Reported 9M18 core PATAMI of RM204.0m was in line with ours and consensus expectations. Considering that Malaysia’s alcohol excise duty structure is already the third highest globally, we opine a hike in taxes would result in growth in the illicit market at the expense of the legal volumes, which will result in reduced tax collection. For this reason, an increase in alcohol excise duties is unlikely. Forecasts remain unchanged. We maintain our BUY call with an unchanged TP of RM22.70 based on DCF valuation methodology.

In line. Carlsberg’s reported 9M18 core PATAMI of RM204.0m was in line with ours and consensus expectations, accounting for 76.3% and 77.9% of full year forecasts, respectively.

Dividend. 16.0 sen per share (3Q17: none) which will go ex on 8 January 2019. YTD: 51.7 (9M17: 10 sen) sen per share.

QoQ. Top line swelled 18.6% from better contributions from both Malaysia (+25.7%) and Singapore (+4.1%) markets. Despite this, increased operating expenses, lower contribution from associate company (Lion Brewery, Sri Lanka) and forex losses resulted in core PATAMI dropping 4.4%.

YoY. Revenue grew 16.4% to RM492.8m driven by the buoyant consumer sentiment from the domestic sales tax holiday as well as increased Carlsberg Smooth Draught sales volumes from the introduction of the POP cap bottle variation. Removing trade offer adjustment of RM18.2m in 3Q17, core PATAMI grew 4.6% in tandem with better top line.

YTD. Better Malaysia sales (+17.6%) was attributed to growths in both flagship (Carlsberg Green Label, Carlsberg Smooth Draught) and premium brands (Kronenbourg 1664 Blanc, Somersby, Asahi amd Conor’s Stout). Decline in Singapore sales (-8.0%) was due to lower sales volume and unfavourable exchange rate. Core PATAMI grew to RM204.0m (+12.9%) mainly from increased total sales (+8.8%) and associate company (Lion Brewery) returning to profitability after flooding in the factory in FY16.

Outlook: Considering that Malaysia’s alcohol excise duty structure is already the third highest globally, we opine a hike in excise duty would result in growth in the illicit market at the expense of the legal volumes, which will result in reduced tax collection. For this reason, a hike in alcohol excise duties is unlikely. Going forward, 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. The recent increase in the minimum age for purchasing alcohol to 21 should result in lower industry volumes due to a smaller pool of legal consumers. However, we feel that the impact of the increased minimum legal drinking age may be less profound in reality given enforcement issues.

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 - 3 Dec 2018