Highlights

FY14 reported a 7.6% decline in operating profit behind the challenging operating environment throughout the year from dampened consumer spending, low consumer confidence, weaker MYR (30% of GAB’s production are exported), poor weather conditions and the decline in tourism numbers.

Contraband products remained a major threat to the brewery players which are priced significantly lower compared to legal beer products. Based on research, the availability of contraband beers grew rapidly in the recent years (by 2.3x within 3 years from 2010-2013).

With regards to the issue of excise duty increase, we gathered that the changes in valuation method imposed by the Royal Malaysian Customs was due to an additional duty charge on all A&P expenses made on locally-brewed beers (i.e. additional duty paid on consumer events).

As a result, GAB experienced an effective excise duty increase of 3%. We understand that the latest valuation method is not in-line with international standards and believe the group would reason with the authorities on the matter.

Given that innovation would be the next engine of growth amid the saturated beer market, GAB has come out with two latest products, Smirnoff Ice and Kirin Ichiban.

The launch of Kirin Ichiban has been very successful and well-received, but we do not expect significant contribution from this category (super-premium beer segment) due to the group’s large portfolio of premium and mainstream brands. Given its high-profile, Kirin Ichiban is only available at highend on-trade outlets at this juncture.

Despite the positive response among consumers, management have shared that it would allow consumers to first digest the introduction of its latest products before introducing more super-premium beers into the market.

Risks

• Excise duty hike after absence of 8 years
• Higher-than-expected raw material prices
• Lower-than-expected TIV
• Continuous decline in market share

Forecasts

Unchanged.

Rating

BUY

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

Given the unexciting and bleak outlook of the brewery industry going forward, coupling with the potential negative impact post-implementation of GST next year, we trim our terminal growth assumption to 1%.

As a result. TP is reduced to RM14.39 based on DCF valuation and we downgrade the stock to HOLD.

Source: Hong Leong Investment Bank Research - 25 Aug 2014