Result

• Within Expectations ? 1Q17 revenue of RM502.6m (+15.6% qoq, +10.3% yoy) translated into PATAMI of RM67.4m (+43.2% qoq, +7.1% yoy) accounting for 28.7% of ours and 28.8% of consensus full year estimates, respectively.
• We deem this to be inline as historically 1Q PATAMI accounted for 27-30%of full year earnings.

Highlights

• Yoy: Revenue grew 10.3% to RM502.6m driven by higher volumes in both Malaysia (revenue +6.7%) and Singapore (revenue +18.7%) and the duty-led price revision back in July 2016 (Malaysia). PAT grew 7% yoy to RM68.5m due to higher sales and effective cost management, partially offset by the larger share of losses from Lion Brewery. EBITDA Margins expanded 0.86ppt yoy on the back of higher revenues and efficiencies across the value chain.
• Qoq: Revenue grew 15.6% attributed to seasonality of the 1Q driven by CNY festivities in the period under review. Subsequently, PAT grew by 40.7% to RM68.5m.
• The larger share of losses of RM5.9m from Lion brewery PLC is largely attributed to a one-off impairment on the Miller Brewery Limited brands in Sri Lanka which was acquired in 2014. This is coupled with minor operational losses as Lion Brewery is still to fully recuperate from the floods of 2016. On further guidance by management, the impairment is a one off, whilst Lion brewery is expected to reach at a minimal, operational breakeven in FY17.
• Carlsberg?s drive to differentiate a portfolio staple (Green Label) in Carlsberg Smooth Draught continues to gain traction amongst drinkers and was well received in the off trade channels during the CNY festivities.
• Their premium portfolio continues to show promise. Somersby cider continued its double digit growth yoy, whilst its premium line up (Kronenbourg 1664 and Connor?s Stout Porter) has shown high growth in demand.
• Whilst it is expected that the domestic market conditions will remain challenging, chiefly from the threat of contraband beers, we can expect Carlsberg to continue to deliver value to its shareholders.
• We continue to prefer Carlsberg in the weak RM environment as its exposure in Singapore would partially negate its

weaker presence in the brewery sector domestically. 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 ↔

• We like Carlsberg for its relatively high dividend yield, geographically diversified earnings base, resilient earnings and low capex requirements. Nonetheless, the subdued domestic sentiment still bounds volume growth.

Valuation

• Maintain BUY with unchanged TP of RM15.70 (WACC: 8.00%; TG: 3.0%).

Source: Hong Leong Investment Bank Research - 18 May 2017