Highlights

• We met with Carlsberg’s CFO Mr. Lew last week , the following are some key takeaways:

• There has been a noticeable slowdown in modern & traditional on-trade channels in Malaysia & Singapore; however this decline in on-trade is negated by a stronger growth in off-trade channels both in Malaysia and Singapore.

• The strength of Singapore operations stem from organic single-digit volume growth and the benefit of a stronger SGD.

• Operating profit margin expansion of 3.69ppt yoy was mainly on the back of cost savings across the supply chain and in the production area, the attrition of 15% of workforce yoy and the transfer of key back office services such as accounting from Singapore to Malaysia.

• Carlsberg aims to grow its cider category; this objective will be aided by the commencement of brewing Somersby domestically. Capex of circa RM12m has been allocated for the purchase of new tanks and vats for the production of Somersby. Currently, Somersby is imported from Eastern Europe. Management has also shared that the formulation will be tweaked slightly to cater more to local palettes. Somersby continues to its strong momentum on the back of brand activation initiatives especially in the modern on-trade channel. Somersby currently commands circa 70% share of market in the cider category. However in absolute terms the cider category is small relative to beer as a segment.

• The group has introduced a new line of Carlsberg in March. Carlsberg smooth, which was designed to taste similar to draught beer in its efforts to introduce a beer like Tiger.

• Prices are expected to increase starting July by circa 2%-5% as the brewers are expected to pass on the full increase in the duty hike to consumers after having absorbed a portion of it since March.

• Brands such as Skol Super, Royal Stout and Special Brew have had their ABV reduced in order to minimize the price increase due to the duty revision. To note, these brands have had their ABV revised by circa 2%.

• Profits from associate companies are expected to be lower in FY16. Volumes in Sri Lanka decreased by 30% on the back of a 100% ED hike towards the end of 2015. Furthermore, the recent episode of floods has damaged a part of the factory which is expected to take several months to address before operations can commence at full capacity again.

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

HOLD

• Positives – 1) 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

Downgrade to a HOLD given the run in share price. Maintain TP of RM13.60 based on DCF (WACC: 8.24%; TG: 2.5%).

Source: Hong Leong Investment Bank Research - 24 Jun 2016