Period  3Q13 / 9M13

Actual vs. Expectations Carlsberg Brewery Malaysia (CARLSBG) reported 9M13 earnings, which were below expectations as its net profit of RM119.9m accounted for just 68% of our full-year number of RM175.6m, and 67% of the consensus estimates of RM179.5m.

 Although the timing of the National Budget 2014 announcement was partly to blame for the weak results, the main disappointment arose from lower revenues from its Singaporean operation due to: (i) an influx of cheap imported beer in addition and (ii) the stock rationalization program which started in 2Q13 and continued throughout 3Q13.

Dividends  As per expectations, no dividends were declared for the quarter.

Key Results Highlights YoY, CARLSBG's 3Q13 revenue declined by 14.3% while earnings fell by 37.0% from RM61.1m to RM38.4m. Revenue contributions were lower from both the Malaysian (-12.2%) and Singaporean (-22.5%) operations. Coupled with the higher proportion of operating expenses, this resulted in a net margin contraction of 4.0ppt from 14.9% in 3Q12 to 10.9% in 3Q13.

 QoQ, NP rose by 24.3% from RM30.9m amid a 2.2% increase in revenue (from RM344.5m in 2Q13 to RM352.1m in 3Q13).

The better performance was in line with normal seasonal trends where the preceding second quarter is typically the weakest. In addition to the improved revenue, 3Q13 earnings also benefited from cost savings, which nudged its NP margin higher by 1.9ppt from 9.0% in 2Q13.

 YTD, the 9M13 NP dropped by 20.7% from RM151.2m to RM119.9m. This came as a result of the lower 3Q13 results which were caused by the phasing issue related to the later timing of the National Budget announcement (The Budget 2014 announcement fell in 4Q13, compared to 3Q12 last year). Consequently, revenue from the Malaysian operations declined by 4.6% while at the same time, revenue from the Singaporean operations (revenue fell by 11.4%) was also affected by challenging business conditions as mentioned above.

Outlook  While the later phasing of the National Budget 2014 will help to deliver a stronger financial performance in 4Q13, we remain cautious on the brewery segment as the malt liquor market remains challenging due to the softer demand and cautious consumer spending.

Change to Forecasts We slash our estimates for FY13E-FY14E to RM156.8m-RM177.0m (-10.7% and -12.6%) on lower volume assumption. At the same time, we have lowered our operating margins to 13.3% for FY13E (-0.1ppt) and 14.3% for FY14E (-0.4ppt) to account for higher operating cost environment, as we expect a higher level of promotional activities to counteract the intense competition in Singapore and Malaysia.

Rating  Downgrade to UNDERPERFORM.

Valuation  Our DCF-based target price of RM11.94 is lowered from RM13.36 following our reduction in our FY13E-FY14E earnings estimates.

Risks to Our Call A lower-than-expected excise duty hike, input cost and improvement in its market share.

Source: Kenanga