News

CARLSBG announced that it is disposing its 70% stake in subsidiary Luen Heng F&B Sdn Bhd (LHFB) to Capriwood Sdn Bhd for a cash consideration of RM19.5m.

To recap, LHFBa 70:30 joint-venture between CARLSBG and Luen Heng Agency Sdn Bhd was incorporated as a private limited company in 2008. LHFB is an established distributor of imported beers, wines and spirits.

LHFB recorded a net profit of RM10.1m in FY 14 while net asset stood at RM45.2m.

Comments

We were not surprised on the disposal as this is aligned with its parent company’s strategy to ‘Focus on beer as a core’ and to maximize the return on capital invested.

However, we are neutral to negative on the disposal as it implied 2.8x FY14 PER and 0.6x FY14 PBV, which is below the book value. Nonetheless, the disposal loss and the loss of earnings contribution from LHFB are not expected to have any material financial impact on the Group (<5%)

The disposal will incur a loss of RM10.9m, as the RM19.5m proceeds is below CARLSBG’s carrying value of the 70% stake of RM30.4m. The loss accounts for 4.9% of our FY15E net profit. For illustration purpose, LHFB’s net profit of RM10.1m represented 4.7% of CARLSBG net profit in FY14 and 3.2% of our FY15E net profit.

Meanwhile, the Group has indicated that the proceeds will be re-invested into the commercial activities which we believe bode well for the business on the back of persistently weak local consumer sentiment.

Outlook

We maintain our neutral stance on the outlook of the Group in view of the implementation of GST, as well as ongoing lawsuit in which the bill of demand amounting to RM56.4m (25.6% of FY15E net profit) is expected to have potential significant financial impact to the Group.

Forecast

We understand that the terms of partnership between CARLSBG and LHFB will remain the same as before, but LHFB will cease to be a subsidiary of CARLSBG. Thus, we do not foresee any earnings margin impact arising from the disposal.

We made no changes to our core net profit (CNP) forecast pending the 1Q15 results release on 18th May 2015.

Rating

Maintain MARKET PERFORM

Valuation

Maintain our TP of RM13.23, based on 18.5x FY15E PER which implied -0.5SD over the 3-year mean.

Risks toOur Call

Unfavourable outcome of tax claims lawsuit.

Sector risk: Higher-than-expected contrabands volume.

Source: Kenanga Research - 18 May 2015