- We are downgrading our rating on Guinness Anchor Bhd (GAB) to HOLD from BUY, given the stock’s limited upside at current levels, but have raised our fair value to RM19.10/share, implying a PE of 24x FY14F EPS.

- Since our upgrade to BUY in February 2013, the stock has climbed 26% to close at its all-time high yesterday. YTD, it has outperformed the FBM KLCI by 19%, extending its 2012’s stellar performance (+23% vs. market’s +10%).

- GAB reported a 3QFY13 net profit of RM61mil, bringing 9MFY13 earnings to RM184mil (+7% YoY). Despite making up 82% of our, and consensus’ estimates, we deem the results to be in- line, given that 4Q is seasonally weaker and that traditionally, its 9-month results contributes 83%-84% to its full-year net profit.

- GAB’s YoY improvement in its bottom line comes on the back of flattish revenue (-1% YoY). Management attributes the better earnings to:- (1) an enhanced product and channel mix; (2) greater efficiency; and (3) a tighter cost control.

- On a sequential basis, 3QFY13 turnover was up 3% to RM443mil. While we believe volumes remained robust, buoyed by the Chinese New Year festivity (25% of full-year revenue), we do not rule out some price discounting by GAB in a bid to maintain market share given the mild topline growth.

- Nonetheless, the improved sales in all distribution channels came at the expense of a dented quarterly net profit (-8% QoQ). The extensive marketing activities for CNY in January (campaign focussed on off-trade segment) and St Patrick’s Day celebration in March (including hosting of a pub crawl) resulted in a 1.6ppt-EBITDA margin decline. YoY, it was a 1.8ppt- expansion to 22%.

- As expected, no dividend was declared for the quarter (2QFY13: 20 sen). We keep our FY13F-FY15F gross DPS forecasts (based on a 90%-95% payout ratio) unchanged. With the price appreciation, however, we note that yields have compressed considerably to an average of 3.7% for the next three years.

- From a valuation standpoint, GAB’s current PE of 26x FY14F EPS appears to be rather stretched vis-a-vis historical trends (4SD above 5-year trend-average). While we remain impressed by GAB’s progress, we suggest investors take profit as we reckon any catalysts would have been fully priced-in.

- Looking ahead, we believe the stock’s downside risks will become more apparent following the dissipation of the 13th GE overhang. These include:- (1) a hike in excise duties (last raised by 23% in 2005); (2) implementation of the GST; (3) decreased consumer disposable income from possible subsidy rationalisation; and (4) rising input costs.

Source: AmeSecurities