-change-consequences-of-
inaction.htm

Opler, T., Pinkowitz, L., Stulz, R. & Williamson, R. (1999). The determinants and
implications of corporate cash holdings. Journal of Financial Economics 52 (1999),
3-46

Parker, G., Hughes, L., & Brunsden, J. (2020, March 11). Economic cost of Brexit laid bare
in OBR forecasts. Retrieved April 13, 2020 from Financial Times:
https://www.ft.com/content/72938c66-638f-11ea-a6cd-df28cc3c6a68

Pellechia, T. (2019, February 20). Low- And No-Alcohol Beverages Are A Growing Trend
Worldwide, Says New Report. Forbes. Retrieved April 2020, from:
https://www.forbes.com/sites/thomaspellechia/2019/02/20/lowno-alcohol-beverages-
are-in-the-worldwide-future-says-latest-report/#6412c8791c85

Penman, S. H. (2013). Financial statement analysis and security valuation (5th edition).New
York: McGraw-Hill.
 242

Porter, M., E. (1980). Competitive Strategy: Techniques for analysing industries and
competitors. Simon & Schuster Inc.

Pramuk, J. (2019, May 13). It’s not just China: Trump’s trade war is raging on several fronts.
Retrieved April 13, 2020 from CNBC: https://www.cnbc.com/2019/05/13/trump-
carries-out-tariff-trade-wars-with-china-eu-canada-and-mexico.html

Rebalancing the 'Covid-19' effect on Alcohol Sales. (2020, May 07). Retrieved May 15,
2020 from Nielsen: https://www.nielsen.com/us/en/insights/article/2020/rebalancing-
the-covid-19-effect-on-alcohol-sales/

Receita Federal do Brasil. (2020, February). Product tax incidence table industrialized
(TIPI). Retrieved April 01, 2020 from: http://receita.economia.gov.br/acesso-
rapido/legislacao/documentos-e-arquivos/tipi-1.pdf

Reints. (2019, November 5). Consumers say they want more sustainable products. Now they
have the receipts to prove It. Fortune. Retrieved April 01, 2020, from:
https://fortune.com/2019/11/05/sustainability-marketing-consumer-spending/

Research and development tax incentives for the brewing industry (2019). Alliant Group.
Retrieved April 15, 2020 from:
https://www.alliantgroup.com/industries/agriculture/brewing/

Roseboro, K. (2019, October). Anheuser-Busch initiative aims to help farmers transition to

organic, boost organic industry. Green America. Retrieved April 05, 2020, from:
https://www.greenamerica.org/story/anheuser-busch

Ross, S. (2020, January 9). What Is a Good Profit Margin for Retailers? Investopedia.
Retrieved April 01, 2020, from:
https://www.investopedia.com/ask/answers/071615/what-profit-margin-usual-
company-retail-sector.asp

Settembre, J. (2019, March 11). Beer is now being sold as a ‘wellness’ product. Market
Watch. Retrieved April 2020, from: https://www.marketwatch.com/story/beer-is-
now-being-sold-as-a-wellness-product-2019-03-07

Shumway, K. (2019, June 12). Brew Bound: beer industry news, events and jobs. Retrieved
April 2020, from “Beer Business Finance: The Economics of ‘Craft-on-Craft’
Acquisitions”: https://www.statista.com/statistics/691527/number-of-craft-breweries-
european-union-eu/

Statista. (2019a, November). Total retail sales worldwide from 2017 to 2023. Retrieved
April 2020: https://www.statista.com/statistics/443522/global-retail-sales/

Statista. (2019b, August). Number of craft breweries in leading countries in Europe in 2017.
Retrieved April 01, 2020 from: https://www.statista.com/statistics/691527/number-
of-craft-breweries-european-union-eu/

Statista. (2019c, n.d.). European beer trend: statistic report, 2019 edition. Statista.
 243

Statista. (2019d, Aug 21). The world's leading 10 brewing groups in 2018, based on
production volume. Retrieved April 01, 2020 from:
https://www.statista.com/statistics/227197/leading-10-brewing-groups-worldwide-
based-on-production-volume/

Statista. (2020a, May). Beer worldwide/region/country outlook. Retrieved May 2020:

https://www.statista.com/outlook/10010000/100/beer/worldwide#market-revenue

Statista. (2020b, February 10). Tax rate on alcoholic beverages in Russia between 2016 and
2019, by type. Retrieved April 2020: https://www.statista.com/statistics/1016633/tax-
rate-on-alcoholic-beverages-russia/

Statista. (2020c, January). Permitted blood alcohol levels for driving in Europe in 2018*, by
country. Retrieved April 2020: https://www.statista.com/statistics/448094/permitted-
blood-alcohol-levels-for-driving-in-europe-by-country/

Statista. (2020d, April). Major barley producers worldwide in 2018/19, by country

(in million metric tons). Retrieved April 01, 2020 from:
https://www.statista.com/statistics/272760/barley-harvest-forecast/

Statista. (2020e, February). Distribution share of hop production volume worldwide in

2019, by leading country. Retrieved April 01, 2020 from:
https://www.statista.com/statistics/757917/share-of-hop-production-worldwide-by-
major-producer/

Statista. (2020f). Number of craft beer breweries in the United States in 2019, by state.
Retrieved April 01,2020: https://www.statista.com/statistics/726518/number-craft-
breweries-state/

Statista. (2020g). Alcoholic drinks worldwide/region/country outlook. Retrieved April 01,

2020 from: https://www.statista.com/outlook/10000000/100/alcoholic-
drinks/worldwide

Stowe, J.D., Robinson, T.R., Pinto, G.E., and McLeavey, D.W. 2007. Equity Asset
Valuation. 1st Ed. Hoboken, NJ: Wiley.

STOXX Index Guide. (2020, May). Retrieved May 01, 2020 from STOXX:
https://www.stoxx.com/document/Indices/Common/Indexguide/stoxx_index_guide.p
df

STOXX. (n.d.). STOXX® Europe 600. Retrieved from https://www.stoxx.com/index-

details?symbol=SXXP

Suozzo, P., Cooper, S., Gillian, S., & Deng, Z. (2001). Valuation Multiples: A
Primer.London: UBS Warburg.

