- Higher MLM growth forecast of 6%-7% ' We have raised our MLM growth forecast to 6%-7% for 2012-2013, up from 5%-6% previously. Our channel checks at selected F&B outlets within the Klang Valley suggest a relatively resilient demand, with the recent 3% price hike wellabsorbed by end-consumers. To recap, the higher pricing structure was implemented by both brewers Carlsberg Brewery Malaysia Bhd (CAB) and Guinness Anchor Bhd (GAB) back in May 2012.
- Robust beer volume growth seen ' Notwithstanding the effect from the Euro 2012 special event, the industry's longer-term upward growth trajectory remains intact. We see healthy demand growth well underpinned by: -1) the status quo in alcohol excise duty at RM7.40/litre; 2) positive consumer spending sentiment and; 3) on-going major A&P campaigns to boost sales.
- Slump in price of malting barley to drive margin expansion in 2013 - Robust beer volume growth aside and more importantly, we believe brewers are poised for an earnings upgrade from margin expansion on the back of cheaper input costs going forward. We see a sustained easing in prices of malting barley due to:- 1) additional global supply on increased plantings and favourable weather conditions, and 2) Flattish demand from Europe alongside the bearish macroeconomic outlook in the region. As it is, the current price of malting barley at EUR219/MT is down a further 12% from 2 months ago, extending its downward trend from the YTD high of EUR288/MT (Feb 2012). This brings the present price level on par to that last seen in 2009, prior to the heat wave-induced price surge in 2010. Much as we witnessed a notable margin expansion back then, we expect a similar re-run going into CY13F.
- EPS forecast raised by 7% to 9% - We anticipate a margin improvement of 2ppts to 3ppts for next year as new and cheaper inventories of malting barley filter through. Both brewers have locked in their respective raw material requirements for CY12. Next to excise duties, raw materials & packaging costs account for approximately 15%-17% of total operating costs. Consequently, our earnings forecasts for CAB and GAB have been nudged upwards by 7% to 9% for FY13F-14F. Our revised earnings models now suggest a 3-year earnings CAGR of 8% for GAB and a higher 10% for CAB.
- Dividend yield of 5% p.a. is still decent ' As we have seen, the recent share price rally comes in largely in line with the re-rating of the broader consumer sector, mainly due to rising interests by investors seeking a defensive portfolio strategy. Nonetheless, net dividend yields of 5% per annum (p.a.) are still decent especially in view of renewed uncertainties in the global capital markets.
- Re-affirm BUY on CAB, FV: RM14.00/share - We re-affirm our BUY recommendation on CAB with a higher DCF-based fair value of RM14.00/share post a revised long-term growth rate assumption of 4% vs. 3% previously. CAB remains our preferred pick for exposure to the brewery sector for its solid earnings prospects on the back of an expanding market share and a deepening market penetration. A strong portfolio of premium beers and in-house brewing of imported labels (Asahi, Kronenbourg 1664 and Kronenbourg Blanc) will further bolster long-term growth.
- Maintain HOLD on GAB, FV: RM14.50/share ' We maintain our HOLD recommendation on GAB with a higher DCF-based fair value of RM14.50/share, as we upped our long-term growth rate assumption from 2% to 3%.GAB's dividend yield of 5% per annum (p.a.) as premised on a generous dividend payout of 90% is well supported by the group's strong brand equity and dominant MLM market share at 60%-62%. Additionally, the stock is a potential beneficiary of capital management initiatives which could result in the establishment of a higher dividend payout policy as part of management's effort to optimise its cost of capital.