Carlsberg’s (CAB) FY18 results fell within our expectations but tracked above consensus, accounting for 100% and 104% of full-year estimates respectively. Core earnings rose 25.5% yoy, driven by robust domestic demand growth, as well as strong earnings recovery from its Singapore and Sri Lankan associate’s operations. Shareholders are also rewarded with another round of special dividend proposed, leading to a record full-year DPS of 100sen. We raise our FY19-20E EPS by 7.5%/6.0% respectively, based on our higher conviction of CAB’s growth strategy, and a more steadfast market outlook. Maintain HOLD with a higher TP of RM23.00

Broadly Within Expectations

CAB’s FY18 core net profit grew 25.5% yoy to RM277.1m, underpinned by higher sales (+14.6% yoy, adjusted for MFRS15) and improved PBT margin (+1.5ppt yoy). The double-digit sales growth is mainly attributable to strong domestic demand for both mainstream Carlsberg as well as premium brands (Kronenbourg, Asahi, Somersby, Conners, etc), which offset a marginal -0.3% sales decline yoy in Singapore. Margins also improved due to: (i) higher premium brand mix, (ii) absence of one-off trade adjustments in SG, and (iii) full-year earnings recovery from Lion Brewery associate in Sri Lanka after 2016’s flood disruptions.

Execution of SAIL’22 Strategy Paying Off

Collectively, both mainstream (+12% yoy) and premium brands (+20% yoy) recorded strong volume growth, which underscored management’s success in executing its SAIL’22 growth strategy to grow the former while also rapidly expanding the latter through continuous product innovations and effective promotion campaigns. Despite the higher A&P spend, management was also prudent on sustaining CAB’s operating margins. Also as part of SAIL’22, management has expressed its intent to reward shareholders with excess cash paid out yearly as special dividends, which would raise dividend payout above 100% over the short term.

2019 Growth Should Normalise, Yet Remain Sturdy

We expect CAB to deliver a stronger set of results in FY19, although growth should begin to normalise in our view. Over the short term, rising costs currently seen for raw and packaging materials could dampen operating margins, while management is wary of raising ASPs shortly after last September’s SST-led price hike of 5.5%. Nevertheless, we expect the impact to be eased by better cost controls, production efficiency gains and improved sales mix led by premiumnisation.

Positive Traction for Both Domestic and Foreign Markets

Domestically, while it is plausible that CAB has nibbled away at Heineken Malaysia’s market share, management also believed that a material shrinkage seen for the contraband beer market over last year has boosted sales, and more so after the Customs’ fresh actions taken to combat the illicit tobacco and alcohol trade. This could potentially further support CAB’s domestic demand growth on top of its continuous sales drive, though we note that the MIER Consumer Sentiment Index recently dipped to 96.8 points in 4Q18. On the foreign front, management has successfully reversed the sales decline in Singapore after reviewing its operations throughout 2H18. Sri Lanka’s Lion Brewery associate has also returned to growth while holding onto its dominant <90% market share, benefitting from an excise duty reform in end-2017 and rising tourist arrivals into the country.

Maintain HOLD But With a Higher TP of RM23.00

As we turn more favourable on CAB’s management execution as well as business outlook, we raise FY19-20E EPS forecasts by 7.5%/6.0% respectively, and also introduce our FY21E estimates. We maintain our HOLD rating, albeit with a higher DCF-derived TP of RM23.00, while noting the attractive FY19-21E dividend yields of 4.6%-5.5%. Upside/downside risk: (i) Higher/lower-than-expected volume growth; (ii) improving/dampening consumer sentiment; and (iii) lower/higher-than-expected production costs

Source: Affin Hwang Research - 15 Feb 2019