Sustainable brands. (2019). Sustainable brands. Retrieved April 2020, from “Conscious
Consumers Flocking to Pinterest for Sustainable Lifestyle Ideas”:
https://sustainablebrands.com/read/behavior-change/conscious-consumers-flocking-
to-pinterest-for-sustainable-lifestyle-ideas
 244

Swanson, A., & Rappeport, A. (2020, January 15). Trump Signs China Trade Deal, Putting
Economic Conflict on Pause. Retrieved April 13, 2020 from The New York Times:
https://www.nytimes.com/2020/01/15/business/economy/china-trade-deal.html

Tett, G. (2019, September 19). Negative interest rates take investors into surreal territory.
Retrieved April 10, 2020 from Financial Times:
https://www.ft.com/content/09360f2e-98b4-11e9-9573-ee5cbb98ed36

The Brew Enthusiast. (2019). The three-tier system. Retrieved April 01, 2020: from
https://www.thebrewenthusiast.com/three-tier-system

Trump threatens new tariffs on China in retaliation for coronavirus. (2020, May 1).
Retrieved April 13, 2020 from CNBC: https://www.cnbc.com/2020/05/01/trump-
threatens-new-tariffs-on-china-in-retaliation-for-coronavirus.html

TTB. (2020). Tax and fee rates. Alcohol and Tobacco tax and trade bureau. Retrieved April
01, 2020 from: https://www.ttb.gov/tax-audit/tax-and-fee-rates#Beer18

Warner, B. (2019, July 30). Why Compañia Cervecera Canarias and Budweiser are killing
it with zero-alcohol Beer. Fortune. Retrieved April 05, 2020 from:
https://fortune.com/2019/07/30/why- Compañia Cervecera Canarias-and-
budweiser-are-killing-it-with-zero-alcohol-beer/

Watson, A. (2018, October 16). Evolving Beer’s Supply Chain in an Era of Climate Change.
Brewers Association. Retrieved April 03, 2020 from:
https://www.brewersassociation.org/insights/evolving-beers-supply-chain-in-an-era-
of-climate-change/

What a no-deal Brexit likely means for the EU economy. (2020, April 29). Retrieved April
30, 2020 from Telegraph: https://www.telegraph.co.uk/money/fisher-investments-
uk/what-a-no-deal-brexit-means-for-eu- economy/?
fbclid=IwAR0yKH2nkbMEiHJQQz9zV3xWXdsaxeda8g6GgD6ALmOq
UsBLTGhI1LzfuuA

WHO (2018). Global status report on alcohol and health 2018. World Health Organization.

World population review. (2020). World population review. Retrieved April 2020:
https://worldpopulationreview.com/countries/drinking-age-by-country/

Yeung, J., & Renton, A. (2020, May 15). May 15 coronavirus news. Retrieved May 15,
2020 from CNN: https://edition.cnn.com/world/live-news/coronavirus-pandemic-05-
15- 20-intl/index.html
 245

Appendix A: Financial Statement Analysis of AB InBev

Exhibit 65: AB InBev’s detailed balance sheet over the period 2010 – 2019
in million US dollar 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Assets
Goodwill 52,498 51,302 51,766 69,927 70,758 65,061 135,864 140,940 133,311 128,114
Acquired intangible assets 22,961 23,344 23,863 28,443 28,941 28,667 43,896 44,895 43,571 41,221
Goodwill and acquired intangibles 75,459 74,646 75,629 98,370 99,699 93,728 179,760 185,835 176,882 169,335
PP&E 15,893 16,022 16,461 20,889 20,263 18,952 26,219 27,184 27,615 27,544
Software and other operating intangibles 398 474 508 895 982 1,010 893 979 1,260 1,231
Investment in associates and joint ventures 7,295 6,696 7,090 187 198 212 4,324 5,263 6,136 5,861
Investment securities 243 244 256 193 30 48 82 100 108 110
Deferred tax assets 744 673 807 1,180 1,058 1,181 1,261 1,216 1,517 1,719
Employee benefits 13 10 12 10 10 2 10 22 16 14
Income tax receivables - - - - - - 6 708 992 1,081
Derivatives 585 613 241 120 507 295 146 25 291 132
Trade and other receivables 1,115 726 987 1,132 1,262 913 868 834 769 807
Total non-current assets 101,745 100,104 101,991 122,976 124,009 116,341 213,569 222,166 215,586 207,834

Investment securities 641 103 6,827 123 301 55 5,659 1,304 87 92

Inventories 2,409 2,466 2,500 2,950 2,974 2,862 3,889 4,119 4,234 4,427
Income tax receivables 366 312 195 332 359 687 1,112 908 457 627
Derivatives 1,059 659 398 607 1,737 3,268 971 458 16 230
Trade receivables and accrued income 2,639 2,572 2,736 2,935 3,363 3,241 4,523 4,752 4,412 4,046
Prepaid expenses 451 434 453 616 554 465 316 428 329 563
Other receivables, operating 60 78 77 687 175 314 846 846 1,094 616
Other receivables, non-operating 429 378 359 517 620 431 667 540 540 962
Operating cash 726 781 795 864 941 872 910 1,129 1,061 1,047
Excess cash 3,785 4,539 6,256 8,975 7,416 6,051 7,669 9,343 6,013 6,191
Assets held for sale 32 1 34 84 101 48 16,455 133 39 10,013
Total current assets 12,597 12,323 20,630 18,690 18,541 18,294 43,017 23,960 18,282 28,814

Total assets 114,342 112,427 122,621 141,666 142,550 134,635 256,586 246,126 233,868 236,648

Liabilities and Equity

Issued capital 1,733 1,734 1,734 1,735 1,736 1,736 1,736 1,736 1,736 1,736
Share premium 17,535 17,557 17,574 17,608 17,620 17,620 17,620 17,620 17,620 17,620
Reserves 2,335 381 327 18 (4,558) (13,168) 23,769 24,835 19,061 24,882
Retained earnings 13,656 17,820 21,519 31,004 35,174 35,949 28,214 28,394 26,068 31,484
Shareholders' equity 35,259 37,492 41,154 50,365 49,972 42,137 71,339 72,585 64,485 75,722
Non-controlling interests 3,540 3,552 4,299 4,943 4,285 3,582 10,086 7,635 7,404 8,831
Total equity 38,799 41,044 45,453 55,308 54,257 45,719 81,425 80,220 71,889 84,553

