Drinking to better sales. The Malaysian malt liquor market (MLM) volume has risen at a tame 1.8% CAGR since 2004 following a steep 71.3% increase in beer excise duties from 2004 to 2006. However, annual growth has been stable and healthy at 6.3% since 2007, when  the  Government  held  back  from  further  increasing  excise  duties.  The  margins  of brewery companies have also improved over the past year or so as consumers gradually shift from mainstream beers to higher-priced ones. This has boosted earnings growth via higher selling volume and wider margins per litre sold.

New IT system to boost transparency. GAB invested in a new RM35m IT infrastructure that  standardizes  supply  chain  processes  and  provides  better  insight  into  its  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.

No  tax  hike  in  2013.  We  believe  regulatory  risks  will  remain  benign  in  2013  for  the following reasons: i) Malaysia's beer duties are already  very  steep,  with  taxes  being the second  highest  globally  and  by  far  the  steepest  on  a  GDP  per  capita-adjusted  basis,  ii)
liquor  consumption  is  the  second  lowest  in  ASEAN,  and  iii)  a  revamp  of  the  current alcohol tax structure will probably lead to higher incremental Government tax proceeds as opposed to a beer duty hike.

Our preferred brewer. Malaysian 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,  strengthening  its  market  share  in  a  growing  industry.  Although Carlsberg is now a credible threat to GAB's dominance via the introduction of new beers and  a  successful  transition  to  a  multi-brand  company,  the  latter  still  has  a  strong  beer portfolio  and  boasts  of  double-digit  volume  growth  in  Guinness  and  Heineken,  a  solid earnings track record and good corporate governance. Maintain BUY, with RM17.47 FV, based on our FCFF model (WACC: 7.1%, terminal growth: 2.2%).

Source: OSK