The Investment Column: SABMiller still a long-term hold at this level

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The Independent Online

Shares in SABMiller have enjoyed a great run over the past three years as the company rose rapidly in the league table of global brewers. What was once dismissed as a Third World upstart has grown into the world's third-largest brewer through a series of acquisitions, behind America's Anheuser-Busch and Belgium's InBev.

The transformational deal that put SAB on the map was America's Miller, which was bought four years ago, whereupon the company's name changed from South African Breweries.

Yesterday's trading update on beer volumes revealed a slowdown in the third quarter in South Africa and the US. Flat volumes in South Africa after 3 per cent growth in the first half were a disappointment in what is SAB's peak season there - due to rain spoiling the South African summer. Nonetheless, margins appear to have been boosted because the company put up prices and saw a shift to premium brands such as Peroni and Amstel, which it started putting into bigger 660ml bottles.

While still SAB's largest market, South Africa accounts for only one-third of group profits - the aggressive marketing of Miller in the US, with the flagship Miller Lite brand, has rejuvenated it so it makes up one-fifth of group earnings now.

Recently SAB has been hit by a savage US price war after the market leader Anheuser slashed the cost of beer. Anheuser knocked down Budweiser prices in Florida so much that wholesalers drove in from neighbouring states to buy and ship crates of the stuff back. That forced SAB to cut its own prices across America at a time when it was being squeezed by higher energy costs. It remains to be seen how that price war evolves, particularly after the Superbowl "beer holiday" in February.

Emerging markets are making up for the difficult US market, though. The company is building a presence in the fast-growing beer markets of China and India, where it is the front-runner in the auction for Mohan Meakin's beer business. It is also well positioned in South America where it recently swallowed the Colombian brewer Bavaria.

SAB shares have seen a healthy start to the year, partly on the back of a strong rand, and now trade in line with the sector. Given the group's growth prospects, its stock is a long-term hold.

Arbuthnot tempts with strong yield

It may be less the Thundering Herd and more a trotting pony, but Arbuthnot is a small British bank that is finding some form.

The London-based group reassured investors yesterday that pre-tax profits this year would top City estimates of about £7m.

Its investment banking business - picked up from the South African financial services group Old Mutual two years ago - is doing nicely in a record year for the industry. Under the stewardship of the former ABN Amro banker Mark Brown, a revamped Arbuthnot Securities has launched three funds and sold hospitals owned by the private healthcare provider Bupa to Legal & General Private Equity.

That, plus the sales of Jennings Brothers brewery to Wolverhampton & Dudley and the acquisition of the Little Chef eateries by the private equity-backed Peoples' Restaurant Group, meant Arbuthnot handled deals worth about £300m in 2005.

That success is helping to offset tougher times at its Arbuthnot Latham private bank and its consumer-lending business. Arbuthnot Bank, which also helps people in the Midlands set cash aside to cover gas and other utility bills, is struggling.

Excitement over investment banking saw the shares chased from about 360p to well north of 450p towards the end of last year. Yesterday, they rose 7.5p to 515p.

Trading at about 13 times expected earnings, its shares are not cheap compared with peers and offers less capital growth potential than pure investment banks such as Evolution or Collins Stewart Tullett. But they are yielding 6 per cent, against just 2 per cent by similar companies. With Henry Angest, the chairman and chief executive, owning almost 49 per cent of the company, that yield looks relatively safe.

For that reason alone, Arbuthnot may be worth a flutter.

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