- We downgrade our recommendation on Carlsberg Brewery (M) Bhd (CAB) from HOLD to SELL with a lower DCF-derived fair value of RM12.50/share in accordance to a downward revision in our earnings forecast.

- CAB’s annualised 1HFY13 results fell short of expectations, accounting for only 38% of our and 40% of market estimates. YoY, net profit shrank by 10% to RM81mil on the back of a 3% dip in turnover.

- The group’s below par performance can be mainly attributed to margin pressures at its wholly-owned Singapore subsidiary (CAS), which historically contributed ~30% of group EBIT (1HFY13: 18%). We highlight that CAS’ margins have been typically 4-5ppts higher than that of CAB’s Malaysian operations.

- While we had anticipated a slowdown in volumes in the absence of CNY festivity during the quarter, we did not foresee management’s move to undertake a stock rationalisation exercise in 2Q as well as the impact of greater competition in Singapore following an influx of imported beer.

- As a result, CAS’s QoQ revenue fell by 6% while its EBIT margin was clipped by 7ppts to a mere 7%. This is its first consecutive margin decline and the smallest margin it has recorded since 4Q09. While some expansion is expected in the coming quarters, management does not believe a full recovery to be likely.

- The group’s strategy to expand its portfolio in the premium and imported segment continues to pay off. YoY, margins at its domestic business had expanded by 0.6ppts despite the 1% decline in revenue. We were surprised to learn from management that consumers have not downtraded despite their cautious sentiment (MIER CSI survey: 2QFY13 -13.2 points).

- In view of the weaker-than-expected results (especially from its Singapore operations) and our softer MLM growth outlook for FY13FFY15F of 1%-1.5% due to:- (1) heightened probability of an excise duty in 2HFY13, and (2) sluggish demand from decreased disposable income, we have trimmed our FY13F-FY15F earnings by 8%-12%.

- We do not anticipate lower A&P expenses for FY13F despite the absence of world events (FY12: Euro 2012 in June) as the group will now need to invest in its Carlsberg-Barclays Premier League campaign (a key marketing event) following its parent company’s 3-year sponsorship of the BPL.

- Unlike previous years, management is not expecting any volume recovery in 3QFY13 from pre-budget stocking activities as this year’s reading on Oct 25 will be later than previous years’. As such, any significant step-up in volumes would only be visible in 4QFY13, ceteris paribus.

- Management has declared a single-tier interim dividend of 5 sen/share for the quarter, a similar quantum to 1HFY12’s. This makes up ~8% of our revised DPS for FY13F. The bulk of CAB’s dividends are declared in 4Q.

Source: AmeSecurities