-  We reiterate our SELL recommendation on Carlsberg Brewery (M) Bhd with a lower DCF-derived fair value of RM10.60/share (previously at RM12.50/share) as we cut our FY13F-FY15F earnings projections by a further 17%-20% in view of weakerthan-expected malt liquor market (MLM) volumes.

-  Carlsberg’s 3QFY13 results fell way short of expectations, constituting only 62% of our and 67% of consensus estimates. 9M earnings historically constituted 77%-79% of full-year net profit. We highlight that this is the second consecutive quarter that the group has missed our earnings estimates. In the previous quarter, we had trimmed Carlsberg’s FY13F-FY15F earnings estimates by 8%-12% following its poor 1HFY13 showing.

-  The group reported 3QFY13 earnings of RM38mil (+24% QoQ) on the back of sequentially flattish revenue of RM352mil (+2%).

-  YoY, 9MFY13 revenue slipped by 6%. The decline in its topline is believed to be the result of weaker MLM demand and the tabling of Budget 2014 (in Oct 2013 vs. Budget 2013’s reading in Sept 2012), which had led to lower 3QFY13 stock-loading activities.

-  Correspondingly, Carlsberg’s 9MFY13 earnings slumped by 21% YoY, which we attribute to:- (1) continuous underperformance by its Singapore subsidiary; (2) greater A&P expenses following the launch of its Barclay’s Premier League campaign; and (3) lower profit contribution (-25% YoY) from its Sri Lanka associate, Lion Brewery, due to higher import costs.

-  Carlsberg’s Singapore outfit had continued to disappoint. Similar to the previous quarter, operations were hampered by the influx of imported beer as well as the undertaking of a stock rationalisation exercise. Its 9MFY13 revenue had declined by 11% YoY (3QFY13: +0.2% QoQ) while EBIT margin was squeezed by 7ppts to 12% (traditionally >20%).

-  We understand that management remains satisfied with the performance of the group’s premium and super premium brands – Asahi Super Dry, Kronenbourg 1664 and Somersby Apple Cider – as distribution coverage and brand awareness are still trending upwards.

-  Looking ahead, management is confident of ending the year strongly in view of an anticipated step-up in 4Q volumes. We, however, are less optimistic given the presently weak consumer sentiment and have further reduced our MLM growth assumption for FY13F-FY15F to 0%-1.5%.

-  As usual, the group did not declare any dividends this quarter. Our downward revised gross DPS forecasts for FY13F-FY15F are based on an unchanged 97% payout ratio. At current price, this translates into yields of ~4.4%.

Source: AmeSecurities