Carlsberg Brewery Malaysia Bhd
(Feb 22, RM2.50)
Downgrade to hold recommendation with a higher target price of RM14.80: Despite a 2.9% year-on-year (y-o-y) increase in revenue to RM434.6 million, Carlsberg Brewery Malaysia Bhd’s fourth quarter of financial year 2016 (4QFY16) net profit fell to RM47.1 million (down 36.8% y-o-y).
The underperformance was due to weak sales volume in Singapore, a higher tax rate of 40% from lower provisions in previous quarters and a loss of RM3.2 million from an associate (versus an RM5.3 million profit in 4QFY15).
In the quarter, the earnings before interest and tax margin weakened by 2% to 19.7%. On a positive note, Carlsberg declared a final dividend of 67 sen, bringing the full-year dividend per share to 72 sen (107% payout ratio) which was above expectations.
Despite the strengthening of the Singapore dollar-ringgit exchange rate, its 4QFY16 revenue and operating profit fell 1.8% and 34.5% y-o-y respectively. This was mainly due to rationalisation of inventory levels, higher sales and marketing expenses and a one-off gain of about RM6 million in 4QFY15.
However, Malaysian operations performed strongly in 4QFY16, with revenue and operating profit rising to RM297.8 million (5.6% quarter-on-quarter) and RM61.2 million (12.8% y-o-y) respectively.
On a positive note, Carlsberg has recorded tremendous growth in the premium segment, which includes key brands such as Asahi, Somersby, Connor’s and Kronenbourg. The group’s premium beer brands’ overall sales volume rose 18.7% y-o-y in FY16 (Singapore and Malaysia). The group plans to continue to focus on its premium brands aggressively given the better margins.
The operations of Carlsberg’s 25%-owned Sri Lanka associate, Lion Brewery (Ceylon) Ltd (LBCP) were hit by floods in May 2016. As a result, the operations were shut for seven months. This led to a loss of RM5.1 million in FY16, versus a profit of RM16.1 million in FY15. We expect LBCP to resume positive contribution in FY17 (RM10.5 million), with normal operations resuming since December 2016.
A downside risk to our view is a sudden increase in excise duties on beer. — CIMB Research, Feb 22