- We downgrade our recommendation on Carlsberg Brewery (M) Bhd (CAB) to HOLD (from BUY) due to its recent share price run-up despite assigning a higher fair value of RM15.30/share as we tweak downwards our WACC to 9.3%.

- The stock’s upward trend (+28% YTD) has lifted its PE multiple to 23x our FY13F EPS, 3SD above its 5-year average but still at a 14% discount to industry peer, Guinness’ (GAB) CY2013 PE of 27x.

- FY13F looks to be a year of consolidation for CAB following 3 remarkable years of growth (FY12 3-year CAGR: 36%). Key to its market share expansion (currently 44%) is its ability to integrate its enlarged portfolio to generate additional growth.

- With no new brands expected to be added to its recently strengthened portfolio, we believe CAB may test the market with new labels via its unit, Luen Heng F&B.

- Malt liquor market (MLM) volumes are likely to soften slightly this year (FY12: +5.5%) in the absence of any world events. Our FY13F growth assumption hinges on:- (1) unchanged beer excise duties; (2) a consumer sentiment rebound in 2H13; (3) more brewer-organised events; and (4) its parent company’s sponsorship deal with the Barclays Premier League.

- For FY13F-FY15F, CAB’s EBITDA margin is expected to remain flat at 17%-18%, as it has expanded rapidly (5-6ppts) since FY10 following improved product and pack size mix as well as savings from local production of premium beers. Its tight cost control will also be challenged by greater A&P expenses in FY13F (+6% YoY).

- Looking ahead, management indicates that the group remains on the lookout for growth opportunities in neighbouring markets as it aspires to become a regional manufacturing hub. This could be tough as its parent, Carlsberg A/S, has also been aggressively expanding in the region (eg. Thailand and Myanmar).

- With the GE done and dusted, we expect the brewers to face more headwinds, especially on the regulatory front. We note that CAB has an upper hand over GAB as it is geographically diversified with a Singapore subsidiary (30% EBIT contribution). Volumes there remain healthy, with projected growth of 5%-7% for FY13F.

- No change to our FY13F-FY15F earnings and gross DPS forecasts (92%-95% payout ratio). Given the run-up in CAB’s share price, we highlight that yields have been squeezed by ~1.5ppt YTD to a decent, but not attractive, 4.3% average yield.

- In our opinion, the market is now fairly valuing CAB with its still positive earnings prospect (3-year CAGR of 16%). In the absence of any foreseeable near-term catalyst, we believe our downgrade to be justified.

Source: AmeSecurities