Result

• Within Expectations – 1H17 core PATAMI of RM121.1m (+6.0% yoy) accounted for 51.6% of ours and 52.1% of consensus full year estimates, respectively.

Dividends

• Declared dividend of 10 sen /share (2Q16: 5 sen /share).

Highlights

• YTD: Revenue in 1H17 expanded 7.4% yoy to RM915m on the back of higher prices, strong sales and successful portfolio “premiumization”. Subsequently, core PATAMI grew by 6.0% yoy to RM121.1m. EBITDA margin expanded 1.8ppts to 20.2%.
• Yoy: Revenue grew 4.1% to RM412.1m driven by better price and sales mix in Malaysia (organic revenue: +4.8%) and strong volumes in Singapore (organic revenue: +10.4%). Subsequently, core PATAMI grew 4.6% to RM53.7m.
• Qoq: Revenue declined by 18.0% qoq due to seasonality. Core PATAMI declined by 20.3% to RM53.72m.
• The group received higher contributions from Lion brewery PLC amounting to RM2.4m in 2Q due to the recovery of insurance compensation. Management guided that a further RM5.8m in insurance compensation can be expected to be paid out, however was coy on whether the proceeds will be received in FY17. On that note, the group’s Sri Lanka share of operating losses amounts to c.RM1.8m per quarter.
• The group’s portfolio “premiumization” drive has led to its portfolio of premium beers growing a commendable 22% yoy. This shift in product mix coupled with ASP revision last July has been instrumental in driving its margin expansion despite flattish volumes produced.
• We believe that Carlsberg has the cost advantage in the cider category which has exhibited tremendous growth yoy due to Somersby being brewed domestically.
• Management lauded the efforts of the authorities in their fight against contraband beers. There has been a noticeable reduction in the incidence of contraband in 2Q17. This evolution together with the group’s brand activation activities has seen growth in both its on and off-trade channels.
• On the government’s decision to change the legal age to purchase alcohol to 21, management sees very little impact to sales as the legal age to consume is still unchanged.
• Carlsberg is well positioned to benefit from the 2018 World Cup due to its long standing association with football. The time difference between Malaysia and Russia will see kick off starting at “happy hours” of 6pm and 10pm locally.

Risks

• Risks to this stock arise from two venues: 1) overhang of the customs bill to the amount of RM56m for duties and penalties. 2) Prolonged soft consumer sentiment bounds total industry volume growth.

Forecasts

• We raise our forecasts to better reflect the shift in sales mix towards premium beers which command better margins. Our FY17-19 EPS increases by 4%-8%.

Rating

• We like Carlsberg for its relatively high dividend yield, geographically diversified earnings base, resilient earnings and low capex requirements and its well-received portfolio premiumization drive. Maintain BUY.

Valuation

• Post earnings revision, our DCF derived TP is raised to RM17.90 from RM15.70 (WACC: 8.00%; TG: 3.0%).

Source: Hong Leong Investment Bank Research - 18 Aug 2017