- We maintain our BUY rating on Guinness Anchor Bhd (GAB) with a higher DCF-derived fair value of RM16.00/share as we roll forward our valuation base to FY16F. Our fair value implies FY15F-FY16F PEs of 21x-22x.

- GAB reported a net profit of RM39mil for 3QFY15, to bring its 9MFY15 earnings to RM170mil. We deem the results to be in line, as it met 77% of our, and 78% of consensus forecasts.

- Compared to 9MFY14, GAB’s 9MFY15 earnings was higher by 12.5% on the back of a similar 12.8% rise in revenue. This improvement stemmed from increases in both prices (+3% to +5% hike effective 29 Dec 2015 for certain products) and volumes (+8.2% YoY led by its mainstream label, Tiger).

- The better performance can also be attributed to its more favourable brand mix, which helped to support margins (flattish YoY despite a 13% hike in opex). The introduction of Smirnoff Ice RTD, Affligem and new Strongbow variants thus far in FY15 is in line with the group’s focus on innovation and premiumisation drive.

- Sequentially, GAB’s revenue and earnings were lower by 16% and 48%, respectively, despite a full quarter of price increase and the CNY festivity. We believe this was partly due to the higher base in 2QFY15, when distributors and retailers stocked up in anticipation of a surge in demand in 3QFY15 from pre-GST loading activities when demand is the highest (i.e. CNY).

- Additionally, its higher sales mix consisting mainly of cans (preferred packaging for CNY and which command lower margins) and increased brand activation activities (timing issue) in 3QFY15 had contributed to the declines and 7ppts margin compression.

- During its analysts’ briefing, management said that the impact of the GST would depend on the distribution channel. It expects the modern on-trade segment – the bulk of its business – to be unaffected as the GST would merely replace the existing 6% SST while the off-trade and some traditional on-trade segments will see a retail price increase (overall, a smaller 3% hike vs. GST’s 6% as previously, there was a 5% sales tax for the brewers).

- No dividends were declared this quarter. We leave our gross DPS forecasts (based on 75% payout ratio) unchanged. With its recent share price appreciation, however, GAB’s yields have declined to ~5% for FY15F-FY17F.

- GAB is currently trading at FY15F-FY16F PEs of 19x-20x, which is <1SD above its 5-year mean. While its peer Carlsberg (BUY, FV: RM13.90/share) may have a higher dividend yield, we still like GAB for its dominance in the malt liquor market, strong franchise value and increasingly attractive brand portfolio.

Source: AmeSecurities Research - 15 May 2015