Media reported thatthe government has revised the excise duty structure by eliminating ad valorem tax, which effectively results in a 10% hike in excise duty on malt beer starting 1st of March 2016. This is the first excise duty hike after the last hike of RM1.40/litre or 23.3% (from RM6.00 to RM7.40) which was announced during the Budget 2006. We believe the additional costs arising from the excise duty hike will be passed through by increasing selling prices. However, we do not think that the price increase would cause a dip in volume due to the price inelasticity of brewery products. We maintain our NEUTRAL call on the sin sector as we think that the earnings growth trajectory for brewery companies is still intact despite the excise duty hike. Our top pick of the sector is GAB (OP; RM 16.36) as we like 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. Meanwhile, we also favour CARLSBG (OP; RM13.86) as we think that the higher earnings contribution from Singapore is positive as it provides a market for the Group to diversify away from the local market which is dogged by persistently weak consumer sentiment and contraband beers.

Media reported that the government has revised the excise duty structure by eliminating the ad valorem tax which effectively results in a 10% hike in excise duty on malt beer starting on 1st of March 2016. A check with GAB’s management confirmed that the excise duty has been raised and the company has made adjustment to its products to align with the new excise duty structure effective immediately. Although we could not get access to its peer, CARLSBG, we believe it is likely to have followed suit in adjusting the prices. We estimate the price increase to be in the range of 4%-5% depending on the products.

A hiatus of more than 10 years. To recap, the last excise duty hike was introduced during Budget 2006, which lifted the excise duty per litre to RM7.40 from RM6.00 (+RM1.40/litre or 23.3%) and it was accompanied by the introduction of 15% ad valorem tax. That was the third successive hikes in three years following Budget 2004 (+RM0.43/litre, +10.0%) and Budget 2005 (+RM1.25/litre, +26.3%). There has been no hike subsequent to that for more than 10 years.

Muted impact to earnings. We are neutral on the excise duty hike as we think that it is likely for the brewery companies to pass through any additional costs arising from the hike by increasing selling prices. However, we do not think that the brewers are able to capitalize on the excise duty hike by increasing price beyond the excise duty hike quantum in view of the Anti-Profiteering Act which is effective until 31stJune 2016. Thus, we do not expect earnings accretion to brewery companies from the excise duty hike.

Volume unlikely to be deterred. As for the impact to the sales volume, we do not think that the modest increase in selling price will cause a dip in volume. This is due to the fact that beers or alcoholic drinks’ prices are less visible or standardized as opposed to cigarettes differing from sales channel and product type, and thus, volume sensitivity to the price changes is less inelastic as compared to the tobacco industry. Thus, we maintain our NEUTRAL call on the overall sin sector as the growth trajectory in brewery sector is still intact driven by innovative product launches and aggressive marketing campaigns. Our top pick of the sector is GAB (OP; RM 16.36) as we like 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. Meanwhile, we also favour CARLSBG (OP; RM13.86) as we think that thehigher earnings contribution from Singapore is positive as it provides a market for the Group to diversify away from the local market which is dogged by persistently weak consumer sentiment and contraband beers.

Source: Kenanga Research - 3 Mar 2016