- We upgrade our recommendation on Guinness Anchor Bhd (GAB) from HOLD to BUY with a higher DCF-derived fair value of RM14.20/share, which implies an FY15F PE of 19x.

- Although GAB’s earnings are generally stronger in the 1H, its FY15 interim earnings came in well ahead of both our and consensus estimates (66% vs. the usual 57%).

- GAB reported a 2QFY15 net profit of RM76mil – its highest quarterly earnings in the past eight years – to lift its 1HFY15 earnings to RM131mil. As expected, an interim dividend of 20 sen/share was also declared.

- Management attributes its sequentially stronger performance to higher MLM demand (from year-end festivities and reduction in contraband beers) and better cost management. Its EBITDA margin was a tad higher as net profit growth outpaced that of revenue, at 39% and 33%, respectively.

- The positive volume growth during the quarter was contrary to indications from the consumer sentiment index (as tracked by MIER), which showed waning consumer confidence. The index had recorded a 15-point decline over the same period.

- Cumulatively, GAB’s 1HFY15 revenue and earnings were higher by 11% and 13% YoY. The growth was mainly driven by the recovery in MLM volumes and its favourable pricing structure (March 2014 price hike). We opine that the impact from its premiumisation strategy has yet to flow through given that its EBITDA margin remained flat at 21%.

- At its briefing, management shared that its MLM volumes are on the rebound, having fallen by 6.6% in FY14. The 6% YoY growth in 1HFY15 was led by the better-than-expected sales of its three core brands, namely Tiger, Guinness and Heineken.

- Looking ahead, we expect its earnings momentum to remain intact in 3QFY15 due to:- (1) the seasonal effect of CNY, which occurs a month later this year (19 Feb 2015 vs. 31 Jan 2014); (2) pre-GST loading activities (implementation in April); and (3) the 3%-5% price hike effective 29 Dec 2014.

- That said, we caution that earnings could hit a soft patch in 4QFY15 before picking up again as we expect MLM volumes to decline amidst the uncertainties in the GST rollout. Cognisant of this, management had said that it will increase its brand activation activities to support its volumes ahead.

- Taking into account the aforementioned, we have thus raised GAB’s FY15F-FY17F earnings by 6%-9%. Our parallel increase in its NDPS translates to average yields of 6%. This is based on payout ratios of ~95%.

- Having retraced by 40% from its high in June 2013, the stock is currently trading at a forward PE of 17x, its 5-year mean. We believe a premium is justified given the stock’s resilient earnings profile and attractive yields.

Source: AmeSecurities