Brewery sector
Maintain overweight: Breweries staged a strong performance in 2011, both in terms of earnings as well as share prices. Aggregate year-to-date 2011 net profit for Carlsberg Brewery Malaysia Bhd and Guinness Anchor Bhd (GAB) grew by 17.3% year-on-year (y-o-y), driven by higher malt liquor market (MLM) sales and stronger margins from productivity and efficiency improvements.
GAB’s share price has appreciated by 38% and Carlsberg’s by 47% year-to-date 2011 and outperformed the FBM KLCI by 43% and 52%. Valuation multiples have re-rated from 13 to 14 times to 16 to 20 times. What is more impressive is that this is the third year of strong share price performance — since January 2009, share prices of brewery stocks have soared by 178% to 211% and outperformed the KLCI by 64% to 86%.
Positive sentiment from GAB’s announcements on its commercial paper/medium term notes (CP/MTN) programme and special dividend per share (DPS) was most likely the cause of the recent sharp share price appreciation for both stocks (15% since early December 2011). While we expect some profit-taking as the year wraps up, we believe fundamentals remain sound to support further re-rating in 2012. Our view is underpinned by:
(i) Effective cost management and earnings delivery. Carlsberg and GAB hedge up to 80% of their raw material requirements in advance. Brewers benefited from lower input costs in 2011 as raw materials were locked in at 2010 prices. The impact of higher raw material prices (prices of malt barley grew by 32% y-o-y in 2011) will be felt in 2012. Brewers will be able to manage the higher costs via gradual and moderate price increases.
We expect MLM sales to be supported by higher on-trade revenue (pubs, coffeeshops and so on) during UEFA Euro 2012 taking place from June 8 to July 1, 2012.
(ii) Strong track record in dividend payout with high possibility of special dividends. Carlsberg paid out a special DPS of 43 sen in 4QFY10 to reward shareholders after the faster than expected integration of Carlsberg Singapore. Aside from the 60 sen special DPS, GAB’s CP/MTN programme also implies further capital management initiatives ahead. In a normal year, Carlsberg pays out 60% to 70% of its earnings while GAB has a higher dividend payout policy of 85% to 90%, or annual dividend yields of 3% to 5%.
(iii) A favourable domestic market for 2012. The fact that the government has not raised excise taxes for six years indicates that the authorities are cognisant of the fact that Malaysia has one of the highest beer taxes in the world. Steady share price improvements over the past three years illustrate increasingly positive sentiment on the domestic malt liquor market, a trend that we believe will likely continue. Although there have been rumours of an excise tax increase after the next general election, we believe the focus will largely be on the tobacco sector.
(iv) The upcoming festive season. Typically, share prices of brewery stocks have fared well in the first and fourth quarters of the year, supported by the Christmas season and Chinese New Year. We expect profit taking to occur around mid-1H12 (traditionally the post-festive season), but believe that in the long term, share prices will continue their upward trend.
(v) A safe haven in a volatile environment. Our house view is that 1H12 will be a relatively volatile time for the market, given the fragile credit markets in Europe, growth cycle and potential 13th general election. Investors seek safe haven in defensive yield stocks during periods of risk aversion — here, the appeal lies in the brewery sector’s resilient earnings growth and high payout ratio.
Maintain “overweight” on the brewery sector. We trim our FY12 to FY14 net profit forecasts for Carlsberg and GAB slightly by 1% to 3%, after some housekeeping and factoring in gradually increasing finance costs for GAB from the CP/MTN programme.
We also switch our valuation methodology from discount dividend model to a 10-year discounted cash flow to better reflect growth in both earnings as well as dividends. Based on terminal growth rates of 3%, our target price for Carlsberg is raised to RM10.90 (weighted average cost of capital: 9%, beta: 0.9 times, previous target price: RM9.10) while GAB’s target price is raised to RM16 (WACC: 7%, beta: 0.7 times, previous TP: RM11.92). We maintain “buy” for Carlsberg and we raise our recommendation for GAB to a “buy” (from “add”). — Affin IB Research, Dec 19
This article appeared in The Edge Financial Daily, December 20, 2011.
