Guinness Anchor Bhd ('GAB') is the market leader in the domestic Malt Liquor market with a market share of 60% as at June-12. Moving forward, we would see GAB's market share to stabilise at 58.5% given the competition in the mainstream and super premium segment from Carlsberg Brewery Malaysia ('CARLSBG'). We like GAB for its defensive and decent dividend yield of 3.9% (based on a dividend payout ratio of 90%). GAB's share price has gained traction post the Budget 2013 announcement, which we believe is largely due to the absence of 'sin taxes' and its potential to benefit from the consumers' higher disposal income. This is further supported by its wider range of product offering and reach due to its commonly-known brand. We are initiating coverage on GAB with a MARKET PERFORM recommendation and a Target Price of RM17.10, which is based on DCF valuation with a WACC of 7.5% and a long-term growth rate of 1.5%. Our MARKET PERFORM rating is premised on its decent dividend yield of 3.9% and defensive earnings during the global economic uncertainties.     

Strong brand and wide range of product offerings.  Over the years, GAB has nurtured its branding in the market through its three strongest and most successful products i.e. Tiger, Guinness and Heineken. Its most notable flagship brand, Tiger, makes up 51.0% of the mainstream segment, while Guinness and Heineken cater for the premium market which they dominate at 95.0% compared to its peer, Carlsberg Brewery Malaysia ('CARLSBG'), which controls the remaining 5% share only. Apart from that, GAB also has eight other brands in its stable that cater for the value for money ('VFM') and super premium segment. However, its total market share in these two segments (in terms of price position) is relatively small at just about 7%. Due to its wider range of product offerings and it having the commonly-known products, Guinness is well positioned to benefit from the likely higher demand growth ahead as a result of the consumers' higher disposable income.   

Defensive earnings & decent dividend yields.  Despite the constant rise in the raw material prices (12% on average per annum), GAB's bottom line still recorded an impressive growth of a 5-year CAGR of 10.5%. This was mainly due to its procurement strategy of locking in raw material prices 12-18 months ahead through its parent company, GAPL Pte Ltd (co-owned by Diageo Plc and Asia Pacific Breweries Ltd's) coupled with its ability to pass on the bulk of the cost increase to its customers (e.g. GAB adjusted its selling price higher by 3-4% last year). Apart from that, based on GAB's historical dividend payout rate of 90% to 95%, GAB will offer decent yields of 3.9%-4.2% on the back of our earnings growth assumption of 4.9-7.3% for FY13-14E.

Excise duties hike expectations. It was a relief to the sector that there was no excise duty hike in previous Budget 2013 announcement. However, the risk of substantial increase in excise tax is still intact. In our scenario analysis, assuming that there is a 15% increase in the excise duty, we believe that GAB will still be able  to  record a positive earnings growth of 0.5%. This  is assuming  the  tax hike pass- through to the consumer and annual hike in ASP ('Average Selling Price') of 3% to 4%. GAB's earnings will be negatively affected by 6.4% should the excise duty increase substantially to 25%.

Risks.  (1) Regulatory risk i.e. Higher than expected increase in excise duties (2) global economic downturn/recession and (3) higher than expected input cost.    

 Fairly  valued  at  RM17.10.  We  initiate  coverage  on  the  stock  with  a MARKET PERFORM recommendation with a target price of RM17.10 based on our DCF valuation with a WACC of 7.5% and a long-term growth rate of 1.5%. We recommend investors to hold the stock given its defensive earnings and its decent net dividend yields of 3.9%-4.2% for FY13-14E.

Source: Kenanga