Results

• 9MFY16 revenue of RM1,388.5m came in within expectations, accounting for 78.2% and 77.8% of ours and consensus estimates. Net profit of RM204.87m came in slightly above our expectations but was in line with consensus, accounting for 86.7% and 84.9% of ours and consensus estimates, respectively. Historically, 9M earnings account for 83%-85%.

• We deem this performance to be in line as the final quarter is usually the weakest quarter due to cyclicality and bulk of the A&P expenses are recognized in 4Q.

Dividends

• None.

Highlights

• YTD: 9MFY16 revenue grew by a marginal 2.8% yoy attributed to higher sales driven by improved brand visibility, pricing and effective targeted commercial activities. Consequently, volumes were up across all channels and key brands. GAB continues to benefit from the Government’s measures against contraband beers which have aided the duty paid market.

• Net profit grew by a stellar 20.2% yoy on the back of greater efficiencies across the supply chain and operations. Subsequently, EBITDA margin improved by 2.92ppt yoy.

• Effectively, there was an increase of circa 10% in absolute value terms under the recent excise duty hike. Management shared that GAB paid circa RM8/L in excise duties for beers under the previous structure. The current structure based on Alchohol By Volume (ABV) is calculated as RM1.75 per 1% ABV. Duties on Beers below 5% ABV remained unchanged whilst beers above 5% saw an increment. Subsequently prices were raised by 3%-5% depending on the channel. Management believes that the increase is in line with inflation as such there should be immaterial impact on volume.

• Management guided that there are no plans to change the existing dynamics, portfolio of brands and strategy despite the company rebranding itself as “Heineken Malaysia Berhad”. All previous commercial relationships with Diageo group remains intact and the Guinness brand will still remain a staple in the company’s portfolio.

• The group will continue to focus on growing momentum though targeted commercial initiatives, innovation and driving investment efficiencies. Nonetheless, the market environment remains challenging in the near term due to the rising costs of living and record low consumer sent iment.

Risks

• 1) Overhang of customs bill to the amount of RM56m for duties and penalties in arrears. 2) Prolonged soft consumer sentiment bounds total industry volume growth.

Forecasts

• Unchanged.

Rating

BUY

Positives

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

Negatives

• 1) Highly regulated industry; 2) Potential excise duty hike.

Valuation

• Maintain BUY on GAB. Yields of 5.0-5.2% for FY16-17 remain compelling despite recent share price movements. Maintain our TP of RM15.68 (WACC: 8.00% TG: 3.0%)

Source: Hong Leong Investment Bank Research - 13 Apr 2016