Carlsberg’s (CAB) 2019 results were within our and consensus expectations. Core net profit increased 5.4% yoy to RM292.1m, underpinned by continued growth from the group’s mainstream and premium products. Nevertheless, we trim our 2020-21E earnings by 7- 9%, taking into account potential impact from COVID-19, especially on the group’s on-trade sales. We maintain our HOLD rating with a higher TP of RM39.50, after applying a lower discount rate. We believe the stock deserves a premium valuation for its solid earnings delivery while yields are still commendable.

Within Expectations

CAB’s 2019 revenue grew 13.8% to RM2.26bn, driven by higher organic sales volume from both its Malaysia (+10.8 yoy) and Singapore (8.6% yoy) operations. Meanwhile, core net profit grew 5.4% to RM292m, with higher sales partially negated by a slight dip in EBITDA margin by -1ppt yoy, partly on higher marketing expenses. Elsewhere, earnings contribution from its Lion Brewery (LB) associate registered a lower profit of RM16.3m (-22.3% yoy) owing to an impairment of LB’s Miller brands as well as insurance claims received in 2018. CAB announced DPS amounting to 45.4sen, bringing total DPS to 100sen, unchanged from 2018.

Cautiously Optimistic for 2020

The start of 2020 is set to be a challenging one for the group, in view of a more cautious macro outlook exacerbated by the impact of COVID-19. We foresee overall sales volume to take a hit in 1Q20, as lower footfall in malls and bars would set to weigh. Meanwhile, 1Q20 sales are also expected to be impacted by the trade loading effect given the earlier Lunar New Year festive season this time around. That said, the management remains focused on driving innovations and premiumisation initiatives on top of intensifying measures to optimise its cost base.

Maintain HOLD

We trim our 2020-21E earnings by 7-9% after taking into consideration the potential impact from COVID-19, especially on the group’s on-trade sales. Meanwhile, we raise our DCF-derived TP to RM39.50 as we now incorporate a lower WACC of 6.5% (TG: 2.5%). We believe the stock deserves a premium valuation (implied 2020E PER of 39.5x) given its steady earnings delivery, while yields are still looking commendable. All in, we maintain our HOLD rating in view of the limited upside to the current share price at this juncture.

Key Risks

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 - 24 Feb 2020