Carlsberg reported a good set of 9M19 results which met both market and our expectations (74% of FY19 estimates respectively). Core net profit increased by 6% yoy on the back of organic sales growth (+11% yoy) from both its local and SG operations, albeit partially offset by softer margins owing to higher marketing expenses and raw material costs. We hold on to our earnings estimates and maintain HOLD on the stock, with an unchanged TP of RM28.50.

Within Expectations

9M19 core net profit grew by 6.4% yoy to RM222.6m due to higher organic sales across mainstream and premium brands from both its Malaysia (+12.4% yoy) and Singapore (+6.7% yoy) operations. This was partially offset by a dip in EBIT margins (-1.2ppts yoy) on the back of higher commercial-related spending as well as an increase in raw material costs. Earnings contribution from its Lion Brewery associate remained robust (9M19: RM14.7m), despite higher beer duties (+12.5%) imposed in Sri Lanka from March, followed by bombing attacks which occurred in April. A higher DPS of 17sen was announced for the quarter (3Q18: 16sen).

Sequentially Stronger

3Q19’s core earnings increased sequentially (+6.0% qoq) on the back of higher sales in both Malaysia (+15% qoq) and Singapore (+8% qoq). EBIT margins dipped 1.9ppts qoq however, as marketing expenses increased owing to the launch of its Carlsberg brand’s new packaging in July. On the other hand, associate earnings contribution increased 15% qoq to RM5.3m as Lion Brewery recovered from a softer 2Q19 attributable to the aforementioned reasons. We expect Carlsberg’s 4Q19 earnings to be stronger, in view of its robust growth momentum as well as higher sales ahead of an earlier Chinese New Year festive period in January 2020.

Maintain HOLD

We leave our earnings forecasts unchanged as we deemed 9M19’s results largely in-line. As the stock continues to be fairly valued, we reiterate our HOLD call on Carlsberg, with an unchanged DCF-derived 12-month target price of RM28.50. 2020-21E yields remain decent at 4.0-4.3%. Upside/downside risks to our call include: (i) Higher/lower-than-expected volume growth; (ii) improving/dampening consumer spending; and (iii) lower/higher-than-expected production costs.

Source: Affin Hwang Research - 27 Nov 2019