Maintain overweight: Breweries staged a strong performance in 2011, both in terms of earnings as well as share prices. Aggregate year-to-date 2011 net profit for Carlsberg Brewery Malaysia Bhd and Guinness Anchor Bhd (GAB) grew by 17.3% year-on-year (y-o-y), driven by higher malt liquor market (MLM) sales and stronger margins from productivity and efficiency improvements.
GAB’s share price has appreciated by 38% and Carlsberg’s by 47% year-to-date 2011 and outperformed the FBM KLCI by 43% and 52%. Valuation multiples have re-rated from 13 to 14 times to 16 to 20 times. What is more impressive is that this is the third year of strong share price performance — since January 2009, share prices of brewery stocks have soared by 178% to 211% and outperformed the KLCI by 64% to 86%.
Positive sentiment from GAB’s announcements on its commercial paper/medium term notes (CP/MTN) programme and special dividend per share (DPS) was most likely the cause of the recent sharp share price appreciation for both stocks (15% since early December 2011). While we expect some profit-taking as the year wraps up, we believe fundamentals remain sound to support further re-rating in 2012. Our view is underpinned by:
(i) Effective cost management and earnings delivery. Carlsberg and GAB hedge up to 80% of their raw material requirements in advance. Brewers benefited from lower input costs in 2011 as raw materials were locked in at 2010 prices. The impact of higher raw material prices (prices of malt barley grew by 32% y-o-y in 2011) will be felt in 2012. Brewers will be able to manage the higher costs via gradual and moderate price increases.
We expect MLM sales to be supported by higher on-trade revenue (pubs, coffeeshops and so on) during UEFA Euro 2012 taking place from June 8 to July 1, 2012.
(ii) Strong track record in dividend payout with high possibility of special dividends. Carlsberg paid out a special DPS of 43 sen in 4QFY10 to reward shareholders after the faster than expected integration of Carlsberg Singapore. Aside from the 60 sen special DPS, GAB’s CP/MTN programme also implies further capital management initiatives ahead. In a normal year, Carlsberg pays out 60% to 70% of its earnings while GAB has a higher dividend payout policy of 85% to 90%, or annual dividend yields of 3% to 5%.
(iii) A favourable domestic market for 2012. The fact that the government has not raised excise taxes for six years indicates that the authorities are cognisant of the fact that Malaysia has one of the highest beer taxes in the world. Steady share price improvements over the past three years illustrate increasingly positive sentiment on the domestic malt liquor market, a trend that we believe will likely continue. Although there have been rumours of an excise tax increase after the next general election, we believe the focus will largely be on the tobacco sector.
(iv) The upcoming festive season. Typically, share prices of brewery stocks have fared well in the first and fourth quarters of the year, supported by the Christmas season and Chinese New Year. We expect profit taking to occur around mid-1H12 (traditionally the post-festive season), but believe that in the long term, share prices will continue their upward trend.
(v) A safe haven in a volatile environment. Our house view is that 1H12 will be a relatively volatile time for the market, given the fragile credit markets in Europe, growth cycle and potential 13th general election. Investors seek safe haven in defensive yield stocks during periods of risk aversion — here, the appeal lies in the brewery sector’s resilient earnings growth and high payout ratio.
Maintain “overweight” on the brewery sector. We trim our FY12 to FY14 net profit forecasts for Carlsberg and GAB slightly by 1% to 3%, after some housekeeping and factoring in gradually increasing finance costs for GAB from the CP/MTN programme.
We also switch our valuation methodology from discount dividend model to a 10-year discounted cash flow to better reflect growth in both earnings as well as dividends. Based on terminal growth rates of 3%, our target price for Carlsberg is raised to RM10.90 (weighted average cost of capital: 9%, beta: 0.9 times, previous target price: RM9.10) while GAB’s target price is raised to RM16 (WACC: 7%, beta: 0.7 times, previous TP: RM11.92). We maintain “buy” for Carlsberg and we raise our recommendation for GAB to a “buy” (from “add”). — Affin IB Research, Dec 19
This article appeared in The Edge Financial Daily, December 20, 2011.
