Carlsberg’s reported 2Q19 core PATAMI of RM66.6m (QoQ: -25.3%, YoY: +1.4%) brought 1H19 core PATAMI to RM155.8m (YoY: +6.6%). This formed 51.4% and 51.6% of ours and consensus estimates. We keep forecasts unchanged as earnings were in line. We maintain our HOLD call and TP of RM22.70 based on DCF valuation methodology (WACC: 7.8%; TG: 3.0%).

In line. Carlsberg’s reported 2Q19 core PATAMI of RM66.6m (QoQ: -25.3%, YoY: +1.4%) brought 1H19 core PATAMI to RM155.8m (YoY: +6.6%). This formed 51.4% and 51.6% of ours and consensus estimates.

Dividend. Declared dividend of 16.1 (2Q18: 15.7) sen per share, going ex on 18/10/19 taking 1H19 DPS to 37.6 sen (1H18: 35.7 sen).

QoQ. Weaker sales (-27.2%) in both Malaysia (-32.2%) and Singapore (-11.3%) markets were due to seasonality, as Chinese New Year in 1Q typically results in higher sales. Core PATAMI declined 25.3% in tandem with lower sales.

YoY. Headline sales figure showed 15.7% growth. However, after accounting for SST tax regime implementation in Malaysia, organic revenue growth was 11.2%. Despite better top line, core PATAMI rose only marginally by 1.4% due to higher marketing expenses.

YTD. Carlsberg recorded robust top line growth of 18.3% (13.1% after excluding SST impact). Better top line was attributed to volume growth in mainstream brand Carlsberg (+5%) as well as premium brands Connor’s (+45%), 1664 Blanc (+51%), Somersby (+8%), Asahi (+8%) and Brooklyn (+130%). Despite strong top line growth, core PATAMI rose just 6.6% as Carlsberg continued to invest in advertising and promotional campaigns to boost sales volumes. Encouragingly, despite the terror attacks in Sri Lanka, associate company Lion brewery contribution grew 49.1% to RM9.4m (after excluding one-off insurance payment of RM4.7m in 1H18 from the factory flooding in 2016) as the company continued to improve operational efficiency post-flooding in 2016.

Outlook: Carlsberg will continue to invest in both mainstream and premium brands to drive volume growth. Due to this, we expect Carlsberg to incur higher marketing expenses in 2H19, particularly from marketing campaigns associated with the promotion of the new redesign of mainstream brand Carlsberg (Figure #2). 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 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.

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 - 16 Aug 2019