Carlsberg’s reported 3Q19 core PATAMI of RM68.5m (QoQ: +2.8%, YoY: +9.0%) which brought the 9M19 sum to RM224.3m (YoY: +7.3%). This was in line with ours and consensus estimates, making up 74.7% and 74.2% respectively. Forecasts were unchanged as results were in line. After rolling over valuation year, TP rises from RM22.70 to RM25.55 based on an unchanged 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.

In line. Carlsberg’s reported 3Q19 core PATAMI of RM68.5m (QoQ: +2.8%, YoY: +9.0%) which brought the 9M19 sum to RM224.3m (YoY: +7.3%). This was in line with ours and consensus estimates, making up 74.7% and 74.2% respectively.

Dividend. Declared dividend of 17.0 sen per share, going ex on 2/1/20 (3Q18: 16 sen) taking 1H19 DPS to 54.6 sen (9M18: 51.7 sen).

QoQ. Stronger sales in both Malaysia (+14.8%) and Singapore (+8.1%) was due to higher sales volumes and “premiumisation”. Core PATAMI rose 2.8% in tandem with better top line.

YoY. Headline sales figure showed 10.0% growth. However, after accounting for SST tax regime implementation in Malaysia, organic revenue growth was lower at 6.0%. In addition to increased sales, higher contribution from associate company Lion Brewery (Sri Lanka) of RM5.3m (vs RM3.8m in 3Q18) led to higher core PATAMI of RM68.5m (+9.0%).

YTD. Carlsberg recorded robust top line growth of 15.5% (10.7% after excluding SST impact). Bottom line grew in tandem to RM224.3m (+7.3%). Better profitability was due to successful marketing campaigns around premium brands such as Carlsberg Smooth Draught, Kronenbourg 1664 Blanc and Connor’s.

Outlook. Carlsberg will continue to invest in both mainstream and premium brands to drive volume growth. 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, we reckon that a hike in alcohol excise duties is unlikely. Going forward, we expect the government and the 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. Furthermore, we are encouraged by Finance Minister Lim Guan Eng’s stance on cracking down on illicit alcohol trade in lieu of increasing Malaysia’s alcohol excise duty structure. Currently, counterfeit alcohol market share is believed to be as high as 25% in Peninsular Malaysia and 80% in East Malaysia.

Forecast. Unchanged as the Results Were Inline.

Maintain HOLD. After rolling over our valuation year, our TP rises from RM22.70 to RM25.55 based on an unchanged 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 - 3 Dec 2019