- We maintain our HOLD recommendation on Guinness Anchor Bhd (GAB) but tweak our DCF-based fair value slightly higher to RM14.00/share (from RM13.90/share previously).

- In last Friday’s analyst briefing, management confirmed our view that the fall in its FY14 revenue (-4% YoY) was due to softer malt liquor market (MLM) volumes and that growth in the premium segment continued to outstrip that of the mainstream’s.

-  Heineken was the group’s best performer in the past year, followed by its pillar brand, Tiger, and eponymous label, Guinness. GAB’s volume split among the three brands is 10:60:20, respectively, with Anchor and other labels contributing the remaining 10%.

-  Besides the usual suspects of low consumer confidence (index slipped below 100-pts in FY14), bad weather conditions and decline in tourist numbers, management noted that contraband beers are increasingly becoming a credible threat to MLM volumes (2013: 3-yr CAGR of 33%).

-  Management also underlined its focus on innovation as a means of reaching out to the younger and more discerning drinkers and remaining relevant amid rising consumption of other alcoholic beverages (e.g. cocktails and wines).

-  To this end, the group had launched its first super premium label Kirin Ichiban in April and explored the RTD segment with Smirnoff Ice in June, with both brands being well-received. We understand that GAB has an innovation pipeline for the next 12 months but would spread out the launches to avoid overcrowding the market.

-  On the higher excise duty payments, management clarified that the valuation base for locally-manufactured products had been revised on 1 Nov 2013 to include A&P expenses and royalty incurred by its subsidiary. The uplift in valuation has indirectly raised total duties payable to the government by 3%, while the excise duty of RM7.40/litre is maintained.

-  Moving forward, GAB is looking at increasing its brand activation activities. With cost savings from its efficiency programmes kicking in (main reason for 4QFY14’s earnings recovery), GAB’s opex is expected to remain stable.

-  All in all, we have raised our FY15F-FY17F earnings estimates by ~9% as we factor in better margins and higher price points from its improving product mix. Our parallel increase in the group’s NDPS translates to average yields of 5.1%. This is based on a payout ratio of 95%-98%.

-  Having retraced by 16% YTD, the stock is currently trading at an fair FY15F PE of 20x. This is <1SD above its 5-year mean 16.7x.

Source: AmeSecurities