Banker, EBRD
  • Steppe Capitalist Equity Research:  APU JSC (MSE: APU)

    Khangai Tserenraash    Steppe Capitalist
    09 Jan 2018

    8 January 2018,
    HOLD Rating with Target Price of MNT 866
    • We are initiating coverage of APU JSC (APU or the Company) a Mongolian Stock Exchange listed alcohol and beverage producer with a HOLD rating and 12 month target price of MNT 866.
    • Merger with Heineken (the Merger): APU is closing a merger transaction with Heineken’s business in Mongolia (Evergreen Investment LLC or Evergreen) publically announced in July 2017 and effectively becoming a near monopoly player with more than 80% share of the local alcoholic beverage market.  The transaction will mark as the largest merger in the country.
    • Immediate value drivers: (i) the Merger expected to create over MNT 13bn cost synergies in 2018-2021; (ii) a vertical integration with the trading business (APU Trading LLC), taking place as part of the Merger is an important value driver for APU public shareholders. It results in immediate 10 percentage point increase in gross margins previously only captured by the shareholders of APU Trading (Shunkhlai Group).
    • Longer term value driver: Having secured a dominant position in the local market APU is strategically focusing on growth through exports, as the market for alcoholic beverages in Mongolia (the largest EBITDA generator) has limited growth potential.
    • Having Heineken as a strategic shareholder will help APU to achieve the immediate and long-term strategic targets through the use of Heineken’s international supply chain network and marketing expertise.
    • As a result of the consolidation in 2017 APU expects to see 65% jump in revenue to MNT 492bn, 10 percentage point increase in gross margins to 39% and an EPS of MNT 68.
    • We conclude that the market has largely priced in the value gain from the Merger as the share price surged 99% since the announcement.