Period  2Q14/1H14

Actual vs. Expectations Guinness Anchor Bhd (GAB) reported 2Q14 net profit of RM66.09 (+33.3% QoQ, -0.1% YoY), bringing its 1H14 earnings to RM115.7m (-5.9% YoY).

 Despite making up 53% and 52% of consensus and our full year estimates, respectively, the numbers are slightly below expectations as the first half of the financial year is seasonally stronger, averaging at 57-58% of full year earnings over the past 3 years.

 The main culprit for the earnings miss is attributed to higherthan-expected operating expenses.

Dividends  As expected, a single tier interim dividend of 20 sen was declared for the quarter. We are expecting another 47.5 sen dividend to be declared in the 4th quarter to bring the total dividend to 67.5 sen (4.5% dividend yield) for FY14.

Key Result Highlights YoY, 2Q14 revenue grew by 16.3% amid pre-budget speculation purchases and the earlier timing of Chinese New Year in FY2014. Nevertheless, net profit growth was almost flat (-0.1%) due to increased investment in brand equity building activities which led to a 2.2ppt net margin contraction from 15.4% in 2Q13 to 13.2% in 2Q14.

 QoQ, 2Q14 revenue rose significantly by 53.3%, underpinned by several major commercial activities, which were rolled out in conjunction with festivities during the October-December months. However, the impact to the bottom-line was dampened by a 58% increase in operating expenses, which led to a lower disproportional 33.2% QoQ growth in net profit.

 YTD, its 1H14 revenue grew marginally by 0.4% due to a planned reduction of distributor stocks in 1Q14. Coupled with the higher operating expenses resulting from higher commercial spend (including marketing initiatives such as GAB's first year as an official beer sponsor for the CIMB Classic golf tournament and Arthur's Day concert), 1H14 net profit slid by 5.9% YoY.

Outlook  Although the: (i) absence of an excise hike during the budget-2014 and (ii) Visit Malaysia Year 2014 are positives for brewers, GAB's outlook remains challenging due to cautious spending by consumers, as well as increasing competition from contraband beers, which are widely available in the market.

Change to Forecasts   Our FY14 and FY15 net profit forecasts have been lowered to RM214.7 (-4.1%) and RM231.5 (-3.5%), respectively, to account for higher operating expenses (eg. Increased marketing efforts and cost inflationary pressures).

Rating Maintain UNDERPERFORM.

Valuation  In addition to the downward revision in earnings forecast, we have also adjusted our WACC to 8.3% from 7.5% after updating the latest risk free rate and Beta. Consequently, our DCF-based target price of RM16.52 has been reduced to RM14.24, which now implies a FY15 PER of 18.6x.

Risks to our Call  Better-than-expected sales.

 Lower-than-expected operating costs.

Source: Kenanga