Borrowings, non-current 41,961 34,598 38,951 41,274 43,630 43,541 113,941 108,949 106,997 97,564
Employee benefits 2,746 3,440 3,687 2,862 3,050 2,725 3,014 2,993 2,681 2,848
Deferred tax liabilities 11,909 11,279 11,168 12,841 12,701 11,961 14,703 13,10 7
4 13,165 12,82 4
2

Income tax payables - - - - - - - 732 576 1,022

Derivatives 1,216 508 273 159 64 315 471 937 766 352
Indirect taxes payable, non-current 535 397 381 369 230 186 159 157 194 174
Trade payables, non-current 395 466 461 381 305 484 465 380 238 237
Other non-operating payables, non-current 149 177 1,198 2,313 471 571 692 925 1,384 1,532
Provisions 912 874 641 532 634 677 1,347 1,515 1,152 701
Total non-current liabilities 59,823 51,739 56,760 60,731 61,085 60,460 134,792 129,695 127,153 117,254

Bank overdrafts 14 8 - 6 41 13 184 117 114 68

Borrowings, current 2,919 5,559 5,390 7,846 7,451 5,912 8,618 7,433 4,584 5,410
Income tax payables 478 499 543 1,105 629 669 3,845 1,558 1,220 1,346
Derivatives 1,730 1,427 1,008 630 1,013 3,980 1,263 1,457 5,574 3,799
Trade payables and accrued expenses 6,759 7,794 8,539 10,096 11,307 11,918 14,450 15,513 15,832 16,076
Payroll and social security payables 624 610 883 1,173 1,030 924 1,027 1,284 900 736
Indirect taxes payable 1,323 1,447 1,497 1,689 1,849 1,610 2,750 2,862 2,633 2,708
Interest payable 874 829 870 888 850 817 1,797 1,790 1,616 1,679
Consigned packaging 559 576 639 682 715 680 974 1,111 1,093 1,106
Dividend payable 116 566 765 384 518 239 447 479 331 338
Deferred consideration on acquisitions 86 88 94 932 1,640 1,474 1,641 1,722 163 221
Provisions 238 241 180 196 165 220 1,199 885 766 210
Liabilities associate with assets held for sale - - - - - - 2,174 - - 1,144
Total current liabilities 15,720 19,644 20,408 25,627 27,208 28,456 40,369 36,211 34,826 34,841

Total equity and liabilities 114,342 112,427 122,621 141,666 142,550 134,635 256,586 246,126 233,868 236,648

(Source: AB InBev’s annual reports)

 246

Exhibit 66: AB InBev’s invested capital over the period 2010 – 2019
in million US dollar 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating cash 726 781 795 864 941 872 910 1,129 1,061 1,047
Inventories 2,409 2,466 2,500 2,950 2,974 2,862 3,889 4,119 4,234 4,427
Income tax receivables, current 366 312 195 332 359 687 1,112 908 457 627
Trade receivables and accrued income 2,639 2,572 2,736 2,935 3,363 3,241 4,523 4,752 4,412 4,046
Prepaid expenses 451 434 453 616 554 465 316 428 329 563
Other receivables, operating 60 78 77 687 175 314 846 846 1,094 616
Trade payables and accrued expenses (7,154) (8,260) (9,000) (10,477) (11,612) (12,402) (14,915) (15,893) (16,070) (16,313)
Payroll and social security payables (624) (610) (883) (1,173) (1,030) (924) (1,027) (1,284) (900) (736)
Indirect taxes payable (1,858) (1,844) (1,878) (2,058) (2,079) (1,796) (2,909) (3,019) (2,827) (2,882)
Consigned packaging (559) (576) (639) (682) (715) (680) (974) (1,111) (1,093) (1,106)
Income tax payables (478) (499) (543) (1,105) (629) (669) (3,845) (1,558) (1,220) (1,346)
Operating working capital (4,022) (5,146) (6,187) (7,111) (7,699) (8,030) (12,074) (10,683) (10,523) (11,057)

PP&E * 15,893 16,022 16,461 20,889 20,263 18,952 26,219 27,184 27,615 27,544
Software and other operating intangibles 398 474 508 895 982 1,010 893 979 1,260 1,231

Invested capital, excluding goodwill and

12,269 11,350 10,782 14,673 13,546 11,932 15,038 17,480 18,352 17,718
acquired intangibles

Goodwill 52,498 51,302 51,766 69,927 70,758 65,061 135,864 140,940 133,311 128,114
Acquired intangible assets 22,961 23,344 23,863 28,443 28,941 28,667 43,896 44,895 43,571 41,221
Goodwill and acquired intangibles 75,459 74,646 75,629 98,370 99,699 93,728 179,760 185,835 176,882 169,335
Gross-up tax effects (8,212) (8,180) (8,331) (9,559) (9,627) (9,488) (14,663) (11,274) (10,550) (10,216)
Adjusted goodwill and acquired intangibles 67,247 66,466 67,298 88,811 90,072 84,240 165,097 174,561 166,332 159,119

Invested capital, including goodwill and

79,516 77,816 78,080 103,484 103,618 96,172 180,135 192,041 184,684 176,837
acquired intangibles

Investment in associates and joint ventures 7,295 6,696 7,090 187 198 212 4,324 5,263 6,136 5,861
Tax loss carried-forward 297 300 242 394 390 249 1,278 1,130 577 515
Other financial assets 923 524 6,529 (1,258) 1,370 (1,282) 18,613 (1,671) (5,621) 5,357
Excess cash 3,785 4,539 6,256 8,975 7,416 6,051 7,669 9,343 6,013 6,191

Total capital invested 91,816 89,875 98,197 111,782 112,992 101,402 212,019 206,106 191,789 194,761

Reconciliation to total fund invested

Shareholders' equity 35,259 37,492 41,154 50,365 49,972 42,137 71,339 72,585 64,485 75,722
Deferred tax liabilities, net, PP&E and inventories 2,454 2,155 2,092 2,379 2,270 1,962 3,434 2,211 2,250 2,083
Deferred tax liabilities, net, non-operating assets 796 571 180 117 136 (421) (3,377) (464) (575) (679)
Dividend payable 116 566 765 384 518 239 447 479 331 338
Total shareholders' equity 38,625 40,784 44,191 53,245 52,896 43,917 71,843 74,811 66,491 77,464
Non-controlling interests 3,540 3,552 4,299 4,943 4,285 3,582 10,086 7,635 7,404 8,831

