• Post a tumultuous 2020, the brewers headed into 2021 with an equally challenging operating environment, given to the reinstatement of MCO 2.0 which hampered recovery momentum for 1Q21
• Despite easing restrictions since early March, existing measures remain unfavourable to most on-trade channels, on the backdrop of: i) restricted operating hours (until 12am), ii) reduced large-scale social gatherings and iii) absence of foreign tourists
• We expect a protracted recovery amid lingering pandemic challenges, and anticipate full recovery to only transpire beyond 2022. Maintain HOLD on both Carlsberg (TP: RM25.50) and Heineken (TP: RM25.60)

An Equally Challenging Year Post 2020

The unprecedented pandemic in 2020 had severely impacted the brew ers’ volume sales, w ith core net profit for Carlsberg and Heineken plunging by -38% and -44% to RM180.7m and RM175.4m respectively, as on-trade sales w ere particularly hard-hit by the lockdow n measures. Meanw hile, the renew ed MCO 2.0 w hich lasted until 3 March 2021* (50 days) for certain states, further threw a spanner into recovery w orks, more so during a traditionally busy 1Q amid the Lunar New Year festive period.

Estimating 2021 sales to remain c.10% below that of pre-Covid 2019 levels

For 2021, w e project volume sales to recover from 2020’s trough but still c.10% below that of pre-Covid levels. This takes into consideration the: i) existing strict CMCO rules w ith restricted operational hours for eateries (until 12am), ii) reduced largescale social gatherings and iii) absence of foreign tourists. Further ahead, w e foresee 2022 to recover to just shy of 2019 levels, before seeing an eventual full profit recovery to pre-Covid levels in 2023, based on our estimates.

Hedging Processes Keeping Production Costs in Check

Elsew here, global commodity prices have been on the rise tow ard the end of 2020, broadly driven by supply chain disruptions that coincided w ith a pent-up demand for raw materials. For the brew ers, certain key raw materials such as malt barley w ere not spared from the run-up in prices. How ever, w ith hedging measures in place, we expect input costs to be rather w ell-managed over the near term.

Keeping HOLD Rating on Both Brewers

No changes to our earnings estimates. We low er our WACC assumption to 7.0%/7.2% from 7.5%/7.7% for Carlsberg and Heineken, largely to reflect the gradual progression of vaccination programmes. In tandem, our TP is raised to RM25.50 (CAB MK) and RM25.60 (HEIM MK) respectively. All in, current valuations (slightly above 5-year mean) for both brew ers looks fair, taking into account the likely protracted recovery amid lingering Covid-19 disruptions. For exposure, our relative preference w ould be Carlsberg, considering its better ROE profile and diversified exposure in Singapore, w hich is faring better as compared to the Malaysian market.

Source: Affin Hwang Research - 8 Apr 2021