This article first appeared in The Edge Financial Daily, on December 2, 2015.

Carlsberg Brewery (Malaysia) Bhd
(Dec 1, RM11.50)
Maintain buy with an unchanged fair value (FV) of RM13.70: We maintain “buy” on Carlsberg Brewery (Malaysia) with an unchanged discounted cash flow-derived fair value. Carlsberg reported a third quarter ended Sept 30, 2015 (3QFY15) net profit of RM62 million to extend its cumulative nine months earnings to RM141 million. 

Excluding the one-off RM12.5 million impairment loss in relation to its divestment of Luen Heng F&B Sdn Bhd in 2QFY15, its nine months FY15 (9MFY15) core net profit was RM154 million. The results were within our and consensus expectations, constituting 72% and 74% of full-year estimates respectively. 

No dividends were declared this quarter. The group usually announces a larger-quantum final and special dividend in the fourth quarter. Our dividend forecasts, which are based on a 100% payout ratio, translate to an average yield of 6% at the current price. 

Year-on-year, Carlsberg’s 9MFY15 revenue and core net profit were higher by 2% and 4% respectively, as the better performance of Carlsberg Singapore Pte Ltd was partially offset by that of its Malaysian operations. While Carlsberg Singapore’s earnings before interest and taxes (Ebit) margin is still below its historical 20% (9MFY15: 18%), we are not overly concerned as it has been expanding sequentially by seven to nine percentage points on the back of higher sales volume impacted by a 25% excise hike), improved price mix, effective cost management, additional contribution from Maybev Pte Ltd and forex gains from a stronger Singapore dollar. 

We understand that the drag in its Malaysian performance was due to the divestment of Luen Heng (revenue for its domestic outfit would have declined by a smaller 4.6% versus 6.8% when adjusted for the divestment impact) and higher raw material costs following the weakening of the ringgit. Overall, Carlsberg’s 9MFY15 Ebit margin was marginally lower by one percentage point to 15%. 

On a quarterly basis, its core earnings had jumped by 41% although revenue was only higher by 0.8% due to its lower operating costs. Looking ahead, we expect the group to report equally strong numbers for its final quarter of FY15F (forecast). While the festive season may result in better sales growth, we caution that Carlsberg’s margins may be crimped as it may have to offer price discounts and invest in more advertising and promotional activities to drive the volumes. We are leaving our FY15F to FY17F earnings unchanged for now. 

The stock is presently trading at FY15F and FY16F price-earnings ratio (PER) of 15 times to 16 times, midway of its five-year PER band. Our FV implies a PER of 20 times (+1 standard deviation above mean). We believe the slight premium is justified given the stock’s resilient earnings profile and attractive yield of 6%. Its position as a relatively safe consumer play offering stable returns will appeal to investors seeking respite from the market volatility. — AmResearch, Dec 1