News

• The government has gazette into law some changes to the methodology in which excise duty (ED) on beers and liquor is calculated.

• Previously the ED on beers was calculated as RM7.40/litre + 15% ad valorem tax. Effective 1/3/2016 the duty is calculated on basis of RM175 per 100% vol/litre.

Comments

• This news was not a surprise as the market was bracing for an overdue revision in ED. Recall that the last ED hike was in 2005.

• The revision in ED calculation can be construed as a slight hike. It is akin to the revaluation method imposed by the Royal Malaysian Customs on 1 Nov 2013 in which A&P spending must be imputed into ED calculation.

• We welcome this revision as it removes the risk of a substantial adjustment to ED to the brewery sector later this year. This is in contrast to the tobacco industry which saw a spike in ED hike of 40% post 2016 budget. This subsequently led to a decline in legal industry volume by 10% yoy.

• Our back of the envelope calculations suggest that the increase in ED in absolute terms is circa RM0.85 per litre. A standard can of beer is 320ml with circa 5% alcoholic content, translating into a duty hike of circa 28.3 sen/ per can. This is insignificant considering the retail price range of RM6-9/can.

• Volume. We don’t expect volume to be affected as the expected increase in retail price would be marginal. We expect the brewers to take this opportunity to price in a buffer as a safety net. On a separate note, we believe the customs will step up efforts in curtailing the smuggling of cont raband beers while the recent controls of distribution channels on our duty free islands would curtail parallel imports.

• Rebasing. It has been a bane for the local brewers in which liquors and wines were taxed at a lower rate despite a higher alcoholic content. This revision will now see ED calculated based on alcohol content instead of absolute volume produced, in line with international standards.

Risks

• There is still marginal risk of the government raising ED further given the pressure on government revenue. The overhang of RM56m claimed by customs which is still pending is of more concern in the near term.

Rating

• OVERWEIGHT
• The mild ED revision removes the risk of a substantial hike which will disrupt TIV (as seen in tobacco industry) while allowing brewers to build buffer from pricing.
• High dividend yield of brewers is another posit ive in the environment of “search for yield”.

Stock Pick

• Forecasts for GAB and CAB remain unchanged. Maintain our BUY on CAB (TP: RM13.60). Our BUY call on GAB is also maintained with higher TP of RM15.68 (previously RM14.42; raising our TG assumption from 2.5% to 3%) on dissipating risk of a significant ED hike negatively impacting TIV. We prefer GAB to Carlsberg due to the latter’s strong domestic presence. We foresee Carlsberg’s performance to taper off in FY16 once the MYR normalizes vs. SGD.

Source: Hong Leong Investment Bank Research - 3 Mar 2016