Borrowings, non-current 41,961 34,598 38,951 41,274 43,630 43,541 113,941 108,949 106,997 97,564
Borrowings, current 2,919 5,559 5,390 7,846 7,451 5,912 8,618 7,433 4,584 5,410
Bank overdrafts 14 8 - 6 41 13 184 117 114 68
Interest payable 874 829 870 888 850 817 1,797 1,790 1,616 1,679
Employee benefits, net 2,733 3,430 3,675 2,852 3,040 2,723 3,004 2,971 2,665 2,834
Provisions 1,150 1,115 821 728 799 897 2,546 2,400 1,918 911

Total capital provided 91,816 89,875 98,197 111,782 112,992 101,402 212,019 206,106 191,789 194,761

(Source: AB InBev’s annual reports)

 225

Exhibit 67: AB InBev’s NOPLAT over the period 2010 – 2019

in million US dollar 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revenue 36,297 39,046 39,758 43,195 47,063 43,604 45,517 56,444 53,041 52,3

Cost of sales (16,151) (16,634) (16,422) (17,594) (18,756) (17,137) (17,802) (21,386) (19,933) (
Depreciation, amortization and impairment 1,954 1,987 2,010 2,133 2,270 2,139 2,313 2,857 2,874
Adjusted cost of sales (14,197) (14,647) (14,412) (15,461) (16,486) (14,998) (15,489) (18,529) (17,059

Distribution expense (2,913) (3,313) (3,787) (4,061) (4,558) (4,259) (4,543) (5,876) (5
Depreciation, amortization and impairment 127 112 106 118 128 123 144 203
Adjusted distribution expense (2,786) (3,201) (3,681) (3,943) (4,430) (4,136) (4,399) (5,673)

Sales and marketing expenses (4,712) (5,143) (5,254) (5,958) (7,036) (6,913) (7,745) (8,3
Depreciation, amortization and impairment 337 400 393 447 481 458 571
Adjusted sales and marketing expenses (4,375) (4,743) (4,861) (5,511) (6,555) (6,455) (7,174)

Administrative expenses (1,960) (2,043) (2,200) (2,539) (2,791) (2,560) (2,883

Depreciation, amortization and impairment 282 246 238 278 350 347 4
Adjusted administrative expenses (1,678) (1,797) (1,962) (2,261) (2,441) (2,213) (

Depreciation of tangible assets (2,355) (2,401) (2,401) (2,567) (2,808) (2,670)

Depreciation of leased assets - - - - - -
Amortisation of softwares and other operating (147) (135) (114) (144) (190)
intangibles
Total depreciation and operating amortisation (2,502) (2,536) (2,515) (2,711) (2,998)

EBITA 10,759 12,122 12,327 13,308 14,15

Operating cash tax (2,825) (3,183) (3,146) (3,473) (3,
NOPLAT 7,934 8,939 9,181 9,835 1

Calculation of operating tax

Weighted nominal tax rate 34.7% 33.7% 32.8% 33.3
Tax incentives (on taxable basis) 600 600 600
Tax at weighted nominal tax rate 3,733 4,085 4,043
Tax incentives (208) (202) (197)
Other tax deductions (700) (700) (700)
Operating tax 2,825 3,183 3,14
(Increase) Decrease in operating deferred tax
liabilities (net) - -
Operating cash tax 2,825 3,183
Operating cash tax rate 26.3% 26.3%

Reconciliation to net income

NOPLAT 7,934

Other operating incomes (expenses) 6

Impairment of tangible assets
Impairment of intangible assets
Adjustment to depreciation, amortisation and
impairment

Restructuring
Acquisition costs business combination
Business and asset disposal
Brazil state tax regularization pro
Cost related to public offering
state in Budweiser APAC
Provision for EU investiga
Impairment of assets
Judical settlement
Fair value adjustm

Finance cost
Finance inc
Non-rec
Share
Non
N

(Source: AB InBev’s annual reports)

 226

Exhibit 68: Financial performance analysis of AB InBev

Operating ratios 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating EBITA/Revenue 31.0% 31.0% 30.8% 30.1% 29.7% 28.0% 30.8% 31.4% 30.5%
Cost of goods sold/Revenue 37.5% 36.2% 35.8% 35.0% 34.4% 34.0% 32.8% 32.2% 33.5%
Distribution expense/Revenue 8.2% 9.3% 9.1% 9.4% 9.5% 9.7% 10.1% 9.9% 9.9%
Sales and marketing expenses/Revenue 12.1% 12.2% 12.8% 13.9% 14.8% 15.8% 13.7% 13.3% 12.5%
Administrative expenses/Revenue 4.6% 4.9% 5.2% 5.2% 5.1% 5.4% 5.8% 5.2% 5.5%
Depreciation & Amortization/Revenues 6.5% 6.3% 6.3% 6.4% 6.6% 7.1% 6.9% 8.1% 8.1%

Return on invested capital (ROIC)*

Operating working capital/Revenues -11.7% -14.3% -15.4% -15.7% -18.0% -22.1% -20.2% -20.0% -20.6%
Software, etc./Revenues 1.1% 1.2% 1.6% 2.0% 2.3% 2.1% 1.7% 2.1% 2.4%
PP&E (including leased assets)/Revenues 40.9% 40.9% 43.2% 43.7% 45.0% 49.6% 47.3% 51.7% 52.7%
Invested capital/Revenues 30.2% 27.8% 29.5% 30.0% 29.2% 29.6% 28.8% 33.8% 34.5%
Revenues/Invested capital, times 3.3 3.6 3.4 3.3 3.4 3.4 3.5 3.0 2.9
Pretax ROIC 102.6% 111.4% 104.6% 100.3% 101.6% 94.7% 106.8% 92.9% 88.5%
Operating cash tax rate 26.3% 26.3% 25.5% 26.1% 22.5% 20.3% 23.9% 22.7% 22.9%
After-tax ROIC, without goodwill and
75.7% 82.1% 77.9% 74.1% 78.7% 75.5% 81.2% 71.8% 68.2%
acquired intangibles
*
Average invested capitals are used

