- We upgrade our rating on Guinness Anchor Bhd (GAB) from SELL to HOLD, with a higher DCF-derived fair value of RM15.40/share (from RM14.70/share previously), as we roll forward our valuation year to FY15F.

- Our upgrade is mainly due to the retracement of its share price, which has reduced the downside to our fair value to less than 15% - our in-house threshold for a sell rating. We believe that the market has priced in the industry’s sluggish growth (FY14F: +1.5%) but its share price will be supported by its decent yields of 5% p.a.

- GAB reported a net profit of RM66.1mil for 2QFY14, which brought 1HFY14 earnings to RM115.7mil. We deem the results to be broadly in line despite it meeting only 51% of our estimates (1H net profit usually contributes ~55% to full year earnings).

- The group’s 2QFY14 revenue surged by 53% QoQ on account of:- (1) a lower base in 1QFY14 following its stock rationalisation exercise; and (2) the seasonally strong CNY period, which traditionally makes up ~25% of full year revenue. Its 1HFY14 revenue was flattish YoY as both events have offsetting effects.

- The softer performance of its bottom line (QoQ: +33%; YoY: -6%) in relation to its top line can be attributed to the squeeze in EBITDA margins (QoQ: -4.2ppts; YoY: -0.7ppt). GAB had incurred greater operating expenses as it looked to support its brands and strengthen its market position through higher commercial investments (e.g. “Heineken Thirst” and “CIMB Classic” sponsorship).

- GAB declared a tax-exempt interim dividend of 20 sen/share, which matches 1HFY13’s payout, quantumwise. Our total gross DPS forecast of 72 sen for FY14F is premised on a 95% payout ratio.

- Looking ahead, the group reiterated its cautious stance for the MLM industry given the expectations of more prudent spending by consumers. Consumer sentiment, as reported by MIER, has slipped for the third consecutive quarter in 2QFY14 to 82.4 points. It peaked at 122.9 points in 3QFY13.

- Management also noted that contraband beers are increasingly becoming a credible threat to MLM volumes. Supply of cheap imported beer has reportedly increased 5- fold in the past 5-7 years, thanks to their much lower prices.

- At the current price, the stock is trading at PE of 19.7x over FY14F earnings, which is 1SD above its 5-year trend average PE of 14.7x. Our new fair value implies a forward PE of 20.4x.

Source: AmeSecurities