CARLSBG : Buy on weakness

Following its lacklustre share price performance in 2023 (-15.7%), we now see more upside potential in Carlsberg. The market appears to undervalue Carlsberg's Singapore operations, which brings several advantages such as sales diversification, natural hedge against exchange rate fluctuations, reduced regulatory risk, and a brighter sales outlook fuelled by robust purchasing power.

Sales void resulting from the delisting of the Asahi brand could swiftly be filled by Sapporo, especially given the former’s small market share in Malaysia, standing at 0.3% (Singapore's market share being unattainable). With Sapporo beer already available in the on-trade channel, we anticipate that their sales will promptly make up for the gap left by Asahi. Notably, Sapporo is renowned as one of the top four beer brands in Japan, alongside Kirin, Santurory, and Asahi. Our expectation of Sapporo sales replacing Asahi is imputed into our forecast, with Carlsberg's top line expected to grow by 5% YoY in FY24. However, we anticipate that the group will undertake a lot of initial marketing to promote the brand, which will drive its higher advertising expenses. Consequently, the anticipation of increased costs has led to flat growth in our Carlsberg FY24 forecast.

Attractive Valuation. Weighed down by concerns including (i) weak consumer demand; (ii) short term concerns from the delisting of Asahi brand; and (iii) uncertainties related to its operations in politically and economically unstable Sri Lanka, Carlsberg’s share price has corrected by 23.6% from its post pandemic peak of RM25. At RM20.0, Carlsberg is trading at about -1SD below the 3-year pre-pandemic mean P/E and -1.5 SD of its immediate 5-year mean P/E, with an attractive DY of 4.7%. Looking at the valuation, we reckon most of the negatives are priced in by the market. We highlight that the current share price is just 13% away from its 2020 trough (RM17.38). Notably, the operating profit or sentiment for Carlsberg is nowhere near the Covid-19 level – in fact, Carlsberg’s FY22-23 earnings are already above the pre-pandemic level. 

Pending rectangle breakout. After rallying 9.5% from a low of RM18.26 to RM20.0 last Friday, Carlsberg is building a base at RM19.81-20.00 region. A successful breakout above RM20.20, will spur the share price toward RM20.90-21.31-22.18 levels. Cut loss at RM19.49.

Collection range: RM19.81-19.94-20.00

Upside targets: RM20.90-21.31-22.18

Cut loss: RM19.49

Source: Hong Leong Investment Bank Research - 27 May 2024