Revenue growth rate analysis

Volume growth 0.1% 0.8% -1.1% 2.9% -0.3% -0.4% -0.5% -7.4% 0.3%
Effect of acquisition/divestment 0.3% 0.5% 0.9% 2.4% 0.3% 1.6% -0.7% -7.7% -0.8%
Organic volume growth -0.2% 0.3% -2.0% 0.6% -0.6% -2.0% 0.2% 0.3% 1.1%
Revenue per hectolitre 4.8% 6.9% 5.3% 5.3% 6.8% 4.4% 4.8% 4.3% 3.2%
Organic revenue growth rate 4.6% 7.2% 3.3% 5.9% 6.2% 2.4% 5.0% 4.6% 4.3%
Effect of currency movement 3.1% -6.2% -3.2% -5.1% -12.7% -6.1% 1.1% -3.2% -5.0%
Effect of significant acquisitions 0.0% 0.0% 8.0% 5.5% 0.0% 7.4% 19.4% 0.0% 0.0%
Effect of immaterial acquisitions/divestitures -0.2% 0.8% 0.5% 2.7% -0.9% 0.7% -1.5% -4.6% -0.6%
Effect of restatement 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -2.8% 0.0%
Revenue growth rate 7.6% 1.8% 8.6% 9.0% -7.4% 4.4% 24.0% -6.0% -1.3%

(Source: AB InBev’s annual reports)

 227

Appendix B: Financial Statement Analysis of Carlsberg

Exhibit 69: Carlsberg’s detailed balance sheet over the period 2010 - 2019
in million DKK 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Assets
Goodwill 42,613 44,790 53,914 57,166 44,657 50,270 52,864 50,497 50,929 52,908
Acquired intangible assets 32,123 31,294 35,927 34,549 23,108 19,702 21,646 15,690 14,723 15,955
Goodwill & acquired intangible assets 74,736 76,084 89,841 91,715 67,765 69,972 74,510 66,187 65,652 68,863
Softwares and delivery rights 1,828 1,750 1,375 2,521 3,426 2,948 2,226 1,606 1,216 942
Property, plant and equipment (PP&E) 31,286 30,890 31,991 31,738 28,970 26,678 25,810 24,325 25,394 27,886
Investments in associat es and joint ventures
1 4,930 5,113 6,241 3,771 3,779 4,676 4,701 4,266 4,562 4,364
On-trade loans and other receivables1 1,747 1,649 2,208 2,049 2,115 1,854 1,071 952 1,097 1,179
Deferred tax assets 1,289 871 1,170 1,130 1,280 1,697 1,610 1,663 1,693 1,938
Total non-current assets 115,816 116,357 132,826 132,924 107,335 107,825 109,928 98,999 99,614 105,172

Inventory 4,191 4,350 4,541 4,592 4,293 3,817 3,963 3,834 4,435 4,751
Trade receivables 5,057 7,115 7,117 7,072 6,246 5,196 5,022 4,203 4,605 4,889
On-trade loans and other receivables1 2,985 4,005 2,804 2,404 4,292 3,065 2,951 2,546 2,404 2,111
Tax receivables 155 129 60 203 196 324 278 181 213 199
Prepayments 939 867 853 1,501 949 1,074 1,137 1,026 840 776
Operating cash 1,201 1,271 1,329 1,287 1,290 1,307 1,252 1,213 1,250 1,318
Excess cash 1,512 1,861 4,431 2,325 1,128 1,824 2,250 2,249 4,339 3,904
Assets held for sale 284 235 - - 27 469 125 - - -
Total current assets 16,324 19,833 21,135 19,384 18,421 17,076 16,978 15,252 18,086 17,948

Total assets 132,140 136,190 153,961 152,308 125,756 124,901 126,906 114,251 117,700 123,120

Liabilities and Equity

Share capital 501 501 3,051 3,051 501 3,051 3,051 3,051 3,051 3,051
Reserves (6,918) (8,632) (6,476) (13,890) (30,875) (35,447) (29,501) (33,483) (36,837) (33,652)
Retained earnings 58,961 63,703 73,686 78,650 72,199 75,885 77,261 77,362 79,088 74,049
Shareholders' equity 52,544 55,572 70,261 67,811 41,825 43,489 50,811 46,930 45,302 43,448
Non-controlling interests 5,381 5,763 3,389 3,190 3,563 3,742 2,839 2,595 2,587 2,587
Total equity 57,925 61,335 73,650 71,001 45,388 47,231 53,650 49,525 47,889 46,035

Borrowings, non-current 31,834 34,137 36,706 30,239 38,480 31,479 21,137 23,340 16,750 20,879
Post-retirement obligations 2,390 3,213 3,957 3,292 4,584 5,235 4,878 3,351 2,908 3,299
Non-current tax payable - - - - - - 1,638 1,795
Deferred tax liabilities 9,197 8,870 9,682 9,215 6,484 5,924 6,250 5,601 4,021 4,708
Provisions 1,471 965 1,230 2,567 2,916 3,374 3,642 3,61 1
4 3,827 4,03 7
2

Other non-current liabilities 747 1,087 1,201 1,355 1,442 1,899 3,199 3,757 6,186 9,056
Total non-current liabilities 45,639 48,272 52,776 46,668 53,906 47,911 39,106 39,660 35,330 43,774

Borrowings, current 5,407 2,591 3,352 9,417 1,820 4,549 9,067 849 7,233 4,112
Trade payables 9,420 11,039 11,862 12,614 12,051 12,260 13,497 13,474 16,199 17,149
Returnable packaging deposits 1,279 1,291 1,381 1,812 2,034 1,819 1,681 1,576 1,583 1,545
Provisions 505 503 619 441 448 648 722 591 1,100 1,663
Current tax liabilities 530 533 537 614 801 601 935 931 878 999
Other liability, operating 7,819 8,611 8,405 9,140 9,074 9,661 7,002 6,544 7,029 7,557
Other liability, non-operating2 3,438 1,959 1,379 601 234 133 1,231 1,101 459 286
Liabilities associate with assets held for sale 178 56 - - - 88 15 - - -
Total current liabilities 28,576 26,583 27,535 34,639 26,462 29,759 34,150 25,066 34,481 33,311

Total equity and liabilities 132,140 136,190 153,961 152,308 125,756 124,901 126,906 114,251 117,700 123,120
1
Other receivables consist of VAT receivables, loans to joint ventures and associates, interest receivables and other financial receivables (E.g. derivatives)
2
Includes derivatives, interest payables and deferred incomes

(Source: Carlsberg’s annual reports)

