Associate loss contributed to weaker earnings

Carlsberg (CAB)’s 9M16 core earnings of RM159m (-4.9% yoy) came below our and street’s expectations. 3Q16 earnings was hit by the Sri Lankan associate and lower margins but 4Q16 earnings should be seasonally stronger qoq. Dividend yields of 5.2-6% for FY16-18E are still attractive. Maintain HOLD with lower TP of RM14.22.

9M16 core earnings slightly below expectations

Stripping out the impairment loss of the Luen Heng F&B Sdn Bhd (LHFB) divestment of RM12.5m in 2Q15 and other exceptionals, 9M16 core net profit decreased by 4.9% yoy to RM159m. This was slightly below our and street expectations, accounting for 65% and 66% of full-year estimates respectively (historically, 3Q accounted for 61-71% of earnings). The marginal increase in 9M16 revenue by 0.6% to RM1.2b was largely due to revenue increase in Singapore operations by 10.6% to RM424.6m due to stronger sales volume from Maybev which owns distribution rights to Asahi. Revenue for Malaysia operations decreased by 3.9% but after adjusting for the LHFB divestment, organic growth was seen to be at 4.9%. While 3Q16 saw EBIT margin drop by 1.5 ppts qoq and 5.4ppts yoy to 15.3% due to higher advertising expenditure from Euro 2016, 9M16 still saw slight EBIT margin improvement by 0.1ppts to 16.8% due to improved product mix and effective cost controls. Singapore’s contribution to CAB’s 9M16 operating profit is at 35% vs 9M15 contribution of 39%.

3Q16 partly affected by subsidiary, 4Q16 should be stronger

Earnings were adversely affected by the flooding on the factory of their associate company Lion Brewery (Ceylon) PLC in Sri Lanka, which caused a loss of RM 1.9m compared to a profit of RM 10.9m for 9M15. We understand that production has halted until 23rd November 2016 and production has resumed thereafter. We estimate 4Q16 earnings to be stronger qoq due to seasonal festivities.

Maintain HOLD with lower TP of RM14.22

We tweak our earnings to account for a lower growth in revenue and lower contribution from associates and decrease FY16-18E by 1-8%. We maintain our HOLD call with a lower DCF-based 12-month TP of RM14.22. We continue to like the Group’s strategy of focusing on beer as its core business and its continuous push to promote premium beers since introducing it into the brand portfolio in 2010 (premium brands are estimated to contribute to approximately 20% of Group revenue and management had previously indicated that this segment sees a strong growth of more than 15% in Malaysia). Estimated dividend yields are still attractive at 5.2-6% for FY16-18E.

Risks include: i) lower or higher-than-expected sales volume on weaker consumer spending; ii) regulatory risks which could dampen sales volumes such as the change of duty free status in Langkawi and Labuan; iii) the possible implementation of security ink which will increase costs for brewers; and iv) lower or higher-than-expected operating expenses.

Source: Affin Hwang Research - 29 Nov 2016