Carlsberg’s reported 1Q19 core PATAMI of RM89.2m (+43% QoQ and +18% YoY) was in line, accounting for 29.7% and 30.1% of our and consensus full year forecasts, respectively. 1Q19 is typically the strongest quarter due to CNY festivities. We keep forecasts unchanged. Our TP of RM22.70 based on DCF valuation (WACC: 7.8%; TG: 3.0%) and HOLD call is maintained.

In line. Carlsberg’s reported 1Q19 core PATAMI of RM89.2m (QoQ: +42.8%, YoY: +17.7%) was in line, accounting for 29.7% and 30.1% of our and consensus full year forecasts, respectively. 1Q is typically the strongest quarter due to Chinese New Year (CNY) festivities, usually accounting for 28-30% of historical full year earnings.

Dividend. Declared dividend of 21.5 sen per share, going ex on 17/7/19. (1Q18: 15.7 sen per share)

QoQ. Stronger sales (+25.5%) of RM659.9m was driven by CNY spending in both domestic (+32.7%) and Singapore (+7.2%) markets. Bottom line grew to RM89.2m (+42.8%) in tandem with top line.

YoY. Headline sales growth of 20.3% was partially attributed to pricing increase associated with the implementation of SST regime in Sept 2018. Excluding SST impact, revenue growth was 16.0%. Carlsberg noted the growth in sales were due to better volumes, particularly in premium brands. Additionally, we note that Carlsberg Smooth Draught ‘POP’ cap innovation introduced has been well received by consumers. Despite higher advertising spending in 1Q19, bottom line grew 17.7%.

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, and eventually 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, boosting government’s revenue collection of excise duty. However, we expect the recent terror attacks in Sri Lanka to impact tourism in the country, hence result in lower volumes in Lion Brewery (25% associate company) in Sri Lanka. Despite this, we note that the contribution to Carlsberg’s bottom line is not too significant (7.6% in FY18).

Forecast. Unchanged as the Results Were Inline.

Maintain HOLD. We maintain our TP of RM22.70 based on DCF valuation methodology (WACC: 7.8%; TG: 3.0%). We opine that at current levels, Carlsberg is fairly valued, therefore, our HOLD call is maintained.

Source: Hong Leong Investment Bank Research - 17 May 2019