Carlsberg’s reported 4Q19 core PATAMI of RM67.7m (QoQ: -1.2%, YoY: +8.4%) which brought the FY19 sum to RM291.9m (YoY: +7.6%). This was in line with ours and consensus estimates, making up 97.2% and 96.5% of forecasts respectively. Forecasts remain unchanged. After tweaking our DCF discount rate, our TP rises to RM35.50 from RM25.55 (WACC: 7.0%, TG: 3.0%). Our HOLD call is maintained.

In line. Carlsberg’s reported 4Q19 core PATAMI of RM67.7m (QoQ: -1.2%, YoY: +8.4%) which brought the FY19 sum to RM291.9m (YoY: +7.6%). This was in line with ours and consensus estimates, making up 97.2% and 96.5% of forecasts respectively. The core PATAMI figure was arrived after adjusting for foreign exchange loss of RM0.9m.

Dividend. Interim, final and special dividend of 17 sen, 23.6 sen, and 4.8 sen (totalling 45.4 sen vs. 4Q18: 31.7 sen) per share going ex 26 Mar, 15 May, 15 May brought FY19 DPS to 100 sen (FY18: 100 sen). This represents a pay-out ratio of 104.7% (vs. 110.4% in FY18).

QoQ. Stronger sales in both Malaysia (+3.8%) and Singapore (+11.1%) were due to higher sales volumes and “premiumisation”. However, this was mitigated by lower contribution from associate company Lion Brewery (Sri Lanka), which resulted in core PATAMI declining 1.2%.

YoY. Core PATAMI growth of 8.4% was mainly due to increasing “premiumisation” and higher sales volume from the earlier timing of CNY in the following year.

YTD. Carlsberg recorded robust top line growth of 13.8%. Bottom line grew in tandem to RM291.9m (+7.6%). Strong sales were driven by growth in core brands (+7%) (Carlsberg Danish Pilsner (+5%), Carlsberg Smooth Draught (+24%)), premium brands (+13%) (Connor’s, 1664 Blanc, Somersby, Asahi) and craft category (+58%).

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. Given Carlsberg’s recent inclusion into the MSCI Global Standard Index, we tweak our DCF valuation discount rate from (WACC:7.8% to 7.0%). As such, our TP rises from RM25.55 to RM35.50 (WACC: 7.0%, TG: 3.0%). Maintain

HOLD. While valuations appear to be on the high side (35.7x FY20 PE), we feel that it's recent inclusion into the MSCI Global Standard Index will lend strong support to share price. Recall that a similar rerating experience was seen with Nestle when it was included into the KLCI index at end-2017.

Source: Hong Leong Investment Bank Research - 24 Feb 2020