Result

• Within Expectations – 9M16 PATAMI of RM 157.9m accounted for 71.1% of our and 65.8% of consensus full year estimates, respectively.

• Historically, 9M earnings accounts for 65.2%-78.9% of full year earnings, as such we deem this to be inline.

Dividends

• None.

Highlights

• YTD: Revenues in 9M16 was flattish growing 0.6% yoy before adjusting for the LHFB divestment (adjusted: +6.7%). This is largely attributed to stronger contributions from both Singapore and Malaysia operations. Higher domestic sales in Malaysia and Singapore coupled with higher exports (to Sri Lanka), effective cost management and higher profits from Maybev Pte Ltd delivered core profit growth of 7.4% yoy.

• Yoy: Revenues contracted by 3.0% (adjusted: -0.2%) namely on the back of weaker consumer sentiments in Malaysia. Revenues from Malaysian operations declined 7.6% (adjusted: -3.3%), whilst Singapore saw revenues increasing 5.3% from volumes. Operating profits declined 27% due to greater price discounts to clear old inventory and higher marketing expenses. Group profits declined 29.7% yoy.

• Qoq: Revenues were flattish declining by 0.6% attributed to weaker consumer sentiments. PAT declined by 15.1% to RM43.6m.

• Management guided that High Alcoholic Beer such as Skol Super, Royal Stout and Special Brew which had upward price revisions circa 1.3% in July have seen a decline in sales. However, we are of the opinion that this is a kneejerk reaction to the recent price and product revision.

• YTD the group’s share of Lion Brewery’s losses amounted to RM1.9m vs. profits of RM10.9m SPLY. We anticipate for the full year, Lion Brewery will continue to be loss making as they have only recently commenced production this week.

• We expect domestic market conditions for the remainder of 2016 to remain challenging. Nonetheless, the group should be able to deliver a good performance on demand inelasticity and the upcoming festive and holiday period.

• We continue to advocate that the duty hike effect is nullified by the potential to reduce the ABV or “water down” beers under the new excise structure.

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 ↔

• We like Carlsberg for its relatively high dividend yield, diversified geographical earnings base, resilient earnings and low capex requirements. Nonetheless, in the near term we expected Sri Lanka to be loss making and domestic subdued sentiments to bound volume growth.

Valuation

• Maintain HOLD and TP of RM14.69 (WACC: 8.24%; TG: 3.0%)

Source: Hong Leong Investment Bank Research - 29 Nov 2016