Carslberg Brewery (M) Bhd 
(May 18, RM12.90)
Maintain buy with a target price of RM13.90: We maintain our “buy” rating on Carlsberg Brewery with an unchanged discounted cash flow (DCF)-derived fair value of RM13.90 per share. 

Last Friday, Carlsberg announced that it is selling its entire 70% stake in Luen Heng F&B Sdn Bhd (LHFB) to Capriwood Sdn Bhd for a total cash consideration of RM19.5 million. 

LHFB’s other 30% equity interest is held by Luen Heng Agency Sdn Bhd. Carlsberg had on Dec 1, 2008, purchased the 70% stake in LHFB for RM2.1 million. 

LHFB is primarily involved in the importation, distribution and sale of alcoholic and non-alcoholic beverages including beer, hard liquor, wine as well as other food and non-food items. 

According to Carlsberg’s management, the rationale underpinning the disposal was its strategy of focusing on the malt liquor market (MLM), which consists of beer, stout and cider as well as its emphasis on maximising its return on invested capital. 

As it is, wine and spirits are very capital-intensive investments given the high value of the products and the need to maintain inventories. Additionally, these products offer limited commercial synergies with MLM as they are of a different segment. 

In Malaysia, MLM products dominate the alcoholic beverage market at 80%, while wine and spirits each has 10%. 

While we are surprised by this divestment, we understand that Carlsberg will continue to sell selected imported premium beers by LHFB as part of its portfolio. 

The LHFB purchase effectively gives Carlsberg exclusive distribution and sales rights to a range of imported premium beers such as Hoegaarden, Stella Artois and Budweiser. 

That said, it may cap Carlsberg’s innovation activities as Carlsberg can no longer immediately or exclusively leverage on LHFB’s labels to quickly adapt to consumers’ ever-changing taste. 

In financial year 2014 (FY14), LHFB contributed about RM10 million (or 5%) to Carlsberg’s net profit. Based on our back-of-envelope calculations, the disposal could potentially trim 2% to 7% off Carlsberg’s FY15 forecast (FY15F) to FY17F earnings (including the one-off loss of RM10.9 million). 

We are, however, leaving our FY15F to FY17F earnings unchanged for now pending the release of its first-quarter financial year 2015 (1QFY15) results. The disposal is expected to be completed in the 3QFY15 with the proceeds being reinvested for working capital and commercial expenses. — AmResearch Sdn Bhd, May 18.

This article first appeared in The Edge Financial Daily, on May 19, 2015.