Results

1QFY14 net profit of RM49.6m came in below expectations, accounting for only 21% of ours as well as consensus’ full year forecasts. 1Q usually records approximately 26-27% of full year earnings.

Deviations

Lower-than-expected malt liquor volume, partially offset by higher-than-expected margins from effective costs savings.

Dividends

None. The group usually declared dividends semi-annually (interim dividend in 2Q and final dividend in 4Q).

Highlights

Revenue declined by double-digit for both yoy and qoq (or -16.9% and -20.9% respectively) mainly due to a planned reduction in distributor stocks. Dampened consumer spending as a result of rise in fuel prices (in Sept) and inflation rate over the past quarter.

Based on revenue per day, GAB suffered the largest decline since FY08. Revenue per day fell by 21.8% qoq and 25.1% yoy respectively.

Earnings-wise, GAB benefited, with a lesser percentage drop yoy, from lower operating expenses arising from effective cost rationalisation.

On the other hand, qoq margin expansion was due to lower commercial spent in 1QFY14, which was partially offset by slightly higher effective tax rate of 25% vs. 22.6% in 4QFY13.

Going forward, we remain conservative and skeptical above volume growth in the brewery sector as we believe that the industry has saturated, coupled with several other external factors such as rising fuel costs, inflation as well as potential exposure to excise duty hike in the near future.

Risks

1) Excise duty hike after absence of 8 years; 2) Higher-thanexpected raw material prices; 3) Lower-than-expected TIV; and 4) Continuous decline in market share.

Forecasts

FY14-15 net profit forecasts reduced by 8-10% as we turned more conservative towards GAB’s malt liquor volume, partially offset by improved margins of 1-2% from better costs rationalisation.

Rating

HOLD

Positives – 1) Relatively high dividend yield stock; 2) Duopoly industry; and 3) Resilient earnings and low capex requirements.

Negatives – 1) Highly regulated industry; and 2) Potential excise duty hike.

Valuation

Post-earnings revision, DCF-derived target price is reduced by 8.2% to RM15.50 from RM16.89 previously. Given that share price have retraced from a high of RM22.16 and the total potential return is within our house range of +/-10%, we keep our HOLD recommendation unchanged.

Source: Hong Leong Investment Bank Research - 11 Nov 2013