- We reaffirm our SELL recommendation on Guinness Anchor Bhd (GAB) with an unchanged fair value of RM14.70/share.

- GAB kicked off FY14F with a 1Q net profit of RM50mil. When annualised, this met both our and market’s full-year expectations of RM228mil and RM232mil respectively.

- QoQ, GAB’s 1QFY14 earnings jumped by 48% despite a 21% drop in turnover. While higher QoQ earnings were expected (4Q is seasonally the weakest given the absence of any festivities), we were surprised by the topline decline, which is GAB’s first 1Q sequential decline since FY04.

- Management attributed the lower revenue in 1QFY14 to a planned distributor stock rationalisation exercise as well as reduction in consumer spending.

- Following this, we suppose that pre-Budget 2014 stockloading activities - which would have supported last quarter’s malt liquor market (MLM) volumes - may have been rather mild. As such, we do not anticipate a significant post-budget normalisation of demand in 2QFY14.

- Recall that the government has not raised alcohol excise duties from the current RM7.40/litre in its Budget 2014 reading. Nonetheless, we remain cautious as ‘sin taxes’ tend to be announced off-Budget.

- On a YoY basis, GAB’s revenue was down by 17%. Correspondingly, its net profit fell by 13%. The smaller earnings decline can be tied to a 2.4ppts YoY EBITDA margin expansion following improvements in its product mix and better cost management. This is in line with management’s focus on innovation in terms of products as well as processes.

- To capture the Gen Y market and tighten its hold as market leader (with ~60% market share presently), the group will be strengthening its portfolio with new premium brands and exciting events and campaigns. Headline events in 1QFY14 included “Tiger Street Football” and “Arthur’s Day” while 2QFY14 will see the return of “Heineken Thirst”.

- Similar to previous years, no dividends were declared for this quarter. Our gross DPS forecasts of 72 sen and 75 sen for FY14F and FY15F respectively are premised on a 95% payout ratio, translating into yields of ~4.3%.

- Our malt liquor market growth forecasts are maintained at 1.5%-2.0% per annum for FY14F and FY15F. While the status quo of excise duty will lend some support to volumes, we believe that demand will remain soft on the back of weak consumer sentiment amid the government’s subsidy rationalisation and GST implementation.\

Source: AmeSecurities