- We reiterate our HOLD recommendation on Carlsberg Brewery (M) Bhd (CAB) but lower our DCF-based fair value from RM13.80/share to RM13.50/share following an upward revision to our WACC.

- CAB reported a 3QFY14 net profit of RM56.3mil, to bring its 9MFY14 earnings to RM148.7mil. The results were in line with our and consensus estimates.

- CAB’s 9M earnings improvement of 24% came on the back of a 4% rise in revenue while QoQ, 3Q net profit rose by 41% in tandem with a 15% topline growth.

- The better performance can be attributed to improvements in all its divisions. Its Malaysian operations had benefited from higher MLM volumes on account of pre-Budget loading activities in 3Q and an improved price and product mix.

- A higher share of profit from its Sri Lanka associate and a sustained earnings recovery at its Singapore operations had also contributed positively to the group’s 9M net profit.

- Carlsberg Singapore’s (CAS) revenue and EBIT had increased by 17% and 31% QoQ (9M: +22% and 55% YoY) following:- (1) the completion of its stock rationalisation program; (2) effective consumer campaigns; and (3) contribution from Maybev, which it acquired in April 2014.

- With revenue growth limited by shrinking MLM volumes, management had earlier said that it will focus on cost efficiency measures to support bottom line. This had resulted in improvements in its EBIT margin by 2ppts QoQ for 3Q and 3ppts YoY for 9M – the reason for the higher net profit growths vis-à-vis revenue.

- As usual, the group had not declared any dividends for this quarter. It usually announces the bulk of its dividends in 4Q.

- CAB’s share price had held up relatively well vs. its peer until 24 Sept 2014, when it announced that it had received two bills of demand totaling RM56mil from the RMC. The stock had subsequently retraced by up to 13% but had since recovered to register a YTD gain of 3.3%.

- At the current price, CAB is valued at FY14F-FY16F PEs of 16x-18x (+1SD of its 5-year trend average of 16x). We deem this to be fair given the near-term headwinds in the MLM sector, namely soft MLM volumes (from dampened consumer sentiment and contrabands), uncertainties over the GST implementation and regulatory/tax concerns.

- That said, we believe any downside to CAB’s share price will be limited by its fairly attractive FY14F-FY16F dividend yields of 5.3%-6.1% (premised on a 100% payout ratio). We recommend investors to HOLD on to CAB as it is a relatively safe consumer play offering stable returns.  

Source: AmeSecurities