 228

Exhibit 70: Carlsberg’s invested capital over the period 2010 - 2019
in million DKK 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating cash 1,201 1,271 1,329 1,287 1,290 1,307 1,252 1,213 1,250 1,318
Inventory 4,191 4,350 4,541 4,592 4,293 3,817 3,963 3,834 4,435 4,751
Trade receivables 5,057 7,115 7,117 7,072 6,246 5,196 5,022 4,203 4,605 4,889
*
Tax receivables 155 129 60 203 196 324 278 181 213 199
Prepayments 939 867 853 1,501 949 1,074 1,137 1,026 840 776
Trade payables (9,420) (11,039) (11,862) (12,614) (12,051) (12,260) (13,497) (13,474) (16,199) (17,149)
Returnable packaging deposits (1,279) (1,291) (1,381) (1,812) (2,034) (1,819) (1,681) (1,576) (1,583) (1,545)
Current tax liabilities (530) (533) (537) (614) (801) (601) (935) (931) (878) (999)
Other liabilities, operating (7,819) (8,611) (8,405) (9,140) (9,074) (9,661) (7,002) (6,544) (7,029) (7,557)
Operating working capital (7,505) (7,742) (8,285) (9,525) (10,986) (12,623) (11,463) (12,068) (14,346) (15,317)
PP&E 31,286 30,890 31,991 31,738 28,970 26,678 25,810 24,325 25,394 27,886
Software, etc. 1,828 1,750 1,375 2,521 3,426 2,948 2,226 1,606 1,216 942
Invested capital, excluding goodwill & acquired
25,609 24,898 25,081 24,734 21,410 17,003 16,573 13,863 12,264 13,511
intangible assets

Goodwill & acquired intangible assets 74,736 76,084 89,841 91,715 67,765 69,972 74,510 66,187 65,652 68,863
Gross-up tax effect (6,774) (6,411) (7,414) (6,974) (4,754) (4,221) (4,626) (3,629) (3,055) (3,215)
Adjusted goodwill & acquired intangible assets 67,962 69,673 82,427 84,741 63,011 65,751 69,884 62,558 62,597 65,648

Invested capital, including goodwill & acquired

93,571 94,571 107,508 109,475 84,421 82,754 86,457 76,421 74,861 79,159
intangible assets

Investments in associates and joint ventures 4,930 5,113 6,241 3,771 3,779 4,676 4,701 4,266 4,562 4,364
*

Other financial assets 2,912 5,735 8,064 6,177 7,328 6,991 5,151 4,646 7,381 6,908
Tax losses carried forward 1,055 569 462 400 466 409 172 (459) 745 468

Total fund invested 102,468 105,988 122,275 119,823 95,994 94,830 96,481 84,874 87,549 90,899

Shareholders' equity 52,544 55,572 70,261 67,811 41,825 43,489 50,811 46,930 45,302 43,448
Deferred tax liabilities, net of assets, PP&E and
2,484 2,396 2,039 1,990 1,434 1,290 1,416 1,053 1,227 1,019
current assets
Deferred tax liabilities, net of assets, non operating (295) (239) (479) (479) (518) (875) (1,230) (1,203) (1,209) (996)
Total shareholders' equity 54,733 57,729 71,821 69,322 42,741 43,904 50,997 46,780 45,320 43,471
Non-controlling interests 5,381 5,763 3,389 3,190 3,563 3,742 2,839 2,595 2,587 2,587
Other non-current liabilities 747 1,087 1,201 1,355 1,442 1,899 3,199 3,757 6,186 9,056

Borrowings, non-current 31,834 34,137 36,706 30,239 38,480 31,479 21,137 23,340 16,750 20,879
Borrowings, current 5,407 2,591 3,352 9,417 1,820 4,549 9,067 849 7,233 4,112 2
Post-retirement obligations 2,390 3,213 3,957 3,292 4,584 5,235 4,878 3,351 2,908 3,299
Provisions 1,976 1,468 1,849 3,008 3,364 4,022 4,364 4,202 4,927 5,700
Non-current tax payable - - - - - - - - 1,638 1,795

Total fund provided 102,468 105,988 122,275 119,823 95,994 94,830 96,481 84,874 87,549 90,899

(Source: Carlsberg’s annual reports)

 229

Exhibit 71: Carlsberg’s NOPLAT over the period 2010 - 2019

(Source: Carlsberg’s annual reports)

 230

Exhibit 72: Financial performance analysis of Carlsberg

Operating ratios 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating EBITA/Revenues 14.5% 14.6% 14.6% 13.2% 12.2% 12.4% 14.3% 14.7% 15.1%
Cost of goods sold/Revenues 50.0% 50.9% 50.4% 50.7% 51.2% 49.8% 50.2% 50.1% 50.5%
SD&A/Revenues 34.0% 32.7% 33.4% 34.3% 34.3% 35.5% 33.4% 33.3% 31.6%
Depreciation & Amortization/Revenues 5.5% 6.0% 6.0% 6.3% 7.1% 7.5% 7.5% 6.5% 6.8%

Return on invested capital (ROIC)*

Operating working capital/Revenues -12.0% -12.1% -13.8% -15.9% -18.1% -19.2% -19.4% -21.1% -22.5%
Software, etc./Revenues 2.8% 2.4% 3.0% 4.6% 4.9% 4.1% 3.2% 2.3% 1.6%
PP&E (including leased assets)/Revenues 48.9% 47.3% 49.5% 47.1% 42.6% 41.9% 41.3% 39.8% 40.4%
Invested capital/Revenues 39.7% 37.6% 38.7% 35.8% 29.4% 26.8% 25.1% 20.9% 19.6%
Revenues/Invested capital, times 2.5 2.7 2.6 2.8 3.4 3.7 4.0 4.8 5.1
Pretax ROIC 36.6% 38.9% 37.7% 36.8% 41.4% 46.3% 56.9% 70.3% 77.3%
Operating cash tax rate 26.0% 25.1% 21.5% 30.3% 23.2% 20.1% 26.7% 18.4% 23.9%
After-tax ROIC, without goodwill and
27.1% 29.1% 29.6% 25.7% 31.8% 37.0% 41.7% 57.4% 58.8%
acquired intangibles
*
Average invested capitals are used

