This article first appeared in The Edge Financial Daily on May 19, 2017 - May 25, 2017

Carlsberg Brewery Malaysia Bhd
(May 18, RM14.74)
Maintain hold with a higher fair value (FV) of RM14.10: Although Carlsberg Brewery Malaysia Bhd’s (Carlsberg) first quarter ended March 31, 2017 (1QFY17) earnings were in line, we have raised our discounted cash flow-derived FV to RM14.10 per share (from RM13.30 per share previously) as we roll over our valuations to FY18.

This implies a forward price-to-earnings ratio (PER) of 19 times, which is the three-year PER band average. We think that this is reflective of Carlsberg’s decent growth prospects.

Carlsberg registered a 1QFY17 revenue of RM502.6 million (year-on-year [y-o-y]: +10.3%) as core profit grew to RM67.4 million (y-o-y: 7.1%). It was in line with our and consensus estimates at 31% and 29% of full-year numbers respectively. Due to seasonally led festivities, first quarter typically contributes up to 31% of full-year earnings.

Carlsberg’s results key highlights include 1QFY17 Malaysia revenue clocking a respectable growth of 6.7% partly due to higher excise duty prices. Meanwhile, revenue of the Singapore unit grew 18.7%. We believe the quarter may have been boosted by a swing in trade restocking activities.

Carlsberg continues to capture greater cost-efficiencies across its supply chain. Earnings before interest and tax margin continue to trend upwards, growing by 1.2 percentage points y-o-y in 1QFY17.

Sri Lanka-based associate brewery Lion Brewery recognised losses of RM5.9 million in 1QFY17 versus a loss of RM1.2 million in 1QFY16. Losses were attributed to impairment losses of assets.

We expect Lion Brewery to break even in FY17 (versus FY16: -RM5.1 million) on the back of resumed operations. Production was initially halted following a flood. However, the unit may not achieve the earnings high of RM16.1 million in FY15 in the near term.

This is because malt liquor demand has been structurally altered following a steep double excise duty hike in late 2015. The Sri Lankan-based brewery commands close to 80% of the malt liquor market share domestically.

We make no changes to our forecast as earnings were in line. Key risks to Carlsberg include an unfavourable outcome in unresolved bills of demand with the Royal Malaysian Customs amounting to RM56.3 million or 24% of FY17 earnings; and a slower-than-expected recovery by Lion Brewery. — AmInvestment Bank, May 18