Result

• Within Expectations – 1Q16 PATAMI of RM 62.9m came in within expectations, accounting for 28.4% of ours and 27.1% of consensus’s full year estimates , respectively.

• Historically Carlsberg’s 1Q PATAMI accounted for approximately 27-29% of full year earnings.

Deviations

• The group was buoyed by the higher consumption of its beverages during the 2016 CNY festive period domestically and in Singapore.

Dividends

• None. Dividends are declared on a semi-annual basis.

Highlights

• Yoy: Revenues in 1Q16 experienced a growth of 6.12% largely attributed to strong performance from Singapore and Malaysia on the back to the CNY festive period, coupled with affective cost efficiency drive across the group. Subsequently PATAMI grew 32.5% yoy.

• Despite the tougher operating environment, operating margins improved by 3.69ppts yoy. We can attribute this to the group’s cost efficiency drive, profit improvements measures and the strength of the SGD vs. MYR.

• Malaysian operations recorded a flattish evolution in revenues yoy (1Q15: RM319.77m vs. 1Q16: RM319.68m). We view this in positive light despite the tougher economic backdrop and persistently low consumer sentiment.

• Momentum of Singapore operations remained strong, growing 24.0% yoy (1Q15: RM109.69m vs. 1Q16: RM136.04m). This is on the back of higher sales volume, improved price/mix and enhanced synergies as well as additional profit contributions from Maybev and the stronger SGD vs. MYR.

• We expect domestic market conditions in 2016 to remain challenging despite the nascent signs of recovery in consumer spending. In 1Q16 consumer sentiments improved by +9.1pts (1Q16:72.9 vs.4Q15:63.8pts) which is still shy of the threshold level of confidence of 100pts.

• Whilst we do expect Carlsberg to improve its margins, investors should take note that the strengthening MYR could marginally offset this improvement should beer consumption fails to recover in tandem with the consumer sentiment . To note our house expects Ringgit to normalize to MYR4.00/USD by years end.

• The Euro 2016 campaign which is expected to kick off on 10 Jun–10 Jul is expected to boost volumes, albeit marginally.

Risks

• Risks to this stock arise from two venues: 1) overhang of the 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; and 3) Resilient earnings and low capex requirements.

Negatives

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

Valuation

• Maintain our BUY call and TP of RM13.60 based on DCF valuation (WACC: 8.24%; TG: 2.5%).

Source: Hong Leong Investment Bank Research - 18 May 2016