An update on Carlsberg’s latest quarter (2Q2021) results for the period 1 April to 30 June 2021. Our first article on Carlsberg was published on 11 December 2020.

KEY SUMMARY

1. 1H2021 revenue improved slightly despite lower overall sales in Malaysia, contributed by a rebound in Singapore’s operation. The Group’s profitability improved as they reduced marketing spend, streamlined operating expenses, and the absence of a one-off Bill of Demand of RM6.4m incurred in 2020. Carlsberg’s financial position remains resilient as before.

2. The prolonged suspension in Malaysia for 2.5 months in 2021 has constituted a major impediment to the ability of the Group to carry on its normal business operations since June. The 11-week total lockdown was longer than the 1st MCO (7 weeks) in March 2020. The full impact is to be reflected in the Group’s upcoming 3Q2021 results.

3. On a 3-year investment horizon, Carlsberg would be equivalent to an equity bond that provides a minimum annual return of 0.6%, to the highest possible return of 11% p.a., within the next 3 years. On a base case of 24x PE, Carlsberg would be yielding a consistent annual return of 6% p.a. for the next 3 years.

UPDATE ON LATEST QUARTER (MAR – JUN) RESULTS

2Q2021 performance was hampered in both Malaysia and Singapore due to the reimposition of lockdown measures. On 2 June 2021, the Group was required to suspend its brewery operations in Shah Alam as part of Malaysia’s lockdown measures. The Group was only allowed to resume operations at 100% capacity on 16 August 2021.

The significant decline in revenue was also partly due to the traditionally stronger 1Q results (Chinese New Year sales).

The Group’s profit from operations decreased RM37m / 44% against the preceding quarter due to lower revenue and lower share of profits in Lion Brewery (Ceylon) Plc, impacted by lockdown measures.

Having said that, the management indicated that they were, in fact, experiencing a strong rebound in sales in the initial weeks of 2Q2021.

UPDATE ON 1H2021 (JAN – JUN) RESULTS

1H2021 revenue improved slightly despite lower overall sales in Malaysia, contributed by a rebound in Singapore’s operation. Singapore operations grew both in volume and value and registered premium brands growth following the easing of restrictions and the re-opening of dine-in.

The Group’s profitability improved as they reduced marketing spend, streamlined operating expenses, and the absence of a one-off Bill of Demand of RM6.4m incurred in 2020. In Malaysia, total revenue was lower by 8.2% to RM600m whilst profit from operations increased by 16.1% to RM100.1m.

Meanwhile, Singapore reported an increase of 25.6% in revenue to RM281m whilst its profit from operations increased by 50.9% to RM29m.

LATEST FINANCIAL POSITION AS AT 30 JUNE 2021

In short, Carsberg’s financial position remains resilient as before.

The increase in borrowings during FY2020 was to backup for short-term liquidity. Borrowings have normalised in its latest quarter.

CORPORATE UPDATES

The prolonged suspension in Malaysia for 2.5 months has constituted a major impediment to the ability of the Group to carry on its normal business operations since June, including not being able to:

1. adequately satisfy domestic market demand; and

2. maintain its supply to Singapore, as well as export demand from regional and other foreign markets.

The 11-week total lockdown was longer than the 1st MCO (7 weeks) in March 2020. The full impact is to be reflected in the Group’s upcoming 3Q2021 results.

VALUATION UPDATES

With reference to Carlsberg’s latest results, we are projecting Group’s FY2022 full-year results, as below.

Assumptions:

1. Revenue projected to grow within the range of 5% – 15% in FY2022 based on the annualised results of FY2021. At 15% growth, the Group’s revenue would remain 10% below FY2019 closing of RM2,256m.

2. FY2022 gross margin assumed to range between 28% – 32%. In comparison, prior to FY2020, the Group’s gross margin was ranging between 31.8% – 36.6%. FY2019 gross margin was 31.8%.

3. FY2022 net margin assumed to range between 9.6% – 12.9%. In comparison, prior to FY2020, the Group’s net margin was ranging between 12% – 14%. FY2019 gross margin was 13%.

4. PE multiple assumed to range between 20x to 28x. Over the past 5 years, the Group has been trading within the range of 19x – 36x, while Heineken Malaysia Berhad trades within the range of 17x – 25x. Benchmarking against the international peers, Carlsberg A/S trades at roughly 23X PE, Heineken NV at 25x PE, and Thai Bev at 20.0x PE. Carlsberg Malaysia’s premium valuation may be due to its dividend policy of 100% dividend payout.

Based on a PE valuation model, Carlsberg valuation seems fully valued.

On a 3-year investment horizon, Carlsberg would be equivalent to an equity bond that provides a minimum annual return of 0.6%, to the highest possible return of 11% p.a., within the next 3 years. Refer to details as below:

On a base case of 24x PE, Carlsberg would be yielding a consistent annual return of 6% p.a. for the next 3 years. I would consider this more as a substitute to fixed deposits/bonds investments you currently own. The resumption of dine-in, travel, and tourism activities would only benefit the Group in the medium term.

Having said that, the most critical assumption for our projection above is that the easing of restrictions is to continue and no operation lockdowns were to be reimposed on the Group moving forward.