This article first appeared in The Edge Financial Daily on December 6, 2018

Carlsberg Brewery Malaysia Bhd
(Dec 5, RM 19.14)
Maintain hold at an unchanged target price (TP) of RM18. Carlsberg Brewery Bhd’s (CAB)  3QFY18 results were in line with our expectations. We believe that the better earnings growth year-on-year (y-o-y) was mainly due to front-loading activities pre-SST, and 4Q earnings could normalise lower.

As such, we keep our earnings estimates unchanged. Maintain “hold” with an unchanged discounted cash flow-TP of RM18 (weighted average cost of capital: 8%, long-term growth: 2.5%).

3QFY17 core net profit of RM65 million (+6% y-o-y, +2% quarter on quarter) brought nine-month financial year 2018 core net profit to RM205 million (+18% y-o-y), accounting for 80% and 78% of our and consensus full-year estimates respectively. Additionally, CAB announced an interim dividend per share of 16 sen. We expect another 32 sen as final dividend per share.

CAB’s 3QFY18 domestic revenue grew 24% y-o-y mainly due to (i) double-digit sales growth in its premium brands (for example, Kronenbourg, Somersby and Connor’s Stout) and (ii) sales volume improvements in CAB’s mainstream brands (Green Label and Smooth Draught) on the back of product innovations and successful promotional activities.

That said, Malaysia earnings before interest and tax (Ebit) grew 16% y-o-y as Ebit margin contracted 1.1 percentage point y-o-y possibly due to the timing of A&P. As for its Singapore operations, 3QFY18 Ebit grew by 4% y-o-y after adjusting for one-off provisions for trade offers (RM18 million) in 3QFY17.

We attribute 3Q18’s strong domestic sales growth to retail front-loading before SST re-implementation on Sept 1. Hence, as CAB’s domestic sales volume normalises post-SST, sequential earnings are likely to be weaker.

Singapore operations may also face challenges with the introduction of the European Free Trade Agreement (from cheaper imports) in 2Q19, but this could be mitigated by better contribution from its associate company in Sri Lanka.

In the longer term, enhanced domestic enforcement to curb contraband beer will be a boon to the industry. We believe contraband alcohol represents 10% to 20% of Malaysia industry share at present. — Maybank IB Research, Dec 2