We recently brought nine fund managers and buy-side analysts to visit Guinness Anchor  (GAB)'s  47-year-old  brewery  in  Sungei  Way,  Selangor.  The  level  of automation  at  the  plant  impressed  us,  as  our  group  easily  outnumbered  the number of workers on the factory floor. Despite producing as many as 1.2m cans of beer a day, the brewery still appears clean and well-organised. We continue to like  GAB's  strong  beer  portfolio,  solid  track  record  and  good  corporategovernance, as well as the beer industry's steadily-growing  volume.  Maintain BUY, with FV RM17.47.

Almost 50 years old. GAB's brewery in Sungei Way, Selangor commenced operations 47  years  ago  in  1965.  It  was  the  first  facility  outside  its  home  country  Ireland  to  brew Guinness Stout. Today, it manufactures all of GAB's key  brands  -  Guinness,  Tiger, Heineken,  Anchor,  Kilkenny,  Malta  and  Anglia  Shandy  -  except  Paulaner  and Strongbow, which are respectively imported from Germany and England. GAB's brew house has a theoretical ultimate capacity of up to 300m litres per annum, although the facility  actually  has  different  utilisation  rates  throughout  the  year.  The  canning  line,  for example, is completely maximised right before the Chinese New Year festive season.
 
Not labour intensive at all. Most of us were amazed by the level of automation in the plant.  We  saw,  at  the  most,  five  factory  staff  inside  the  brewery,  with  the  majority  of them working at the packaging line. The machinery is monitored by a central controlling system  (which  we  were  told  comprises  multiple  screens  displaying  charts,  figures, graphs)  outside  the  brewery  to  ensure  operating  efficiency  and  to  address  mechanical breakdowns.  During  the  visit,  the  plant  came  across  as  well  organized  and  seemingly tidier than other breweries we have seen. Some parts of the automated process, which involve  simple  engineering  such  as  the  alignment  of  empty  glass  bottles  for  filling, actually carried out the designated task smoothly.

Our preferred brewer. Malaysian malt liquor market (MLM) volumes have increased at a  6.7%  CAGR  since  2007,  when  the  government  put  beer  excise  duty  hikes  on  hold. GAB  has  historically  outperformed its peer  to strengthen  its  market share  in a  growing industry. Although Carlsberg is now a credible threat to GAB's dominant position by introducing new beers and becoming a multi-brand company, the latter still has a strong beer  portfolio  and  boasts  of  double-digit  volume  growth  for  Guinness  and  Heineken,  a solid  earnings  track  record  and  good  corporate  governance.  Maintain  BUY,  with  FV  of RM17.47, based on our FCFF model (WACC: 7.1%, terminal growth: 2.2%).

Malts and hops. The beer-brewing process begins with malted barley, where malts are crushed, mixed with water and cooked at 68 ''C. After filtration to remove barley residuals (which is used for cattle feed), hops are added to the solution and the combination boiled together for one hour. Hops, the female flower clusters of a plant,  are  the  reason  behind  a  beer's bitterness and its alpha  and  beta  acids  serve  as  the  unique  taste component, while its essential oils give beer its aroma. Stout, in general, is thrice as bitter as lager due to the usage of roasted barley and the amount of hops included. After being boiled, the solution is further clarified. Our helpful brewery tour guide believes that 40% of a beer's flavour is derived from the malted barley.

A  special  yeast.  Up  to  this  point  in  the  brewing  process,  the  solution  is  hot.  A  cooler  then  lowers  the temperature to 12''C-14''C, and yeast is added to begin the fermentation process. Fermentation lasts two to three weeks; GAB's fermentation vessel fills up to 300,000 litres of in-process beer at a time. The company sources  for  1kg  of  yeast  from  the  Netherlands  once  every  two  to  three  months,  and  propagates  the  yeast locally.  After  that,  the  beer  is  stored  in  cold  temperatures  for  a  few  days  before  being  filtered  to  remove residual yeasts and proteins, resulting in a clearer, brighter beer.

The  final  package.  The  completed  beer  then  undergoes  a  20-parameter  testing  process  (for  colour,  taste, bitterness, body etc) to ensure that it is within specifications before proceeding to the packaging line. GAB is able to fill 74,000 cans per hour to produce 1.2m cans of beer a day. The kegging  line, meanwhile, fills at a rate  of  350  barrels  per  hour.  Glass  bottles  are  generally  recycled  and  typically  last  for  six  to  10  cycles. Malaysian customs wait at the end of the production line to stamp a duty on the finished beer, charging the company an average of RM1.2m in beer excise duties each day.

Source: OSK