Period  2Q15/1H15

Actual vs. Expectations  1H15 net profit of RM130.7m (+14% YoY) is above both our, and consensus, expectations, accounting for 63.8% and 64.1% of the full-year forecasts, respectively. The positive deviation can be attributed to the better-than-expected impact from efforts by the authorities in tackling contrabands beer, which resulted in higher legal volume that benefited Guinness Anchor Berhad (GAB).

Dividends  As expected, a dividend of 20 sen/share was declared (vs. 1H14: 20 sen/share), within our expectation. We had previously estimated a DPS of 64.4 sen/share for FY15.

Key Results Highlights  YTD, 1H15 revenue rose 10.8% to RM913.9m thanks to 6% increase in sales volume, which the Group attributed to a mixed function of higher consumption and extra market share gained at the expense of contrabands due to the better effort from Customs. As a result, net profit jumped 13% to RM130.7m with net margin expanding by 0.3pptx on the back of better operating efficiencies.

 YoY, 2Q15 revenue was 4.3% higher in light of the higher sales volume, benefiting from comparably better consumer sentiment, and higher legal volume as 2Q14 was badly hit by contrabands. The higher volume boosted net profit by 15.2% to RM76.1m which was further lifted by a saving of interest expense of RM1.2m and normalization of effective tax rate.

 QoQ, 2Q15 revenue surged 32.5% to RM520.8m while similarly net profit was higher by 39.4% to RM76.1m mainly due to seasonality as 2Q15 was aided by year-end festivities and holidays.

Outlook  Management confirmed that a marginal price increase (single-digit percentage) was imposed to the beers under its belt in late December 2014, which is in line with the price increase assumption of 5.1% in our FY15E earnings.

 GAB is looking forward to a strong 3Q15 subsequently, as it expects moderate pre-GST stocking up activities despite beer not being durable goods as compared to furniture and home appliances, mainly due to its relatively higher pricing. As for the 4Q15, GAB is not ruling out a soft quarter post-GST, but expects volume to normalize as soon as in six months’ time.

 We also believe the late timing of CNY in 2015 to be positive for all consumer counters, with consumer spending boosted by bonuses and freed up disposal income after the school opening in January, which normally takes up a significant amount of spending.  Meanwhile, the legal Malt Liquor Market (MLM) volume is also expected to be on the uptrend at the expense of illegal volume as the Group proactively work together with the government in efforts to tackle the contrabands beers.

Change to Forecasts  We impute higher MLM volume growth assumption to our earnings model as we think that the better efforts in tackling contrabands, which will generate extra tax revenue to government, can be sustained. As a result, FY15E-FY16E net profits are upgraded by 13.5%-15%.

Rating UPGRADE TO OUTPERFORM (from Market Perform) with higher Target Price of RM15.60 from RM13.56. Our rating upgrade was prompted by: (i) higher legal sales volume at the expense of contrabands, (ii) higher profitability due to better efficiency and innovative product mix, (iii) unjustified valuation; last closing price implies 15.6x PER FY15E, below its +1.5 SD 3-year mean, and (iv) attractive dividend yield of >6%.

Valuation  TP is based on unchanged 20x FY15 PER (-0.5SD 3-year mean average)

Risks to Our Call  Worse-than-expected efforts in tackling contrabands.

 Longer-than-expected transition or adaptation period post-GST.

Source: Kenanga