Carlsberg Brewery Malaysia Bhd (Jan 25, RM8.68)
Maintain market perform at RM8.64 with revised fair value of RM8.70 (from RM8.05): Carlsberg will be releasing its 4QFY11 results on Feb 28. We understand from management that 4Q earnings should be fairly strong, underpinned by the earlier timing of Chinese New Year.
Typically, 4Q revenues are the weakest, given that sales volumes normally drop after the trade loading activities by wholesalers and other distributors in anticipation of a potential excise duty-driven price hike in October or 3Q. Overall, we expect total industry volume (TIV) growth to be within the 4% to 6% range for FY12, in line with our forecast.
Given that capital expenditure plans for FY12 are relatively small, comprising largely replacement capex of about RM30 million, we believe management could potentially surprise the market by paying out 90% to 100% of its FY11 earnings.
Our view is further supported by Carlsberg’s fairly clean balance sheet position as at 9MFY11, with net gearing of only 0.01 times and reserves of RM450 million or RM1.46 per share. Note that Carlsberg does not have any long-term debt and the gearing is comprised purely of its short-term revolving credit for working capital purposes.
Assuming a net payout of 90% to 95%, based on our earnings forecast, this would translate to a 4QFY11 dividend of 45 to 48 sen per share.
In our 2012 strategy report, we highlighted that one of our main concerns regarding the earnings of food and beverage consumer stocks are the potentially higher raw material prices which could erode margins. We highlighted that Carlsberg, with wheat being its key raw material, could face eroding margins due to the volatility of raw material prices.
However, based on our recent discussion with management, we understand that almost all of Carlsberg’s raw material requirements for FY12 were locked in by end-FY11, albeit at a higher prices year-on-year of 9% to 10%. We view this positively as this would mean margins would be relatively stable throughout FY12.
Regarding Carlsberg’s move to brew Asahi beer locally, management confirmed our view that it wouldn’t have an immediate significant impact in the premium beer market and Carlsberg’s earnings in the next one to two years. We are not imputing any incremental contribution from Asahi as yet, as it is still uncertain how big of an impact it will have.
We make no change to our earnings forecasts. The risks include:
(i) a sharp drop in TIV;
(ii) continued decline in Carlsberg’s market share; and
(iii) an excise duty hike in the next budget.
Our discounted cash flow-derived fair value is increased to RM8.70 (from RM8.05) based on a new weighted average cost of capital of 9.4% (from 9% previously) after we updated our beta assumptions.
We also reduced Carlsberg’s long-term annual capex assumptions to RM30 million per year from RM50 million to RM60 million previously, in line with management’s guidance of its replacement capex for FY12. We maintain our “market perform” call on the stock. A near-term re-rating catalyst would be a potential bumper dividend for shareholders for FY11, as highlighted above. — RHB Research, Jan 20
Maintain market perform at RM8.64 with revised fair value of RM8.70 (from RM8.05): Carlsberg will be releasing its 4QFY11 results on Feb 28. We understand from management that 4Q earnings should be fairly strong, underpinned by the earlier timing of Chinese New Year.
Typically, 4Q revenues are the weakest, given that sales volumes normally drop after the trade loading activities by wholesalers and other distributors in anticipation of a potential excise duty-driven price hike in October or 3Q. Overall, we expect total industry volume (TIV) growth to be within the 4% to 6% range for FY12, in line with our forecast.
Given that capital expenditure plans for FY12 are relatively small, comprising largely replacement capex of about RM30 million, we believe management could potentially surprise the market by paying out 90% to 100% of its FY11 earnings.
Our view is further supported by Carlsberg’s fairly clean balance sheet position as at 9MFY11, with net gearing of only 0.01 times and reserves of RM450 million or RM1.46 per share. Note that Carlsberg does not have any long-term debt and the gearing is comprised purely of its short-term revolving credit for working capital purposes.
Assuming a net payout of 90% to 95%, based on our earnings forecast, this would translate to a 4QFY11 dividend of 45 to 48 sen per share.
In our 2012 strategy report, we highlighted that one of our main concerns regarding the earnings of food and beverage consumer stocks are the potentially higher raw material prices which could erode margins. We highlighted that Carlsberg, with wheat being its key raw material, could face eroding margins due to the volatility of raw material prices.
However, based on our recent discussion with management, we understand that almost all of Carlsberg’s raw material requirements for FY12 were locked in by end-FY11, albeit at a higher prices year-on-year of 9% to 10%. We view this positively as this would mean margins would be relatively stable throughout FY12.
Regarding Carlsberg’s move to brew Asahi beer locally, management confirmed our view that it wouldn’t have an immediate significant impact in the premium beer market and Carlsberg’s earnings in the next one to two years. We are not imputing any incremental contribution from Asahi as yet, as it is still uncertain how big of an impact it will have.
We make no change to our earnings forecasts. The risks include:
(i) a sharp drop in TIV;
(ii) continued decline in Carlsberg’s market share; and
(iii) an excise duty hike in the next budget.
Our discounted cash flow-derived fair value is increased to RM8.70 (from RM8.05) based on a new weighted average cost of capital of 9.4% (from 9% previously) after we updated our beta assumptions.
We also reduced Carlsberg’s long-term annual capex assumptions to RM30 million per year from RM50 million to RM60 million previously, in line with management’s guidance of its replacement capex for FY12. We maintain our “market perform” call on the stock. A near-term re-rating catalyst would be a potential bumper dividend for shareholders for FY11, as highlighted above. — RHB Research, Jan 20
