News

• Carlsberg Brewery Malaysia Bhd (CBMB) has announced that it has agreed to the sale of its 70% shareholding in its subsidiary Luen Heng F&B Sdn Bhd. (LHFB) to Capriwood Sdn Bhd for a total consideration of RM19.5m in an announcement dated 15 May 2015.

• The intent of the brewer’s move in divesting its stake in LHFB is to realign its ‘Focus on beer’ and to maximize the return on capital invested.

• CBMB entered into a shareholders agreement with Luen Heng Agency (LHA) in Nov 2008 to establish a new JV company LHFB. The principal activities of LHFB are importation, distribution and sale of alcoholic and nonalcoholic beverages including beer, hard liquor wine.

Comments

• We are neutral on the announcement as we see this divestment as a strategic move to free up working capital. Recall that LHFB is also in the business of the distributing wines and liquor; which is highly capital intensive, due to the high value of the products and the need to keep inventory. As such, the turnover of wines and liquor is longer in comparison to beers, trapping capital that could be more efficiently utilized.

• CBMB will continue to sell selected beers imported by LHFB such as Budweiser, Stella Artois, Hoegaarden and Beck’s. To note, the bulk of the group earnings is from their flagship Carlsberg Green Label. Furthermore, the group also brews the premium Asahi and Kronenbourg lines domestically.

• The filing highlights that LHFB is valued at RM43.4m (Inclusive of goodwill RM5.0m). There will be a one-off loss of 10.9m at the group level, as Carlsberg’s stake is worth RM30.4, whilst the divested price is RM19.5m.

• Based on the disclosure, LHFB FY14 audited financial statements highlighted a PAT of RM10.1m.The FY14 audited annual reported figures of PAT for CBMB was RM216m. LHFB’s contributions to FY14 PAT is a dismal ~3.3%. As such, we believe that future potential loss of earnings contribution from LHFB is immaterial.

Risks

• Excise duty hike after absence of 9 years
• Higher-than-expected raw material prices
• Lower-than-expected TIV
• Continuous decline in market share

Forecasts

• Unchanged.

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

Maintain HOLD with unchanged TP of RM12.50 based on DCF valuations.

Source: Hong Leong Investment Bank Research - 18 May 2015