· We maintain our BUY rating on Carlsberg Brewery (M) Bhd (CAB) with an unchanged DCF-derived fair value of RM13.90/share.

· Last Friday, CAB announced that it is selling its entire 70% stake in Luen Heng F&B Sdn Bhd (LHFB) to Capriwood Sdn Bhd for a total cash consideration of RM19.5mil. LHFB’s other 30% equity interest is held by Luen Heng Agency Sdn Bhd (LHA).

· CAB had on 1 December 2008, purchased the 70% stake in LHFB for RM2.1mil. LHFB is primarily involved in the importation, distribution and sale of alcoholic and non-alcoholic beverages including beer, hard liquor, wine as well as other food and non-food items.

· According to CAB’s management, the rationale underpinning the disposal was its strategy of focusing on the malt liquor market (MLM), which consists of beer, stout and cider as well as its emphasis of maximising its return on invested capital.

· As it is, wine and spirits are very capital-intensive investments given the high value of the products and the need to maintain inventories. Additionally, these products offer limited commercial synergies with MLM as they are of a different segment. In Malaysia, MLM products dominate the alcoholic beverage market at 80%, while wine and spirits each consist of 10%.

· While we are surprised by this divestment, we understand that CAB will continue to sell selected imported premium beers by LHFB as part of its portfolio. The LHFB purchase effectively gave CAB exclusive distribution and sales rights to a range of imported premium beers such as Hoegaarden, Stella Artois and Budweiser. That said, it may cap CAB’s innovation activities as CAB can no longer immediately/exclusively leverage on LHFB’s labels to quickly adapt to consumers’ ever-changing taste.

· In FY14, LHFB contributed ~RM10mil (or 5%) to CAB’s net profit. Based on our back-ofenvelope calculations, the disposal could potentially trim 2%-7% off CAB’s FY15F-F17F earnings (including the one-off loss of RM10.9mil). We are, however, leaving our FY15FFY17F earnings forecasts unchanged for now pending the release of its 1QFY15 results. The disposal is expected to be completed in 3QFY15 with the proceeds being reinvested for working capital and commercial expenses.

Source: AmeSecurities Research - 18 May 2015