Revenue growth rate analysis

Volume growth 4.0% 1.0% 0.0% 3.0% -1.0% -2.0% -4.0% 5.3% 1.4%
Effect of acquisition/divestment 2.0% 3.0% 1.0% 5.0% 2.0% 0.0% -2.0% 0.5% 1.3%
Organic volume growth 2.0% -2.0% -1.0% -2.0% -3.0% -2.0% -2.0% 4.8% 0.1%
Revenue per hectolitre 3.8% 5.0% 2.0% 4.2% 5.3% 3.8% 3.0% 1.7% 3.1%
Organic revenue growth rate 5.8% 3.0% 1.0% 2.2% 2.3% 1.8% 1.0% 6.5% 3.2%
Effect of currency movement -1.0% 1.9% -2.9% -6.0% -1.0% -5.0% -0.3% -3.6% 1.2%
Effect of acquisition/divestment 1.0% 0.9% 2.0% 4.0% 0.0% -1.0% -2.0% 0.1% 1.0%
Effect of change in accounting policy 0.0% -1% -3.3% 0.0% 0.0% 0.0% -1.8% 0.0% 0.0%
Revenue growth rate 5.8% 4.6% -3.2% 0.2% 1.3% -4.2% -3.1% 3.0% 5.4%

(Source: Carlsberg’s annual reports)

 231

Appendix C: Financial Statement Analysis of Molson Coors

Exhibit 73: Molson Coors’ detailed balance sheet over the period 2010 - 2019
in million US $ 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Assets
Operating cash 65 70 78 84 83 71 98 220 215 212
Excess cash 1,153 1,009 546 358 542 360 463 199 843 312
Trade receivables 504 530 608 573 489 408 654 728 736 706
Affiliate receivables 67 59 52 31 39 17 15 6 8 9
Other receivables1 159 137 93 124 94 101 136 168 127 106
Inventories 195 207 214 205 202 179 593 592 592 616
Other current assets, net2 74 106 155 150 109 94 187 206 226 215
Derivatives 5 0 2 12 20 29 24 71 20 9
Total current assets 2,221 2,118 1,748 1,538 1,577 1,259 2,170 2,190 2,766 2,184

PP&E 3 1,389 1,430 1,996 1,970 1,798 1,591 4,507 4,674 4,608 4,547
Goodwill 1,489 1,453 2,453 2,419 2,192 1,983 8,250 8,406 8,261 7,631
Other intangibles 4,655 4,586 7,235 6,825 5,756 4,746 14,032 14,297 13,776 13,656
Investment in MillerCoors 2,574 2,488 2,432 2,507 2,389 2,441 - - - -
Tax loss/credit carried forward - - 111 62 68 75 116 160 216 234
Deferred tax assets - - 225 161 172 123 111 114 262 263
Other assets 370 349 13 100 29 59 155 408 219 345
Total assets 12,698 12,424 16,212 15,580 13,980 12,276 29,342 30,247 30,110 28,860

Liabilities and equity

Trade payables and other operating payables 1,073 948 1,017 1,135 1,027 1,014 2,148 2,362 2,369 2,396
Accrued interest - - 37 29 149 21 120 116 113 107
Other current non-operating liabilities 26 108 139 265 129 149 200 207 225 264
Deferred tax liabitlites 220 161 152 138 165 - - - - -
Current portion of long-term debt and short-term
1 47 1,246 587 849 29 685 715 1,595 928
borrowings
Discontinued operation 14 13 8 7 6 4 5 - - -
Total current liabilities 1,334 1,277 2,599 2,161 2,325 1,217 3,158 3,399 4,301 3,696

Long-term debt 1,960 1,915 3,423 3,213 2,321 2,909 11,388 10,599 8,894 8,110
Pension and post-retirement benefits 459 698 833 463 543 202 1,196 849 727 717
Derivatives 405 213 222 - - - - - - -
Deferred tax liabilities 467 456 949 911 784 800 1,699 1,89 6
4 2,129 2,259
Unrecognized tax benefits 81 76 82 107 25 - - - - -
Other liabitlities 126 78 94 77 80 75 267 317 324 407
Discontinued operation 24 22 20 17 16 10 13 - - -
Total liabilities 4,855 4,734 8,221 6,950 6,094 5,213 17,720 17,060 16,374 15,187

Share capital 838 837 836 824 772 713 681 663 663 662
Paid-in capital 3,548 3,572 3,624 3,748 3,871 4,000 6,635 6,689 6,773 6,774
Retained earnings 3,242 3,690 3,901 4,200 4,440 4,496 6,145 6,958 7,693 7,617
Accumulated other comprehensive income (loss) 171 (130) (72) 155 (898) (1,695) (1,572) (860) (1,150) (1,162)
Shares hold in treasury - (321) (321) (321) (321) (471) (471) (471) (471) (471)
Total shareholder's equity 7,799 7,648 7,967 8,605 7,863 7,043 11,419 12,978 13,507 13,419
Non-controlling interests 44 42 25 25 23 20 203 209 228 254
Total equity 7,843 7,690 7,992 8,630 7,886 7,063 11,622 13,187 13,736 13,673

Total liabilities and equity 12,698 12,424 16,212 15,580 13,980 12,276 29,342 30,247 30,110 28,860

1
Includes note receivables and other receivables
2
Includes prepaid assets, maintenance and operating supplies, promotion materials and current deferred tax in 2011-2014
3
Includes software

(Source: Molson Coors’ annual reports)

 232

Exhibit 74: Molson Coors’ invested capital over the period 2010 - 2019
in million US $ 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating cash 65 70 78 84 83 71 98 220 215 212
Trade receivables 504 530 608 573 489 408 654 728 736 706
Affiliate receivables 67 59 52 31 39 17 15 6 8 9
Inventories 195 207 214 205 202 179 593 592 592 616
Other current assets, net 74 106 155 150 109 94 187 206 226 215
Trade payables and other operating payables (1,073) (948) (1,017) (1,135) (1,027) (1,014) (2,148) (2,362) (2,369) (2,396)
Operating working capital (168) 24 90 (92) (105) (245) (601) (610) (591) (638)

PP&E 1,389 1,430 1,996 1,970 1,798 1,591 4,507 4,674 4,608 4,547
Invested Capital without goodwill and
1,221 1,454 2,086 1,878 1,693 1,346 3,906 4,064 4,017 3,908
acquired intangibles

