- We reaffirm our SELL recommendation on Carlsberg Brewery (M) (CAB) but raise our DCF-based fair value from RM10.60/share to RM11.00/share.

- Following our meeting with management, we have revised upwards our FY13F-FY15F earnings by ~8% to account for the improved performance of its 100%-owned Singapore subsidiary, Carlsberg Singapore (CAS). CAS had historically contributed 23% and 30% to group revenue and EBIT, respectively, but for 9MFY13, it was only 20% and 18%.

- We gather that CAS has placed its house in order after undergoing two quarters of stock rationalisation exercises (in 2Q and 3Q of FY13F). Although competition remains stiff, we understand that there has been an upturn in both MLM volumes and margins.

- That said, management maintains its view that FY14 will be another challenging year for the group as domestic MLM volumes continue to be pressured by a pick-up in inflation. We continue to expect flattish MLM volume growth for FY13F-FY15F of 0%-1.5%.

- Interestingly, we learned that the largest threat to volumes in the premium/imported segment is the continued growth of the contraband market and not downtrading activities. Supply of cheap imported beer has reportedly increased 5-fold in the past 5-7 years.

- Nonetheless, the premium/imported segment remains the fastest growing segment, with distribution coverage and brand awareness still trending upwards. Encouraged by this, CAB is looking at brewing its well-received Somersby Apple Cider locally (Asahi and Kronenbourg have been produced here since 2011 and 2012, respectively).

- With revenue growth limited by a shrinking MLM, management is turning its focus on cost cutting measures to support its bottomline. This would be a fitting strategy given the current cost headwinds (e.g. logistics and packaging amid subsidy pullbacks). All in all, we expect CAB’s margins to hover at 16.5% (FY12: 16.7%).

- We do not anticipate any significant impact on CAB’s earnings from the GST implementation as any savings from the 5% sales tax it currently pays will be offset by a potential decline in volumes (from price increases). No pre-GST stocking activities are anticipated.

- We have also adjusted our FY13F-FY15F gross DPS forecasts by +10% as we see no risk in its ability to meet its 100% payout guidance. This translates into yields of close to 5%.

- We choose to remain conservative on the stock pending its FY13 results, which will tentatively be released on February 21. 

Source: AmeSecurities