Brewery sector’s earnings ended FY17 within expectations. Going into FY18, we expect a better year in terms of stronger total beer consumption backed by better private consumption spending. Both brewers also launched several new premium products to attract more drinkers, which should improve the product mix and profit margins. Our studies suggest that 2018 FIFA World Cup may not have a significant impact on the sector. We maintain HOLD ratings on Heineken and Carlsberg as we believe both are fairly valued. But we prefer Carlsberg in the sector for its stronger earnings growth.

Impact of 2018 FIFA World Cup

Russia will be the host of 2018 FIFA World Cup and 36 matches (56% of total matches) will be played at Malaysia local time between 8pm and 12am. Due to the more favourable air time of the live matches this year, one may wonder if that would translate into higher beer consumption this year. We think the event may not drive a meaningful growth in beer consumption this year as the one-month event may not be sufficient to boost the full-year beer consumption. Historically, there is no strong evidence that FIFA World Cup events contributed significantly to beer consumption, even for the ones hosted in South Africa in 2010 and in South Korea/Japan in 2002 when the air time of matches were favourable as well. On the corporate level, we do not see strong correlation of the events with revenue growth.

Still a Better Year

We believe that the total beer consumption in 2018 should show better growth than 2016 and 2017 even without accounting for potential catalyst from the FIFA World Cup event. Implementation of GST in 2015 and excise duties hike in 2016 had dampened beer consumption for the past two years. Barring the risk of potential excise duties hike, we forecast the total volume to grow at higher rate of 4% p.a. in 2018 and 2019 underpinned by a recovery in private consumption. We expect revenue of both Heineken and Carlsberg to benefit from better beer volume growth and premium-product promotion strategy to drive double-digit growth for the segment.

Maintain Neutral View on the Brewery Sector

We maintain our Neutral rating on the brewery sector. Both HEIM and CAB have performed well with 8% and 25% YTD gains respectively in share prices. Trading at 20-21x FY18E PER with decent dividend yield of 4-5% for FY18E-19E, we think the positive factors have been largely priced in. We revise Heineken’s FY18E-20E earnings marginally by -1.5%-0.8% and slightly adjust Heineken’s TP from RM20.10 to RM 20.75. Also, Carlsberg’s earnings are revised by -3%-1% to reflect actual figures in their recentlyreleased annual reports. Nevertheless, we revise up Carlsberg’s TP to RM18.60 from RM16.00, reflecting a higher revenue growth of 5% yoy in FY19-24E (vs. 3% yoy previously) as the results of Carlsberg’s “premiumnisation strategy” was better than our expectation and we believe the momentum should sustainable.

Source: Affin Hwang Research - 9 Apr 2018