We attended GAB’s FY14 results briefing hosted by its management and came back feeling unexcited and cautious on the outlook of the brewer. As FY14 net profit shrank 8.9% on the back of lower revenue growth of 3.9%, the Group attributed the decline to higher operating costs, hike in excise duty as well as the negative implications of contrabands on the market. GAB’s focus on FY15 would be on better cost management by enhancing its efficiency and capability, while the product strategy would see better innovation with more quality new addition to its product portfolio. Reiterate UNDER PERFORM with unchanged Target Price of RM12.93 as we expect the earnings growth to be unexciting with low single-digit of growth being projected moving forward on the back of cautious industry outlook.

Tough FY14. GAB experienced a challenging FY14 as operating costs rose due to the subsidy rationalisation by the government. As a result, operating expenses in FY14 spiked by 3.3% despite the lower revenue growth of 3.9%. Besides, uplift in valuation of the excise duty on 1 November 2013 saw the Group incurring an additional 2.5% or RM18m in total excise duty paid in FY14. Meanwhile, the increasing presence of contrabands had also taken a toll while GAB was also forced to deal with water shortage due to a water ration.

Dim outlook in FY15. GAB expects the Malt Liquor Market (MLM) moving forward to remain competitive and challenging, in view of the unfair competition from contraband beers, of which the sales price per unit is lower than the excise duty alone imposed on GAB’s beers as Malaysia has the second highest excise duties for beer and stout products in the world. Meanwhile, the Group is also concerned on the imminent implementation of the GST in April 2015, which may further dent the consumer sentiment and thus discretionary spending.

Multi-pronged strategy drafted. Moving forward, GAB plans to manage its cost more prudently by improving operational efficiency. Besides, the Group also expects to increase its portfolio by introducing more new products through innovation. New products launched in FY14, including Kirin Ichiban, the best-selling super premium brand in Japan and Smirnoff Ice, the world number 1 RTD brand which received good response, which was reflected in 4Q14 sales growth of 10.8% QoQ. Meanwhile, GAB would still be counting on its core brands, namely Heineken, Tiger and Guinness moving forward in sustaining the sales volume. Although GAB did not reveal the sales figure of the brands, we gathered that Heineken recorded the best sales growth among the core brands, followed by Tiger and Guinness in FY14.

Reiterate UNDER PERFORM with unchanged Target Price of RM12.93. Our TP offers a mere upside of 0.6% (capital loss of 4.2% and DY of 4.8%) from the last closing price as we continue to peg our TP to 19x FY15E PER, implying -0.5SD below its 3-year mean. We reckon that our valuation is justified judging on the low single-digit earnings growth potential moving forward at a projected rate of 3.2% and 3.8% respectively in FY15 and FY16 on cautious industry outlook. Meanwhile, the dividend yield has also dipped to <5% despite the high payout ratio of 98.3% of net profit in the recently concluded FY14 (DPS: 64.5sen, DY: 4.8%). Moving forward, we forecast a payout of 64.3sen/share and 66.8sen/share in FY15 and FY16 respectively by assuming a payout ratio of 95% of net profit, which translate into DY of 4.8% and 4.9% respectively.

Source: Kenanga