GAB's 1QFY13  earnings  rose  2.9%  y-o-y  to  RM56.8m  despite  the  absence  of speculative  buying  prior  to  the  unveiling  of  the  2013  Budget  and  the  shortened quarter,  during  which  the  company  halted  business  dealings  for  nine  days  to migrate to a new IT system. The industry's product mix continued to improve, and this has had the effect of boosting ASPs and margins. The shortened 1Q and lack of speculative buying should lead to stronger volumes in 2Q. We are keeping our forecasts and FV unchanged at RM17.47. Maintain BUY.

Within  estimates.  GAB  registered  revenue  of  RM392.3m  (-11.8%  y-o-y)  and  earnings of RM56.8m (+2.9% y-o-y) as the company closed its books for the first quarter of FY13. Revenue declined y-o-y as a result of: i) the absence of speculative purchases prior to the announcement of Budget 2013 (it was pretty clear that there would not be a hike in beer  excise  duty),  ii)  an  intended  reduction  in  duty-free  volume  in  view  of  the  thin margins  from  such  sales,  and  iii)  a  shorter  business  period  (please  see  the  next paragraph).  Group  earnings,  nonetheless  grew  y-o-y,  thanks  to  a  more  favourable product mix, which led to higher ASPs per litre sold, which in turn boosted profit margins. On a sequential basis, revenue and earnings grew 13.4% and 63.1% respectively due to the seasonally higher volume (the Chinese Hungry Ghost Festival). The quarter's profits made up 25.0% and 25.5% of our and consensus' full-year forecasts.

A shorter quarter. GAB stopped taking orders and did not ship beer for nine days at the end  of  1Q  as  it  migrated  from  four  old  IT  platforms  to  two  new  ones.  The  new  IT infrastructure, which costs RM35m, standardizes supply chain processes and provides a more comprehensive look into GAB's efficiency and productivity. The company can now create  individual  P&Ls  for  each  selling  location  based  on  sales  volume  achieved  and expenses  incurred  (including  complimentary  mugs,  banners  and  signboards).  This  will gives  GAB:  i)  greater  leeway  in  analyzing  the  effectiveness  of  its  distribution  and marketing, ii) a better understanding of its portfolio's demographic appeal, and iii) more transparency to improve each outlet's profitability.

2Q  expectations.  The  shorter  1Q  meant  that  some  selling  volume  and  commercial expenditure  had  been  deferred  to  2Q.  Hence  its  2Q  earnings  would  capture  nine additional  days  of  business  (ie  2Q  will  become  9.8%  longer).  In  addition,  with  minimal speculative purchases before the Budget this time around, retailers' stockpiles are likely to be lower than that in 2Q last year. These two factors point to stronger y-o-y 2QFY13 sales  volume.  However,  as  the  upcoming  Chinese  New  Year  will  fall on  a  later date in 2013  (10  Feb  vs  23  Jan  in  2012),  we  expect  some  CNY  purchases  to  potentially  spill over to 3QFY13, unlike in FY12 when most of the purchases were concentrated in 2Q.

Maintain  BUY.  We  are  keeping  our  FY13  and  FY14  earnings  forecasts  unchanged.  Our  FV hence remains at RM17.47, based  on  our FCFF model (WACC: 7.1%, terminal  growth: 2.2%). The  brewers  are our preferred sin sector exposure in light of the industry's healthy volume growth  and  improving  product  mix.  GAB  is  our  favourite  pick  due  to  its  stellar  corporate governance and strong brand portfolio across all price points.

Source: OSK