- We upgrade our rating on Carlsberg Brewery (M) Bhd (CAB) from SELL to HOLD with a higher fair value of RM13.80/share (vs. RM11.00/share previously) following the announcement of its better-than-expected FY13 results.

- CAB’s full year numbers have outperformed both our and consensus forecasts by ~10%. The group reported a 4QFY13 net profit of RM64mil, which lifted its FY13 earnings to RM184mil.

- The positive variance can be attributed to stronger sales in 4Q from successful marketing campaigns during the year-end festivities, as well as pre-budget loading activities. Together with cost efficiency programs and a lower effective tax rate (4Q’s 15% vs. 3Q’s 25%), its 4QFY13 earnings grew by a larger quantum of 67% QoQ vis-à-vis its revenue’s 11% QoQ growth.

- On a YoY basis, CAB’s FY13 revenue and net profit declined by 2% and 4% respectively. The commendable performance of its Malaysian operations (EBIT: +9% YoY) was negated by lower contributions from its wholly-owned Singapore subsidiary, Carlsberg Singapore (CAS) (EBIT: -32% YoY) and Sri Lanka associate, Lion Brewery (-23% YoY).

- CAS’ FY13 operations were hampered by greater competition from parallel imports and the undertaking of a one-off stock rationalisation exercise since 2QFY13. Its margins were squeezed by 5ppts YoY to 15.1% - typical margin for its domestic operations. Nonetheless, management is confident of CAS making a full recovery in terms of volume and margins in FY14F.

- Faced with a mature domestic malt liquor market and expectations of weak consumer spending in FY14F, management aims to harness the power of innovation – in both products and processes – to expand market share and drive earnings growth. It has new brands in its pipeline that will begin to be rolled-out by as early as 1QFY14.

- We also understand that CAB will continue its proven strategy of pushing premium, high-margin lines moving forward as a response to declining MLM volumes.

- All in all, we raise our FY14F-FY15F earnings by ~11% to factor in a higher EBIT margin from:- (1) the turnaround at CAS; (2) management’s renewed focus on cost control; and (3) CAB’s further move up the value chain (it has a longer term target for premium/imported brands to form 40% of its product mix vs. the current 20%).

- The group also declared a final and special single-tier dividend of 56 sen/share. Total gross DPS for the year of 61 sen/share was a tad below FY12’s 63 sen/share, but is based on a same payout ratio (i.e. 100%). This translates to a yield ofm 4.8% at the current price.

Source: AmeSecurities