- We upgrade Carlsberg Brewery (M) Bhd (CAB) from HOLD to BUY with a higher DCF-derived fair value of RM13.90/share (vs. RM13.50/share previously) following its better-than-expected FY14 results and attractive forward yields of 6%-7%.

- CAB wrapped up its FY14 on a strong note with 4QFY14 earnings of RM63mil. This lifted its full-year net profit to a new peak of RM212mil. The results were above both our and consensus estimates by ~8%.

- CAB also proposed a final and special single-tier dividend of 66sen/share. This brings its total for FY14 to 71sen/share, 16% above FY13’s 61 sen/share. Payout ratio is maintained at >100% while yield is at a decent 5.5%.

- The main reason for the positive surprise is the higher-than-expected MLM sales volume of its Malaysian operations in 4QFY14 following its successful consumer campaigns. The division had registered QoQ revenue and EBIT growths of 4.6% and 5.5%, respectively.

- The MLM volume improvement was contrary to our expectation of a dip in the final quarter of FY14 following 3Q’s pre-budget loading activities and waning consumer confidence as indicated by the 15-point decline in the MIER consumer sentiment index.

- For the full year, the group’s better performance (YoY, revenue: +5%; net profit: +15%) can be attributed to:- (1) margin expansions (especially in its domestic market) from its improved product and price mix and effective cost management programs; (2) ongoing recovery of its Singapore operations; and (3) higher share of profit from its Sri Lankan associate, Lion Brewery (YoY: +87%).

- Carlsberg Singapore (CAS) had recorded 23% and 27% YoY jump in revenue and EBIT for FY14 on the back of the completion of its stock rationalisation programme (from 2QFY13 to 1QFY14) and synergies from its acquisition of Maybev – exclusive distributor of Asahi in Singapore.

- That said, we note that CAS’ EBIT margin was still below its historical 20% (FY14: 15.5%). We believe this was due to competitive pressures as well as downtrading activities by consumers following the steep 25% hike in liquor excise duty in February 2014. We expect its margins to normalise moving forward barring further regulatory setbacks.

- All in all, we have raised its FY15F-FY16F earnings by 8%- 10%. Our latest earnings forecasts take into account a higher MLM growth assumption of 4%, the 3%-5% price hike effective 29 Dec 2014 and greater contribution from its associate. Volumes ahead will be supported by the CNY festivities and pre-GST loading activities.

- At the current price, the stock is trading at FY15F-FY17F PEs of 15x-17x, midway of its 5-year PE band of 11x-26x.

Source: AmeSecurities