Carlsberg seen investing in brands to drive volume

Carlsberg Brewery Malaysia Bhd (Aug 16, RM23.94) Maintain hold with an unchanged target price (TP) of RM22.70: Carlsberg Brewery Malaysia Bhd’s reported second quarter of financial year 2019 (2QFY19) core profit after tax and minority interests (Patmi) of RM66.6 million (quarter-on-quarter [q-o-q]: -25.3%, year-on-year [y-o-y]: +1.4%) brought first half of FY19 (1HFY19) core Patmi to RM155.8 million (y-o-y: +6.6%). This formed 51.4% and 51.6% of our and consensus estimates respectively.

The company declared a dividend of 16.1 sen per share (2QFY18: 15.7 sen) — ex-dividend date is Oct 18 — taking 1HFY19 dividend per share to 37.6 sen (1HFY18: 35.7 sen).

Weaker sales q-o-q (-27.2%) in both Malaysia (-32.2%) and Singapore (-11.3%) markets were due to seasonality, as Chinese New Year in 1Q typically results in higher sales. Core Patmi declined 25.3% in tandem with lower sales.

Headline sales figure showed 15.7% growth y-o-y. However, after accounting for Malaysia’s sales and service tax (SST) regime implementation, organic revenue growth was 11.2%. Despite better top line, core Patmi rose only marginally by 1.4% due to higher marketing expenses.

Year to date, Carlsberg recorded robust top-line growth of 18.3% year to date (13.1% after excluding SST impact). Its better top line was attributed to volume growth in mainstream brand Carlsberg (+5%) as well as premium brands Connor’s (+45%), 1664 Blanc (+51%), Somersby (+8%), Asahi (+8%) and Brooklyn (+130%). Despite a strong top-line growth, core Patmi rose just 6.6% as Carlsberg continued to invest in advertising and promotional campaigns to boost sales volumes.

Encouragingly, despite the terror attacks in Sri Lanka, associate company Lion Brewery’s contribution grew 49.1% to RM9.4 million (after excluding one-off insurance payment of RM4.7 million in 1HFY18 from the factory flooding in 2016) as the company continued to improve operational efficiency post-flooding in 2016.

Carlsberg will continue to invest in both mainstream and premium brands to drive volume growth. Due to this, we expect Carlsberg to incur higher marketing expenses in 2HFY19, particularly from marketing campaigns associated with the promotion of the new redesign of mainstream brand Carlsberg. On the legal front, we note that Malaysia’s alcohol excise duty structure is already the third highest globally. As such, we opine a hike in excise duty would result in growth in the illicit market at the expense of the legal volumes, and eventually reduced tax collection. For this reason, a hike in alcohol excise duties is unlikely. Going forward, we expect the government and the Royal Malaysian Customs to continue their efforts to fight contraband and strengthen the legitimate tax paying portion of the beer market in Malaysia, boosting government’s revenue collection of excise duty.

Hence, our forecast is unchanged as Carlsberg’s results were in line. We opine that at current levels, Carlsberg is fairly valued and thus, our “hold” call is maintained. — Hong Leong Investment Bank Research, Aug 16

Source: TheEdgeMarkets