Period

2Q16/1H16

Actual vs. Expectations

1H16 net profit of RM153.9m (+17.8%) was above expectations by matching 66.4% of our full-year forecast and 67.8% of the consensus. The positive deviation can be attributed to higherthan- expected sales growth and better-than-expected operating efficiency.

Dividends

Surprisingly, the Group declared a special dividend of 30.0 sen/share on top of the interim dividend of 20.0 sen/share, bringing total DPS to 50.0 sen (1H15: 20.0 sen), translating into payout ratio of c.100%. Our previous FY16E DPS forecast was 72.9 sen.

Key Results Highlights

YoY, 1H16 revenue grew marginally by 1.7% to RM929.5m but the actual growth should be higher as 1H15 revenue included a 10% sales tax which was subsequently replaced by GST starting 3Q15. PBT surged 16.0% to RM202.1m which the Group attributed to improved cost efficiency and the recognition timing of A&P expenses, which expanded PBT margin by 2.6ppt. As a result, net profit jumped 17.8% to RM153.9m, further aided by lower effective tax rate of 23.8% (vs 1H15: 25.0%)

QoQ, 2Q16 revenue soared 29.5% to RM524.5m, driven by yearend seasonality and new product launches. PBT surged 40.3% to RM118.0m as margin expanded 1.7ppt to 22.5% as a result of continuous efficiency improvement but also due to the lower recognition of A&P expenses which we think could spike up in 3Q16 in conjunction with Chinese New Year festival. Net profit climbed 44.0% to RM90.8m thanks to lower effective tax rate of 23.0% (vs 1Q16: 25.0%).

Outlook

We are buoyed by the impressive results particularly considering it was achieved on the back of the persistent weak local consumer sentiment. We think the growth was driven by successful new product launches including Tiger White, Smirnoff Ice Black, Tiger Radler Mandarin Orange and Strongbow Red Berries, as well as the enforcement to tackle contraband beers by the authorities.

Thus, we expect the healthy growth momentum to be sustained with more A&P activities to be rolled out in conjunction with the Chinese New Year festival to stimulate sentiments. On the flipside, we do not expect the high margin to be sustained as A&P expenses will be recognized in the subsequent quarters.

We continue to like GAB for its market leading position in the local Malt Liquor Market (MLM), while the strategy of focusing on premium segment by embarking on aggressive marketing activities will help to sustain earnings growth. Net profit growth is forecasted at 17.5% and 9.1%, respectively, in FY16E and FY17E.

Change to Forecasts

We upgrade our earnings forecast after imputing higher sales growth and higher margin assumptions. As a result, FY16E and FY17E net profits were raised by 8.5% and 8.0% respectively.

Rating

Maintain OUTPERFORM

Valuation

Our Target Price is raised to RM16.36 (from RM15.36) correspondingly with the earnings upgrade after we rolled over our valuation base to FY17E (from FY16E). We applied lower PER of 18x (from 20x) as we opt to be more conservative on the valuation to reflect the risk of excise duty hike which the brewery sector has been spared for 10 years, following the massive hike in the tobacco sector. The valuation is slightly below its 5-year mean.

Risks to Our Call

Higher-than-expected marketing expenses.

Unexpected excise duty hike.

Source: Kenanga Research - 20 Jan 2016