Investment Highlights

• Carlsberg Brewery’s (M) (Carlsberg) 3QFY17 earnings were in line; we maintain our DCF-derived fair value of RM15.50/share (TG: 2.0%, WACC: 7.3%). This implies a forward PE of 19x, which is the 3-year PE band average. We think valuations are fairly reflective of Carlsberg's forward growth prospects.

• Carlsberg’s 3Q17 recurring profit of RM42.8mil (YoY: - 29.7%, QoQ: -1.7%) brought 9M earnings to RM171mil (YoY: 8.4%). It was in line with our estimate at 79% but below consensus at 72% of full-year numbers respectively.

• No dividend was declared as expected.

• Carlsberg’s results key highlights include:

i. 3QFY17 Malaysia revenue grew 18%. This is off a low base with purchases being front-loaded prior to the alcohol tax being implemented in July 2016. Favourable product mix and higher ASPs ~5% were contributing factors as well. Since the tax revision, Carlsberg has gained market share on Heineken Malaysia. However, this quarter may be indicative of market share erosion that has subsided with Heineken regaining market share against Carlsberg, growing 32% YoY for the quarter.

ii. Carlsberg’s domestic margin improvement by 3.3ppts to 17.8% for the quarter is attributed to higher ASPs and higher A&P stemming from Euro 2016 weighing on 3Q16’s margins.

iii. Singapore’s quarterly top line appears to have exhibit seasonal trade destocking resulting in -8% YoY growth. 3Q17 Singapore earnings contracted 84%, which was further weighed by what we think is a lumpy provision for trade offers amounting to RM18mil.

iv. We are encouraged over its Sri Lanka-based associate brewery Lion Brewery turning a profit of RM0.6mil in 3QFY17. It is aligned with our expectations and management’s guidance on the turnaround at Lion Brewery. However, Lion Brewery may not be as profitable as it was in the past (contributing 6% of FY15’s PBT earnings). Aside from resuming production operations, we are wary that malt liquor demand has been structurally altered following a steep double excise duty hike in late 2015.

• We make no changes to our forecast as earnings were in line. Key risks to Carlsberg include: i) elevated competition; and ii) proliferation of illicit alcoholic beverages.

Source: AmInvest Research - 4 Dec 2017