Carlsberg’s FY20 Core PATAMI of RM174.6m (YoY: -40.2%) was below our expectations (93.8%) but in line with consensus (99.7%) forecast. The shortfall in earnings was due to poorer-than-expected recovery in sales volumes. We lower our FY21/22 forecasts by 2.2%/2.1% to account for lower sales volumes going forward. After adjusting for our changes in forecasts and rolling over our valuation year, our TP is raised to RM22.50 from RM21.25 previously, based on an unchanged DCF valuation methodology (WACC: 8.0%, TG: 2.5%). Maintain HOLD.

Below expectations. Carlsberg’s 4Q20 core PATAMI of RM45.1m (QoQ: +17.9%, YoY: -33.4%) brought FY20’s sum to RM174.6m (YoY: -40.2%). This is marginally below our expectations (93.8%) but in line with consensus (99.7%) forecasts. The shortfall in earnings was due to poorer-than-expected recovery in sales volumes. Core PATAMI was arrived at after adjusting one-off EIs of RM12.5m; settlement of Customs’ Bills of Demand of RM6.4m (2Q20) and RM9.9m (4Q20) restructuring expense and forex gains of RM3.8m.

Dividend. 4Q20: DPS of 40 sen (10 sen interim DPS goes ex on 4 Mar 2021, 30 sen final DPS goes ex on 16 Apr 2021). FY20: 40 sen (FY19: 100 sen DPS).

QoQ. Sales grew +8.5% from seasonally stronger sales for year-end festive season and retailers stocking up in preparation for Chinese New Year in 1Q21 in both Malaysia (+9.2%) and Singapore (+7.2%). Core PATAMI rose +17.9% in tandem with sales recovery.

YoY. Core PATAMI shrank -33.4% along with -17.7% decrease in revenue. This was due to significantly lesser on-trade sales in both Malaysia and Singapore. Note the lockdown restrictions from CMCO was re-implemented in Malaysia while Phase 2 continued in Singapore. Additionally, sales were also impacted by lesser stocking up activity from retailers due to later timing of CNY in 2021 (Feb) than in 2020 (Jan).

YTD. Sales decline of -20.9% in both Malaysia (-23.3%) and Singapore (-14.6%) was due to various states of lockdown restrictions in FY20. Carlsberg shared that volume decline in core brand Carlsberg (-20%) was more severe than premium brands (-17%) (1664 Blanc, Somersby, Asahi etc.). While Carlsberg’s cost control measures included lower marketing spend and reduction in operating expenses, core PATAMI fell -40.2% due to diminished operating leverage.

Outlook. Going forward, Carlsberg’s earnings is greatly reliant on Malaysia and Singapore keeping the spread of Covid-19 under control and rolling out vaccinations swiftly which would eventually lead to the reopening of on-trade sales channels. While we opine the worst is over for Carlsberg with the loosening of MCO rules in Malaysia, certain drinking venues (clubs, karaoke venues) remain shut. As such, we expect volumes to remain below FY19 levels for the foreseeable future. For the time being, Carlsberg will shift focus to investing into e-commerce and off-trade sales channels. We note that Carlsberg’s e-commerce sales increased 2.5x in FY20, albeit from a low base.

Forecast. We lower our FY21/22 forecasts by 2.2%/2.1% to account for lower sales volumes going forward.

Maintain HOLD. TP: RM22.50. After adjusting for our changes in forecasts and rolling over our valuation year, our TP is raised to RM22.50 from RM21.25 previously, based on an unchanged DCF valuation methodology (WACC: 8.0%, TG: 2.5%).

Source: Hong Leong Investment Bank Research - 19 Feb 2021