Carlsberg’s reported 3Q20 core PATAMI of RM38.3m (QoQ: +220.9%, YoY: - 44.1%) which brought 9M20’s sum to RM123.2m (YoY: -45.1%). This is below expectations, making up 58.0% and 62.1% of ours and consensus forecasts, respectively. We lower our FY20/21/22 earnings forecasts by 12.4%/4.4%/5.4% to account for slower-than-expected recovery in sales volumes. After tweaks to our earnings and WACC, our TP rises from RM19.70 to RM21.25 based on DCFderived valuation methodology (WACC: 8.0%, TG: 2.5%). Stronger QoQ earnings and relaxation of stringent MCO restrictions lead us to believe the worst is over for Carlsberg. Maintain HOLD.

Below expectations. Carlsberg’s reported 3Q20 core PATAMI of RM38.3m (QoQ: +220.9%, YoY: -44.1%) which brought 9M20’s sum to RM123.2m (YoY: -45.1%). This is below expectations, making up 58.0% and 62.1% of ours and consensus forecasts, respectively. The shortfall in earnings was due to slower-than-expected recovery in sales volumes. Core PATAMI was arrived at after removing RM1.0m in foreign exchange gains.

Dividend. None declared (3Q19: 17.0 sen per share). 9M20: None (9M19: 54.6 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. Sales recovered +51.5% QoQ in both Malaysia (+38.7%) and Singapore (+85.4%) following the easing of lockdown measures. In addition to better sales and cost controls, increased contribution from associate company Lion Brewery and absence of production disruptions resulted in core PATAMI rebounding 220.9% amid a low base. Note that Carlsberg’s brewery operations were shut for the entirety of April.

YoY. Sales decline of -19.7% was mainly due to lower sales in the on-trade sector and limited consumer-facing A&P activity amidst Covid-19 restrictions in both Malaysia and Singapore. Despite lower marketing spend, core PATAMI saw higher deceleration (-44.1%) due to fixed portion of costs.

YTD. Revenue decline (-22.0%) was mainly due to various lockdown measures imposed on Malaysia (-23.6%) and Singapore (-17.6%). While Carlsberg’s cost control measures included lower marketing spend and reduction in operating expenses, core PATAMI fell -45.1% due to diminishing operating leverage.

Outlook. Going forward, Carlsberg’s earnings is greatly reliant on Malaysia and Singapore keeping the spread of Covid-19 under control. For the time being, Carlsberg will shift focus into investing into e-commerce and off-trade sales channels.

Forecast. We lower our FY20/21/22 earnings forecasts by 12.4%/4.4%/5.4% to account for slower-than-expected recovery in sales volumes.

Maintain HOLD. Stronger QoQ earnings and relaxation of stringent MCO restrictions lead us to believe the worst is over for Carlsberg. Additionally, recent encouraging vaccine news may prove to be beneficial in curbing Covid-19. Therefore, we tweak our WACC from 8.5% to 8.0%. Thus, our TP rises from RM19.70 to RM21.25 based on DCF-derived valuation methodology (WACC: 8.0%, TG: 2.5%) despite the earnings downward revision. While we opine the worst is over for Carlsberg, reimplementation of CMCO in Malaysia and therefore the continued closure of certain drinking venues (clubs, karaoke venues ), we expect volumes to remain below FY19 levels for the foreseeable future.

Source: Hong Leong Investment Bank Research - 13 Nov 2020