Carlsberg’s 1Q18 core PAT of RM75.5m (+26.4% QoQ, 12.7% YoY) was above ours and consensus expectations. Better earnings were mainly attributed to higher contribution from associate company (Lion Brewery, Sri Lanka) and growth in premium brands. Going forward, we expect improving consumer sentiment and the occurrence of World Cup 2018 should boost the group’s top line. Maintain BUY call with a higher TP of RM22.70 based on DCF valuation methodology (WACC: 7.8%; TG: 3.0%)

Above expectations. Reported 1Q18 core PAT of RM75.5m was above ours and consensus expectations, accounting for 28.6% and 29.5% of forecasted PATs, respectively.

Dividend. 20 sen. (ex-date: 18 June 2018)

QoQ. Revenue rose by 27.6% RM548.5m due higher sales in Malaysia (+39.5%) and Singapore (+2.7%) attributed to Chines New Year festive period. Higher sales and better contribution from associate company (Lion Brewery, Sri Lanka) contributed to 26.4% increase in core PATAMI.

YoY. Revenue was up by 9.1% due to stronger sales in Malaysia (+18.9%) from growth in premium brands in spite of poorer Singapore sales (-11.6%). Core PATAMI grew 12.7% from RM67m to RM75.5m from better sales, better internal efficiencies as well as the final insurance compensation settlement of RM4.7m to Lion Brewery (25% associate) (RM1.2m attributed to Carlsberg).

Premium brands growing strongly. Carlsberg shared that its premium brands Somersby Cider, Kronenbourg 1664 Blanc, Asahi Super Dry and Conor’s Stout Porter in total grew 26% across Malaysia and Singapore YoY.

Ongoing bills of demand. In late 2014, Carlsberg had received two bills of demand from Selangor State Royal Malaysian Customs totalling RM56m pertaining to owed excise duty, sales tax and penalties. Carlsberg believes State Customs does not have legal grounds for this claim.

Outlook: Rebounding consumer sentiment, “zerorising of GST”, growth in premium brands and the occurrence of Russia 2018 World Cup in FY18 should ignite Carlsberg’s sales. Additionally, we expect the newly elected government and Royal Malaysian Customs to continue their efforts to fight contraband and strengthen the legitimate tax paying portion of the beer market in Malaysia and hence the government’s revenue collection of excise duty.

Forecast. We increase our FY18/19 PATAMI forecasts by 1.3%/9.6% to account for quicker turnaround in Carlsberg’s associate company Lion Brewery as well as increased effort from government authorities to clamp down on illegal alcohol.

Maintain BUY. We maintain our BUY call with a higher TP of RM22.70 (from RM17.90) based on DCF valuation methodology after earnings adjustment and tweak to our WACC as a result of favourable macro factors (WACC: 7.8%; TG: 3.0%) (previously WACC: 8.0%; TG: 3.0%)

Source: Hong Leong Investment Bank Research - 18 May 2018