Investing: Should you buy into World Cup-related stocks?

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 28, 2018 - June 03, 2018.
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With the 2018 FIFA World Cup in Russia less than a month away, the stocks of several local and foreign listed companies that are riding this theme are looking attractive. These companies are either official sponsors of the tournament or manufacturers of products that will be in demand during this period.

Carlsberg Brewery Malaysia Bhd and Heineken Malaysia Bhd — long-time beneficiaries of thirsty football fans — will be looking to get an early lead, thanks to their new premium product strategies, the zero-rated Goods and Services Tax and football fans who will be celebrating or commiserating over drinks.

“What we have noticed is that historically, share prices have rallied ahead of the World Cup as people tend to drink more. You will most likely see the corporate earnings reflected sometime after the event,” says an analyst.

“There may be a reasonable buying opportunity ahead of the tournament. Take positions in breweries on the back of an anticipated spike in volumes.”

But Malaysians have much more to celebrate now that the 14th general election has brought about a historic change in government. One of the first major decisions of newly elected Prime Minister Tun Dr Mahathir Mohamad was to zero-rate the unpopular GST across the board, effective June 1.

Even so, Affin Hwang Capital Research analyst Tan Jun Zhang does not think there will be a significant positive effect on beer consumption during the World Cup period. “Both the zero-rating of the GST and the upcoming World Cup are positive for breweries, but I don’t see a meaningful boost in volumes as the tournament only lasts a month,” he tells Personal Wealth.

In an April 9 note, Tan maintains his “hold” recommendation on Carlsberg and Heineken Malaysia as he believes both stocks were fairly valued. “In this sector, we prefer Carlsberg Malaysia for its stronger earnings growth,” he says.

Tan explains that there wasn’t any strong evidence to indicate that the World Cup contributed significantly to beer consumption, even in the 2010 and 2002 tournaments, when the match schedules were favourable to Malaysian viewers. “On the corporate level, we do not see a strong correlation between the events and revenue growth.”

That said, he believes that the total beer consumption this year should see better growth than in 2016 and 2017 “even without accounting for potential catalysts from the World Cup”.

An analyst with a local investment bank also thinks that Carlsberg and Heineken Malaysia are currently fairly priced. “The share prices of breweries, together with the broader consumer sector, have rallied in reaction to the more consumer-friendly policies. As investors are forward looking, it appears that the confluence of these positive factors — including the upcoming World Cup and the zero-rating of the GST — have already been priced in. This is reflective of current valuations trading at greater than one standard deviation of its three-year historical price-earnings trading band,” he says.

As a result, he believes that investors are better off staying away from breweries and instead, hunt for other bargains. “The World Cup impact, while positive, is not a game changer. These positives are already reflected by the current lofty valuations,” he says.

Carlsberg Malaysia began the current financial year on a positive note, with its net profit up nearly 20% to RM80.92 million in the first quarter ended March 31, from RM67.39 million a year ago. In a recent press statement, the brewery attributed the strong showing to improved Chinese New Year sales, continued growth of its premium brands and higher profit from its associate company Lion Brewery (Ceylon) plc.

The company also posted higher earnings per share of 26.43 sen in the first quarter of this year, compared with 22.04 sen in the previous corresponding period. The stock was trading at RM20.03 on May 23.

Heineken Malaysia registered a marginal drop in its net profit in the first quarter ended March 31. Net profit dropped 0.44% to RM48.76 million from RM48.97 million a year earlier, due to higher promotional costs and timing difference of commercial expenses. The stock was trading at RM23.00 on May 23.

When it comes to World Cup-specific plays, the local scene tends to be limited to breweries, say analysts. OCBC Bank (M) Bhd vice-president of wealth management research Michael Lai concurs to a certain extent.

“In previous World Cups, there were no notable patterns of trading on the FBM KLCI. For example, during the 2002 World Cup, the index’s performance was -9%, and this was related to the loss of investor confidence sparked by the infamous accounting fraud at Enron,” he says.

“The performance of equity markets in the region was similar to that of the KLCI. Financial market developments remain the drivers of their performance.”

