Carlsberg’s Reported 2Q20 Core PATAMI of RM 11.9m (QoQ: -83.7%, YoY: -82.1%) Brought 1H20 Sum to RM84.9m (YoY: -45.5%). This Is Below Expectations, Making Up 33.0% and 36.1% of Ours and Consensus Forecasts, Respectively. The Shortfall in Earnings Was Due to Weaker-than-expected Sales Volumes as a Result of MCO Restrictions. We Lower Our FY20/21/22 Forecasts by 17.3%/ 14.0%/ 7.8% to Account for Slower-than-expected Recovery in Sales Volumes. After Our Earnings Adjustments, Our TP Falls From RM21.00 to RM19.70 Based on An Unchanged DCF-derived Valuation Methodology (WACC: 8.5%, TG: 2.5%). Our SELL Call Remains.

Below expectations. Carlsberg’s reported 2Q20 core PATAMI of RM11.9m (QoQ: - 83.7%, YoY: -82.1%) brought 1H20 sum to RM84.9m (YoY: -45.5%). This is below expectations, making up 33.0% and 36.1% of ours and consensus forecasts, respectively. The shortfall in earnings was due to weaker-than-expected sales volumes as a result of MCO restrictions. Core PATAMI was arrived at after adding back RM1.3m in foreign exchange losses.

Dividend. None declared (2Q19: 16.1 sen per share). 1H20: None (1H19: 37.6 sen per share). Whilst Carlsberg typically declares dividend every quarter, the group has decided to be cautious in light of the Covid-19 impact.

QoQ. Revenue declined (-51.3%) from temporary closure of brewery operations and many of Carlsberg’s sales channels in both Malaysia and Singapore. Core PATAMI declined by a larger rate (-83.7%) due to (i) fixed cost structure; (ii) lower contribution of RM0.5m (from RM5.1m) from associate company Lion Brewery (Sri Lanka); and (iii) payment of RM6.4m to the Royal Malaysian Customs in 2Q20 pertaining to unpaid excise duty and sales tax.

YoY. Revenues declined (-40.2%) in both Malaysia (-38.9%) and Singapore (-43.5%) due to temporary suspension of Carlsberg’s brewery operations as well as lockdown impact on on-trade venues (restaurants, bars etc.) in both countries in 2Q20. Core PATAMI shrank -82.1% due to similar reasons mentioned above.

YTD. Revenue and core PATAMI declined -23.1% and -45.5%, respectively for reasons mentioned above.

Outlook. While the relaxation of lockdown restrictions in both Malaysia and Singapore should result in sales rebound in 3Q20, we continue to expect sluggish sales volumes. We note that many bars and clubs are still prohibited from opening, while others continue to operate with operate shorter operating hours.

Forecast. We lower our FY20/21/22 earnings forecasts by 17.3%/ 14.0%/ 7.8% to account for slower-than-expected recovery in sales volumes.

Maintain SELL. After our earnings adjustment, our TP falls from RM21.00 to RM19.70 based on an unchanged DCF-derived valuation methodology (WACC: 8.5%, TG: 2.5%). Our SELL call remains.

Source: Hong Leong Investment Bank Research - 24 Aug 2020