Carlsberg’s 1Q21 core PATAMI of RM60.2m (QoQ: +33.6%, YoY: -17.5%) was below ours and consensus expectations, at 22.6% and 23.6% respectively. This was due to lower than expected recovery in sales volumes. Going into 2Q21, we expect sales to continue to be sluggish given the recently implemented movement restriction rules in both Malaysia and Singapore. We reckon Carlsberg is fairly valued at current price levels, with FY21/22 forecasted yields of 3.6%/4.1%, which is decent in the current low interest rate environment. After rolling over our valuation year and adjusting for lower forecasts, our TP falls slightly from RM22.50 to RM22.00 based on an unchanged DCF valuation methodology (WACC: 8.0%: TG: 2.5%). Maintain HOLD.

Below expectations. Carlsberg reported 1Q21 core PATAMI of RM60.2m (QoQ: +33.6%, YoY: -17.5%), This is below ours and consensus expectations, at 22.6% and 23.6% respectively. We deem this below expectations as (i) 1Q is typically a seasonally strong quarter, historically accounting for 28-30% of full year earnings and (ii) we expect 2Q earnings to be impacted by recently imposed MCO restrictions. The shortfall in earnings was due to poorer-than-expected recovery in sales volumes from Covid-19 and MCO restrictions. Core PATAMI was arrived at after adjusting for forex gains of RM6.2m.

Dividend. 1Q21 DPS: None declared. 1Q20: In May-20 Carlsberg had declared 28.4 sen DPS pertaining to FY19.

QoQ. Top line recovery (+12.6%) in Malaysia (+13.1%) and Singapore (+11.5%) was due to (i) Chinese New Year sales and (ii) easing of Covid-19 restrictions. Despite lower contribution from Singapore (EBIT: -12.1%) from higher marketing spending, core PATAMI rose +33.6% in tandem with higher sales and lower marketing spending in Malaysia.

YoY. Overall lower sales (-9.8%) resulted in core PATAMI declining (-17.5%). Decline in Malaysia sales (-19.9%) was mainly due to lower sales in the on-trade sector (bars restaurants etc.) and limited consumer-facing promotions as sales were impacted by Covid-19 restrictions, in particular during the MCO implementation in Jan-21. However, increase in sales in Singapore (+21.4%), particularly in premium brands in off-trade (supermarkets, convenience stores etc.) and e-commerce channel buffeted some of Malaysia’s decline.

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 expect FY21 earnings to be stronger YoY due to somewhat lighter Covid-19 restrictions than in FY20, the recent reimplementation of movement restrictions in both Malaysia and Singapore is expected to result in sluggish on-trade sales in 2Q21.

Forecast. We lower our FY21/22 forecasts by 8.0%/7.4% to account for lower sales volumes going forward.

Maintain HOLD. TP: RM22.00. While we expect sales in 2Q21 to continue to be sluggish from the movement restrictions in Malaysia and Singapore, we reckon Carlsberg is fairly valued at current price levels, with FY21/22 forecasted yields of 3.6%/4.1%, which is decent in the current low interest rate environment. After rolling over our valuation year and adjusting for lower forecasts, our TP falls slightly from RM22.50 to RM22.00 based on an unchanged DCF valuation methodology (WACC: 8.0%: TG: 2.5%)

Source: Hong Leong Investment Bank Research - 19 May 2021