Carlsberg’s reported FY18 core PATAMI of RM266.4m was in line with ours and consensus expectations. Carlsberg expects the premium brands (Connor’s, Somersby, 1664 Blanc, Asahi) to remain as growth drivers in FY19. Furthermore, we expect the group to invest in newly introduced products (Somersby Elderflower Lime, Brooklyn) to strengthen their brand portfolio. Our forecasts remain unchanged. We maintain our TP of RM22.70 based on DCF valuation methodology (WACC: 7.8%; TG: 3.0%). However, we downgrade our call from Buy to HOLD as the share price has surged after our previous upgrade, leaving limited upside.

In line. Carlsberg’s reported FY18 core PATAMI of RM266.4m which was in line with ours and consensus expectations, accounting for 99.6% and 100.3%% of full year forecasts, respectively.

Dividend. 4Q18: 48.3 sen per share (4Q17: 77 sen), whereby 16.6 sen will go ex on 27/3/19 and 31.7 sen will go ex on 15/5/19. FY18 dividend amounted to 77.0 sen per share vs FY17’s 87.0 sen.

QoQ. Core PATAMI declined marginally by 0.6% due to high base effect from the sales tax holiday in 3Q18. Note that the reported headline top line growth of 7.9% in domestic sales was mainly due to the price escalation as a result of implementation of the SST tax regime.

YoY. Top line grew 22.3% to RM525.7m driven by stronger domestic (+30.0%) and Singapore (6.1%) sales. Despite this, bottom line grew just 4.6% after removing trade offer adjustment of RM13.8m in 4Q17. The better domestic sales were partially attributed to the POP Cap innovation on Carlsberg Smooth bottles and successful customer promotions.

FY18. Higher sales (+12.1%) were due to growth in mainstream brands (+12.0%) (Carlsberg green label +8%; Carlsberg smooth draught +58%) as well as premium (+20.0%) (Connor’s +42%, Somersby +24%, 1664 Blanc +40%, Asahi +8%). Core PATAMI grew to RM266.4m (+10.8%) from better sales as well as turnaround in associate company Lion Brewery (Sri Lanka) as they continue to improve profitability after flooding in FY16.

Outlook: Carlsberg expects the premium brands (Connor’s, Somersby, 1664 Blanc, Asahi) to remain as growth drivers in FY19. Furthermore, we expect the group to invest in newly introduced products (Somersby Elderflower Lime, Brooklyn) to strengthen their brand portfolios. On the legal front, we note that Malaysia’s alcohol excise duty structure is already the third highest globally. As such, 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.

Forecast. Unchanged.

Downgrade to HOLD. We maintain our TP of RM22.70 based on DCF valuation methodology (WACC: 7.8%; TG: 3.0%). However, we downgrade our call from a BUY to a HOLD as the share price surged after our previous upgrade, leaving limited upside.

Source: Hong Leong Investment Bank Research - 15 Feb 2019