We expect beer demand to stay resilient in 2H22, driven by continued pent-up demand for out-of-home drinking, return of foreign tourists, and FIFA World Cup. Moreover, brewers' various measures, together with the price hike, will cushion potential margin contraction amid higher input costs. We also think concern over demand slowdown in 2H22 due to the high inflationary environment and the price hike has been overplayed, given that beer remains the cheapest alcoholic drink in the market. All in, we maintain our OVERWEIGHT stance on the sector with BUYs on both Carlsberg and HEIM.

1H22 earnings wrap up. Brewers ended their 1H22 performances with a bang, where Carlsberg and HEIM’s 1H22 results exceeding our/consensus expectations at 61%/65% and 58%/63% of full-year forecasts. The positive surprises were mainly due to stronger-than-expected beer sales coupled with margin expansion amid better product mix (premium brands gaining tractions). We note that brewers’ 1H22 results has surpassed the pre-pandemic level (vs 1H19).

High input cost a concern, but will be cushioned by price hike and various measures. During HEIM and Carlsberg's 2Q22 briefings, both brewers pointed out the ongoing raw material supply disruptions as a concern in 2H22. To mitigate the impact of rising input cost, various measures were implemented by the brewers, with Carlsberg using “premiumisation” and cost innovation, while HEIM implementing revenue management (improving sales mix) together with labour cost management. Such measures, coupled with the price hike and better operating leverage, should cushion the higher input cost, preserving margins in 2H22.

Demand to stay resilient in 2H22. Since Aug, Carlsberg and HEIM’s beer has been priced higher in response to the rising input cost (barley and aluminum). Despite the price hike, we do not think a significant slowdown in the beer demand would happen, considering beer is still the cheapest alcoholic drink in the market with relatively inelastic demand. In fact, we think any demand slowdown in 2H22 will be offset by two primary catalysts – the return of foreign tourists and FIFA World Cup.

An excise duty hike on the card in upcoming Budget 2023? Despite Malaysia already having the second highest alcohol excise duty in the world, risk of an excise duty hike for alcohol drinks in the upcoming Budget 2023 can’t be discounted, considering the last excise duty hike was back in 2016 and the government’s tight financial position. However, history suggests that higher excise duty has a rather short-lived financial impact on brewers. Taking the 2016 excise duty hike as a reference, the upward price adjustment in beer prices in response to the higher excise duties has caused brewers to record relatively lackluster earnings. Nevertheless, beer sales gradually recovered after consumers adapted to the new pricing after two quarters. Considering that brewers already raised their prices in response to higher input costs, we think brewers might absorb a certain portion of the excise duty in the near term and pass it to the consumer when sentiment recovers.

Maintain OVERWEIGHT as the recovery trajectory of beer sales remains intact, alongside a further boost from the return of foreign tourists and FIFA World Cup. We like Carlsberg’s relatively diversified sales exposure (c.60% Malaysia, 30% Singapore), which is partially insulated from the regulatory risk (potential excise duty hike in Malaysia). We also like HEIM, owing to its strong brand equity and leadership position. We, however, lower our P/E multipliers for HEIM (from 25x to 24x) and Carlsberg (from 27.8x to 27.3) as we recalibrate the 5-year mean. Consequently, HEIM and Carlsberg’s TPs are now lower at RM29.62 (from RM30.85) and RM28.36 (from RM28.88), while BUY ratings were retained.

Source: Hong Leong Investment Bank Research - 19 Sept 2022