Carlsberg’s 1H18 core PAT of RM141.2m (17.0% YoY) was in line with ours and consensus expectations. Better earnings were mainly attributed to higher contribution from associate company (Lion Brewery, Sri Lanka) and growth in premium brands. Maintain BUY call with an unchanged TP of RM22.70 based on DCF valuation methodology (WACC: 7.8%; TG: 3.0%)

In line. Reported 1H18 core PATAMI of RM141.2m was in line with ours and consensus expectations, accounting for 52.8% and 53.9% respectively.

Dividend. 15.7 sen (ex-date: 18 September 2018) (2Q17: 10 sen)

QoQ. Decreased revenue of 24.3% was due to higher sales in 1Q18 to both Malaysia and Singapore during Chinese New Year festive season as well as trade loading in Malaysia in March 2018 (in preparation for Carlsberg raising prices in 2Q18). Lower PAT of 13.0% was mainly due to lower sales.

YoY. 2Q18 core PATAMI accelerated 22.3% from RM53.7m to RM65.7m due to (i) better contribution from associate company Lion Brewery (Sri Lanka) and (ii) increased domestic sales (partially attributed to higher selling price of 2-3% in 2Q18). Carlsberg shared weaker sales to Singapore was due to stronger ringgit vs SPLY as well as lower sales volume. Higher contribution from Lion Brewery was due to recovery from floods that hit its factory in FY16.

YTD. Stronger domestic sales (+15.4%) from better sales of flagship brand Carlsberg as well as premium brands more than offset decline in Singapore revenue (-13.1%), resulting in top line growth of 5.4%. In addition to increased sales, recovery from Lion Brewery resulted in core PATAMI increase of 17.0%.

Premium brands growing strongly. Carlsberg shared that its premium brands including Somersby Cider (+22.0%), 1664 Blanc (+41.0%), Asahi Super (+7.0%) and Conor’s Stout Porter (29.0%) grew +19.0% YoY in 1H18.

Associate company Lion Brewery. Carlsberg estimates Lion Brewery currently commands 85%-87% of the total Sri Lanka beer market, which is higher than their market share before the flooding in FY16 (82%-85%).

Outlook: Rebounding consumer sentiment and sales tax holiday, should fuel Carlsberg’s sales in 2H18. 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. Unchanged.

Maintain BUY. We maintain our BUY call with an unchanged TP of RM22.70 based on DCF valuation methodology (WACC: 7.8%; TG: 3.0%).

Source: Hong Leong Investment Bank Research - 17 Aug 2018