Carlsberg’s (CAB) 1Q20 core net profit of RM74.4m (-15% yoy) fell below our and consensus expectations. Declines were seen across both Malaysia and Singapore operations, owing to earlier CNY tradeloading as well as Covid-19 disruptions. In anticipation of tighter cash flows ahead, the group decided to suspend quarterly dividends to ensure sufficient liquidity for the year. Post our earnings cuts of 3- 10% for 2020-21E, we maintain our SELL rating on CAB, albeit with a higher TP of RM18.50, after rolling forward our DCF base year.

Core Net Profit Down 15% - Below Expectations

CAB’s 1Q20 revenue declined 10.6% yoy to RM589.9m, on the back of lower sales from both Malaysia and Singapore operations. Early Lunar New Year trade-loading in December 2019 and the impact of Covid-19, in particular the MCO in Malaysia contributed to the sales decline in 1Q. Subsequently, core net profit came in at RM74.4m (-15% yoy), accounting for 28% and 26% of our and consensus forecasts respectively. We deem the results to be below expectations as we expect softer quarters ahead. The variance against our forecast was mainly due on lower-than-expected volume sales. On a qoq basis, revenue and core net profit rose 3% and 7% respectively, benefitting from festive sales as well as higher profit from the group’s 25%-owned Sri Lankan associate.

Quarterly Dividend Suspended; Focus on Preserving Cash

In view of the Covid-19 impact to the group’s cash flow, CAB’s board decided to suspend its quarterly dividend payments – a negative surprise. The group indicated that some of 2020’s focus will be on preserving cash and ensuring sufficient liquidity for the year. The disruption from Covid-19 took a heavy toll on brewers, while we continue to expect recovery to be rather slow against the backdrop of strict Covid- 19 preventive measures that may well stretch past 2020 and amidst deteriorating macro conditions.

Maintain SELL

We cut our 2020-21E earnings forecasts by 3-10% in light of the weakerthan-expected results. Post revisions, we arrive at a higher DCF-derived TP of RM18.50, (WACC 9%; TG 2.5%) after rolling forward our valuation horizon to FY21E. Reiterate SELL as we believe valuation at current levels is rather stretched considering heightened earnings volatility in the near term. Following through, we also assume no dividend pay-out for 2020E.

Source: Affin Hwang Research - 1 Jun 2020