Guinness Anchor Bhd
(May 14, RM14.82)
Maintain hold with higher target price (TP) of RM14 from RM12.70: Guinness Anchor’s cumulative core earnings for the first nine months of financial year 2015 ending June (9MFY15) grew 12.8% year-on-year (y-o-y) to RM170 million, mainly on improved product mix in favour of the premium and super premium brands, increased selling prices and higher sales volume for core beer brands. All in, the results were within expectations.

We maintain “hold” as valuations do not look compelling. However, Guinness Anchor’s strong franchise and decent yields of more than 4% should offer a cushion to share-price downside.

Guinness Anchor’s 9MFY15 revenue rose 12.8% y-o-y to RM1.3 billion and net profit rose 12.5% y-o-y to RM170.2 million.

Nevertheless, earnings before interest, taxes, depreciation and amortisation margin fell 0.4 percentage points to 17.1% on overall higher advertising and promotional (A&P) expenses and higher excise duties compared with last year.

Overall, Guinness Anchor’s 9MFY15 earnings were within our and consensus expectations, representing 79% and 78% of the respective full-year forecasts.

We deem this in line as the fourth quarter (4Q) is typically the group’s weakest quarter due to the lack of festivities in the April to June quarter.

Relative to 3QFY14, Guinness Anchor’s 3QFY15 revenue rose 17.4% and core earnings rose 11% y-o-y.

This was mainly due to Chinese New Year falling on a later date this year, higher selling prices and the full impact from new product launches such as Kirin Ichiban, Smirnoff Ice and new Strongbow flavours.

We are keeping our earnings forecasts unchanged as we are expecting weaker 4Q sales volume and a post goods and services tax impact as consumers pull back on their spending, given an overall increase in the cost of living.

We maintain our “hold” call on the stock with a higher TP of RM14 as we roll over our discounted cash flow model valuation horizon to FY16.

Guinness Anchor is currently trading at 20 times our 2016E (estimated) earnings per share (+1 standard deviation of its five-year historical mean price-earnings ratio.

We believe this is fair as the group’s healthy balance sheet and steady operating cash flows should help support decent dividend yields of more than 4% over the next three years.

Key upside risks include stronger-than-expected sales volume growth, lower-than-expected raw material costs, particularly malt barley prices, and a special dividend payout that could result in a share price rally.

Downside risks include lower-than-expected sales volume growth and higher-than-expected operating expenses. — Affin Hwang Investment Bank Bhd, May 14

This article first appeared in The Edge Financial Daily, on May 15, 2015.