Nonetheless, Lai thinks there may be some unique overlaps between the recently concluded general election and the upcoming World Cup. “Event organisers and the food and beverage sector would benefit for a short period of time from the unique business opportunities of organising political and World Cup-viewing events,” he says.

He also thinks the gaming sector could see a spike in business during the tournament in the form of, say, Resorts World Genting organising large-scale World Cup-related events. “A slightly out-of-the-box beneficiary would be Tenaga Nasional Bhd. With the festive mood prevailing over the recent change in government (as well as the upcoming World Cup), we could expect higher consumption of electricity by F&B outlets,

special events and customers staying longer than usual for after-work drinks at the various venues. With GST being zero-rated before the World Cup, the lower prices could well spur consumption along the margins,” he says.

Beyond Malaysia, some global names are poised to benefit from the World Cup euphoria. According to RHB Research in a March 2018 note, Singapore-listed Food Holdings Empire Ltd is set to be a beneficiary of Russia’s host status, among other favourable market conditions.

The Singapore Exchange-listed instant coffee, frozen food and confectionary manufacturer operates nine facilities around the world, including Malaysia, Myanmar and Russia, and exports to more than 50 countries. Its largest market is currently Russia, which contributed more than US$116 million (RM460.2 million) to the group’s overall FY2017 revenue of almost US$269 million. This represented an 8.1% increase in revenue, thanks primarily to the appreciation of the rouble against the US dollar.

The ongoing recovery in oil prices and higher domestic consumption could further boost the appreciation of the Russian currency, thus posing an additional upside to the group’s earnings ahead of the World Cup. As at May 17, RHB Research maintains a “buy” call on the stock, with a target price of S$1.07. It was trading at 67 Singapore cents as at May 23.

Other stocks further afield include perennial World Cup sponsors Adidas, Coca-Cola and McDonald’s. The long-time corporate partners of the most widely followed global sporting event have been joined more recently by Asian auto players Hyundai Motor Co and its sister company Kia Motor Corp (Hyundai owns about a 33% stake in the latter). The automakers became sponsors in the late 1990s and noughties respectively and have become the mainstays of the World Cup equities roster.

The quarterly earnings of the two automakers have been dismal for some time now, having missed their global sales targets for the past three years, according to Thomson Reuters. For the quarter ended March 31, Hyundai posted sales of 22.4 trillion won — a 4% drop from a year ago. The decline was led by a 15% drop in China and a further 12% drop in the US market.

Frankfurt-listed Adidas AG has been making a major push into the e-commerce space over the last couple of years and the move is paying off handsomely. With CEO Kasper Rorsted at the helm since 2016, the sporting goods and apparel giant reported a 16% rise in revenue to €21.2 billion (RM99.4 billion), with online sales surging some 57%, according to Bloomberg.

A May 21 Morningstar quantitative equity report found that Adidas was somewhat overvalued. On May 23, the stock was trading at €193.55, compared with Morningstar’s fair value of €190.08.

McDonald’s Corp has found a rich vein of form in recent times, with its share price soaring on the back of bold menu price increases on selected premium offerings, as well as new dollar menu items. These strategies helped the company famous for its golden arches beat its first quarter earnings expectations in late April, delivering earnings of US$1.79 per share (adjusted) compared with a Thomson Reuters survey of analysts that came in at US$1.67 per share. US sales increased 2.9% while wider global sales jumped 5.5%.

In an April 30 note, Barclays analyst Jeff Bernstein had a “buy” call on the stock. Also, according to a May 21 Morningstar quantitative equity report, the stock was currently undervalued. As at May 23, McDonald’s was trading at US$159.45 per share compared with Morningstar’s fair value of US$171.33.

Similarly, The Coca-Cola Co has hit high gear, with its recent earnings numbers revealing a surprising return to form due to an old veteran, Diet Coke. Although US consumers are reportedly moving away from artificial sweeteners, the beverage giant’s first quarter earnings got a boost with Diet Coke’s first growth since the fourth quarter of 2010. Morningstar’s May 21 quantitative equity report found the stock to be slightly undervalued. It had a fair value of US$45.74, compared with the May 23 share price of US$42.25.