Result

• Within Expectations – 1HFY16 PATAMI of RM 114.3m came in within expectations, accounting for 51.6% of our and 48.3% of consensus full year estimates, respectively.

Dividends

• Declared first interim dividend of 5 sen /share (2QFY15: 5 sen /share), in line with our expectations. This represents a payout and yield of 13.37% and 0.33%, respectively.

Highlights

• YTD: Revenue in 1HFY16 experienced a growth of 10.3% yoy after adjusting for the LHFB divestment (unadjusted +2.4%). This is largely attributed to the robust performance from Singapore, stable growth in Malaysia and the groups “premiumization program”, coupled with affective cost efficiency drive. Subsequently, organic Operating Income grew 25.5% (unadjusted +42.7%) yoy.

• Qoq: PAT declined by 17.5% to RM52.9m on the back of lower revenue as distributors slowed purchases, post price hike in March and after stocking up in 1Q16 for CNY festivities. Recall that Carlsberg revised prices by 3% in March on the back of the ED revision,

• Brands in their High Alcoholic Beer category such as Skol Super, Royal Stout and Special Brew have had their ABV revised down by circa 2% to minimize the price increase due to the ED revision. Subsequently, the group only revised prices upward by 1.3% in July.

• Carlsberg Smooth was introduced successfully in Malaysia and Singapore. Their cider category continues to make ground with Somersby apple variant being brewed locally and 320ml tin variants being introduced to off-trade channel. Their Premium segment saw YTD volume growth of 15% vs SPLY.

• On their associate in Sri Lanka: we can expect earnings of to be reduced yoy as Lion Brewery was affected by a disastrous storm which will see it out of operation till November. In FY16 we can expect reduced contributions from their associate partially offset by the insurance policy payout.

• We expect domestic market conditions in 2H16 to remain challenging but the group should be able to deliver a good performance on demand inelasticity.

• We are wary that the Brewery industry is a potential target for another ED revision in the near term more so than the tobacco sector due to the latter’s ED induced downturn and the relative strong performance of the brewery sector.

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

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

Downgrade to a HOLD given the run in share price. We raise our TP to RM14.69 from RM13.60 as we adjust our TG assumption to 3% from 2.5% (WACC: 8.24%; TG: 3.0%).

Source: Hong Leong Investment Bank Research - 24 Aug 2016