- We are downgrading our recommendation on Guinness Anchor Bhd (GAB) from HOLD to SELL with a lower DCF-derived fair value of RM14.70/share following a downward revision in our earnings forecasts to reflect:- (1) a softer MLM volume growth outlook; (2) weaker consumer sentiment; and (3) its uninspiring dividend yield.

- GAB wrapped up FY13 on a weaker note with full-year revenue of RM1.7bil (+3% YoY) and net profit of RM218mil (+5% YoY). Although this was in line with our, and consensus, estimates, we highlight that this was the weakest top- and bottom-line YoY growth GAB has recorded in the last 5 years. (FY12 revenue and earnings growth were 9% and 14%, respectively).

- The soft top line growth, which came about despite a 3% hike in prices for the year, gives us reason to believe that volume growth for GAB and the overall MLM sector (GAB: ~60% market share) has been sluggish and downtrading by consumers have occurred in FY13.

- Our view on the latter is supported by management attributing growth in FY13 to its mainstream brand, “Tiger”, as well as the positive growth in its modern on-trade channel, which takes up ~80% of volumes.

- Taking into account the heightened possibility of an excise duty hike (in view of the government’s need to rein in its budget deficit) and the risk of decreasing disposable income, we have trimmed our MLM volume growth for FY14F-FY15F to 1%-1.5%.

- This resulted in net profit cuts for FY14F of 6% to RM228mil and FY15F of 10% to RM239mil.

- Recognising the need to grow its super premium portfolio, GAB will be introducing new brands and line extensions in the fastest growing (+3%to +5% in the medium term) and least price sensitive segment in the coming months. However, we caution that margins (FY13: EBITDA margins +0.7ppts) may be under pressure should GAB resort to price discounting to gain market share from segment leader Carlsberg (Under Review).

- Management has proposed a final single-tier dividend of 48.5 sen/share, bringing total dividends for FY13 to 68.5 sen/share. This translates into a yield of 3.8%, which is relatively unattractive for a defensive stock (FY14F-FY15F: 4.1%). Also, we do not foresee any more special dividends (last seen in FY12) until it reverts to a net cash position, which we believe will be in FY15F at the earliest.

- The selldown in GAB’s share price since June 21 means that the stock is now trading at a PE of 24x FY14F earnings (vs 26x during its latest rally from March 5 to June 20). Our fair value implies a PE of 19.5x (+1SD above 5-year mean) which we believe reflects the greater downside risks of the stock.

Source: AmeSecurities