• 2Q20 revenue and core earnings plunged -40.2% and -74.9% yoy to RM287.3m and RM16.5m respectively, attributable to lockdown disruptions in both Malaysia and Singapore operations.
• Excluding one-offs, 6M20 core earnings fell -40.5% yoy to RM90.9m, accounting for 38% of our and consensus forecasts - below expectations.
• We cut 2020E earnings estimates by 12%, largely to pencil in overall lower sales volume. Maintain SELL with an unchanged DCF-derived TP of RM21.90.

6M20 core net profit at RM90.9m (-40.5% yoy); below expectations

YTD revenue fell 23.1% yoy to RM877.1m while core net profit (adjusted for one-off settlement in relation to the Customs’ Bill of Demand) came in at RM90.9m (-40.5% yoy). Broadly, performance was dismal for both its Malaysia and Singapore operations, largely attributed to the severe impact from MCO* and CB** respectively, which affected both sales and distribution. The results were below our and consensus expectations, accounting for 38% of respective full-year forecasts. Variance to our estimate was due to lower-than-expected sales volume. No dividends were declared for 1H20 (1H19: 37.6 sen) pending further evaluation – management indicated that they’re still committed to a 100% pay-out policy.

2H20 likely to fare better HoH

Sequentially, revenue and core net profit were down 51.3% and 77.9% respectively owing to the aforementioned factors. Going forward, we foresee 2H20 to fare better HoH in tandem with the re-opening of most on-trade channels, albeit with strict SOPs still in place. Meanwhile, various measures are put in place to rationalise cost base and preserve cash. On top of cost optimisation, the group will look to reallocate investments into e-commerce and off-trade as well as reviewing operational processes to better prepare for the post-Covid-19 landscape

Maintain SELL with TP unchanged at RM21.90

We cut our 2020 earnings estimate by 12% mainly to impute overall lower alcohol consumption; 2021-22E estimates are kept unchanged. Our DCF-derived TP remains unchanged at RM21.90 (WACC 8.0%, TG 2.5%). Maintain SELL. At this juncture, valuation looks fairly stretched (27x forward PER, near 1SD above its 5-year mean) in view of the lingering pandemic concerns. For exposure in the brewery space, our relative preference is Heineken (HEIN MK, RM22.16, HOLD, TP: RM21.30) as its valuation is comparatively undemanding at 22x PER whilst its 2021E earnings growth is projected to be stronger at 45% yoy, off 2020’s low base.

Key risks

Upside risks: (i) earlier-than-expected containment of Covid-19 and (ii) sharp decline in raw material costs

Source: Affin Hwang Research - 17 Aug 2020