Goodwill 1,489 1,453 2,453 2,419 2,192 1,983 8,250 8,406 8,261 7,631
Other intangibles 4,655 4,586 7,235 6,825 5,756 4,746 14,032 14,297 13,776 13,656
Invested Capital witho acquired
ut goodwill and
7,365 7,493 11,774 11,122 9,640 8,075 26,188 26,766 26,055 25,195
intangibles

Other financial assets 3,364 3,312 2,368 2,489 2,653 2,751 293 322 659 101
Tax loss/credit carried fo rward - - 111 62 68 75 116 160 216 234

Total fund invested 10,729 10,805 14,253 13,673 12,361 10,901 26,597 27,248 26,930 25,530

Reconciliation to total fund provided

Shareholder's equity 7,799 7,648 7,967 8,605 7,863 7,043 11,419 12,978 13,507 13,419
Deferred tax liabilities, net of assets 467 456 724 751 612 677 1,588 1,783 1,867 1,996
Total shareholders' equity 8,266 8,104 8,691 9,356 8,476 7,720 13,006 14,761 15,374 15,415
Non-controlling interests 44 42 25 25 23 20 203 209 228 254

Long-term debt 1,960 1,915 3,423 3,213 2,321 2,909 11,388 10,599 8,894 8,110
Current portion of long-term debt and short- 1,246 587 849 29 685 715 1,595 928
1 47
term borrowings
Accrued interest - - 37 29 149 21 120 116 113 107
Pension and post-retirement benefits 459 698 833 463 543 202 1,196 849 727 717

Total fund provided 10,729 10,805 14,253 13,673 12,361 10,901 26,597 27,248 26,930 25,530

(Source: Molson Coors’ annual reports)

 233

Exhibit 75: Molson Coors’ NOPLAT over the period 2010 - 2019
in million US $ 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Net sales 3,254 3,516 3,917 4,206 4,146 3,568 4,885 11,003 10,770 10,579

Cost of goods sold 1 (1,812) (2,049) (2,353) (2,546) (2,493) (2,132) (2,999) (6,237) (6,585) (6,378)
Derivatives 3 14 16 0 2 (1) (27) (154) 111 24
Integration costs - - (12) (12) (1) - 82 11 5 -
Adjusted cost of goods sold (1,809) (2,035) (2,349) (2,557) (2,492) (2,133) (2,944) (6,380) (6,469) (6,355)

Marketing, general and administrative expenses (1,013) (1,019) (1,126) (1,194) (1,164) (1,038) (1,597) (3,052) (2,803) (2,728)
Integration costs - - 41 11 - 7 108 71 39 25
Amortisation 43 40 42 48 45 30 82 222 224 221
Adjusted marketing, general and administrative
(970) (979) (1,043) (1,135) (1,119) (1,002) (1,407) (2,759) (2,540) (2,482)
expenses

EBITA 476 502 525 514 535 433 535 1,864 1,761 1,743
Operating tax (13) (18) (46) (7) (58) (59) (148) (465) (284) (324)
NOPLAT 463 484 479 507 477 375 387 1,399 1,476 1,420

Calculation of operating tax

Federal tax rate 35% 35% 35% 35% 35% 35% 35% 35% 21% 21%
State tax rate 2% 2% 1% 1% 3% 1% 4% 2% 1% 3%
Effective statutory tax rate 37% 37% 36% 36% 38% 36% 39% 37% 22% 24%
Foregin tax rate difference effect -20% -21% -25% -27% -24% -22% -2% -17% -8% -21%

Income tax at effective statutory tax rate 176 184 191 187 201 158 206 693 394 425
Foregin tax rate difference effect (163) (166) (145) (179) (142) (99) (58) (228) (110) (102)
Operating tax 13 18 46 7 58 59 148 465 284 324
Operating tax rate 3% 4% 9% 1% 11% 14% 28% 25% 16% 19%

Reconciliation to Net income

NOPLAT 463 484 479 507 477 375 387 1,399 1,476 1,420

Special items, net (21) (12) (81) (200) (324) (347) 2,533 (36) 250 (709)
Integration costs - - (29) 1 1 (7) (190) (81) (44) (25)
Amortisation (43) (40) (42) (48) (45) (30) (82) (222) (224) (221)
Derivatives (3) (14) (16) (0) (2) 1 27 154 (111) (24)

Equity income in MillerCoors 456 458 511 539 562 516 501 - - -

Interest expense (110) (119) (196) (184) (145) (120) (272) (349) (306) (281)
Interest income 11 11 11 14 11 8 27 6 8 8
Other pension and post-retirement benefits, net - - - - - - 8 47 38 3
Other income (expense), net 44 (11) (90) 19 (7) 1 (33) 1 (12) (15)

Non-operating tax (126) (81) (108) (77) (11) (3) (1,307) 670 59 90
Net income 670 675 438 571 517 395 1,600 1,588 1,135 246

Includes depreciation

(Source: Molson Coors’ annual reports)

Exhibit 76: Financial performance analysis of Molson Coors

Operating ratios 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating EBITA/Revenues 14.3% 13.4% 12.2% 12.9% 12.1% 10.9% 16.9% 16.3% 16.5%
Cost of goods sold/Revenues 55.6% 57.9% 60.0% 60.8% 60.1% 59.8% 60.3% 58.0% 60.1%
Marketing, general and administrative expenses/Revenues 27.8% 26.6% 27.0% 27.0% 28.1% 28.8% 25.1% 23.6% 23.5%

Return on invested capital (ROIC)*

Operating working capital/Revenues -2.0% 1.5% 0.0% -2.4% -4.9% -8.7% -5.5% -5.6% -5.8%
PP&E/Revenues 40.1% 43.7% 47.1% 45.4% 47.5% 62.4% 41.7% 43.1% 43.3%
Invested capital/Revenues 38.0% 45.2% 47.1% 43.1% 42.6% 53.8% 36.2% 37.5% 37.5%
Revenues/Invested capital, times 2.6 2.2 2.1 2.3 2.3 1.9 2.8 2.7 2.7
Pretax ROIC 37.5% 29.7% 25.9% 30.0% 28.5% 20.4% 46.8% 43.6% 44.0%
Operating tax rate 3.6% 8.8% 1.4% 10.9% 13.6% 27.6% 25.0% 16.1% 18.6%
After-tax ROIC, without goodwill and acquired
36.2% 27.1% 25.6% 26.7% 24.7% 14.7% 35.1% 36.5% 35.8%
intangibles
*
Average invested capitals are used