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Friday, August 17, 2018

Carlsberg Brewery Malaysia - 1H18 Within Estimates

Author: kiasutrader | Publish date: Fri, 17 Aug 2018, 09:52 AM

1H18 core PATAMI of RM140.0m (+9%) and interim dividend of 15.7 sen are within expectations. Malaysian sales were better with the 2018 World Cup season and higher spending during the “tax-holiday”. However, pending price increases post-SST implementation and growing competition in Singapore are mid-term hurdles. Sustained earnings from Sri Lankan operations is a welcomed change. Maintain MARKET PERFORM and TP of RM18.25.

1H18 within. 1H18 core PATAMI of RM140.0m is within our/consensus estimates, making up for 54%/53% of respective full-year expectations. An interim dividend of 15.7 sen is also within expectations. Recall that the group had formalised a dividend policy where at least 75% of profit will be paid out per quarter with a 100% payment by the full-year.

YoY, 1H18 registered sales of RM963.9m (+5%) arising from stronger Malaysian sales (+15%) amidst poorer performance in Singapore (-13%). Aside from a later CNY period, the Malaysian market is thought to have benefited from a growing proportion of premium offerings which could be supported by the “tax-holiday” in June 2018 in addition to the World Cup football season. The Singapore market could have been dragged by stronger Ringgit affecting returns and poorer spending sentiment. The above translated into better operating margins in Malaysia at 20.3% (+1.5ppt) but weaker for Singapore at 14.5% (-5.9ppt) which could also be dragged by poorer operating synergies. The group’s associate, Lion Brewery sustained profitability with RM11.0m contributions, albeit RM4.7m of which were returns from insurance claims. Core PATAMI in 1H18 registered at RM140.0m (+9%) thanks to the abovementioned better returns from Malaysia and a lower ETR of 20.9% (-0.5ppt).

QoQ, 2Q18 revenue of RM415.5m declined by 24%, mainly due to a seasonally stronger 1Q18 from CNY festivities. Group EBIT only declined by 21% as better product mixes during the quarter supported margins. Further backed by the RM5.3m associate gains from Lion Brewery, core earnings during the quarter registered at RM63.9m (-16%).

Great short-term, cloudy mid-term. The coming quarters are set to see stronger sales, particularly in Malaysia. This is driven by higher consumption backed by: (i) the 2018 World Cup season (till mid-Jul 2018), and (ii) lower prices from the zero-rated GST. Regarding the coming SST implementation, management commented on the intention to pass down the chargeable tax quantum to consumers.

This could further undermine on-trade sales as establishments (i.e. restaurants, pubs) with an annual turnover of RM1.0m/outlet and above are subject to another layer of tax. On the Singapore market, management also highlights that the introduction of the European Free Trade Agreement by end 2018 could open up to highly aggressive price competition from duty free competitors. We believe the emphasis on premium offerings would lead the group as they command higher margins and enjoy stickier demand in niche markets against higher prices. Additionally, the now stabilised operations in Sri Lanka’s Lion Brewery and its positive contribution are a timely blessing amid the challenging times ahead.

Post-results, we leave our assumptions unchanged for FY18/FY19.

Maintain MARKET PERFORM and target price of RM18.25. Our target price is based on an unchanged 19.0x FY19E PER (which is also within the stock’s 5-year Fwd. average PER). CARLSBG is valued lower than its peer HEIM (OP, TP: RM23.30) which we valued at 20.0x FY19E PER, owing to the latter’s leading domestic market position and decent dividend yields. Still, CARLSBG may provide dividend-seeking investors better visibility from its formalised dividend policy.

Risks to our call include: (i) lower-than-expected sales from both markets, and (ii) poorer demand for premium products.

Source: Kenanga Research - 17 Aug 2018

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