The share price trends of Guinness Anchor Bhd (GAB) and Carlsberg Brewery Malaysia Bhd are quite similar and the two breweries even trade within the same range of price-earnings multiples. But between the two, which is the better buy?  

Based on 2015 calendarised earnings per share, GAB (fundamental: 2.30; valuation: 1.70) is trading at a price-earnings ratio (PER) of 18.33 times while Carlsberg (fundamental: 1.30; valuation: 1.50) has a slightly lower PER of 15 times.

However, according to Bloomberg data, the two trade within a similar historical PER range. Over the last seven years, GAB has traded at between 11 and 29 times with an average PER of 18.57 times while Carlsberg has traded at between 11.5 and 27.5 times with an average PER of 18.27 times.  

In terms of capital appreciation, GAB’s share price has performed better, climbing 7.32% year to date, while Carlsberg rose 2.56%. Still, GAB offers a higher upside potential of 12.3% compared with Carlsberg’s 5.6% based on analysts’ consensus target prices of RM14.83 and RM12.72 respectively (see table).

Kenanga Research analyst Soong Wei Siang says GAB is the research house’s top pick in the local brewery sector. “Investors should go for GAB because it is the market leader and its earnings growth and profit margins are better,” he tells digitaledge Weekly over the phone.

As for Carlsberg, Soong says its Singapore business is boosting the group’s earnings but this was offset by weakness in the Malaysian market.

The potential risk, he adds, is that Carlsberg had, in September last year, received two bills of demand from Royal Malaysian Customs over tax claims of RM56.1 million, which is 27% of its net profit in its financial year ended Dec 31, 2014 (FY2014).

The company does not admit liability on the demands and has sought legal advice on the matter while holding discussions with Customs.

In a recent interview with digitalEdge Weekly, GAB managing director Hans Essaadi says it is “not highly unusual” for the two breweries to trade within a similar historical PER range. “Carlsberg has a combination of Malaysian and Singapore businesses. If you look at GAB’s Malaysian business unit, we are the leading brewer in the market, and that is something.”

Essaadi goes on to say that GAB has a sizeable premium portfolio, comprising Heineken and Guinness Stout, and activity plans in place. For the longer term, the group is also investing in sustainable growth. “Carlsberg is expanding its portfolio, which will help it move away from the Carlsberg Green Label (flagship product). I invite you to look at their success versus our success. Investors should also look at our future cash flow and earnings,” Essaadi adds.

GAB’s net profit grew 8% year on year in its financial year ended June 30, 2015 (FY2015). Based on analysts’ forecast, it is expected to post an earnings growth of 7% in FY2016. 

Carlsberg, which has a Dec 31 year-end, is expected to post flat earnings growth in its current financial year. In FY2016, analysts see its net profit growing 6%. 

In terms of operational efficiency, GAB reported an operating margin of 16.8% in FY2015 while Carlsberg posted 16.3% in FY2014. 

In FY2015, GAB registered a net profit margin of 12.2%, which was slightly less than Carlsberg’s 12.9% in FY2014. As for dividend payout, Essaadi highlights that GAB has a policy of paying 90% to 95% of its profit as dividends. Historically, the group has been distributing 90% to 100%.

“Dividend is the result of the profit we made at the end, so it starts with profit. Do we think we can match the last financial year [in terms of earnings]? We are cautiously optimistic because it’s very unpredictable,” Essaadi comments.

Carlsberg managing director Henrik Juel Andersen acknowledges that the company has not set a dividend policy but it has been paying out 100% of its profit as dividends in the past. “It is important for us to keep paying out good dividends to our shareholders. Of course, from time to time, we need to make investments and that may compromise our short-term ability to pay good dividends. But at this point in time, I don’t see any major change in our practice of paying out high dividends.”

Based on last Wednesday’s closing prices and the brewers’ latest financial year’s dividend per share, Carlsberg offers a slightly higher dividend yield of 5.9% compared with GAB’s 5.4%.

Five out of the nine research analysts covering GAB give the counter a “buy” call while the remaining four recommend a “hold”. The target prices range from RM13.92 to RM16.45.

Carlsberg has a “buy” rating from five analysts who track the company closely and a “hold” recommendation from two research houses. At the moment, TA Securities is the only research house that has a “sell” call on the stock with a target price of RM10.78, which translates into a downside potential of 10.5%.

This article first appeared in digitaledge Weekly, on September 7 - 13, 2015.