FY17 PATAMI of RM221.2m (+8%) is within our expectation but missed consensus. Total dividends of 87.0 sen declared beat expectations. Premium products are expected to lead growth while sales of less premium products could be boosted by the 2018 World Cup. Sri Lankan operations are expected to be profitable and new dividend policy improves visibility. Upgrade to OUTPERFORM with a higher TP of RM17.65 on a revised 19.0x FY19E PER.

FY17 within expectations. FY17 PATAMI of RM221.2m is within our estimate but below consensus, making up 97% and 94% of respective estimates. The negative deviation from consensus is possibly due to better-than-expected results from its Singapore operations. The full- year dividend of 87.0 sen declared is above our 75.0 sen estimate as we had expected dividend payments to be only slightly above 100%.

YoY, FY17 revenue of RM1.8b increased by 5% driven by stronger sales in both Malaysian and Singaporean markets. Operating margin for Malaysia operations was stronger at 18.5% (+0.7ppt) from better premium product mix but Singapore margin recorded 13.8% (-3.1ppt) from prolonged impact of trade offer adjustments. The poorer contributions from Singapore led group operating profit to only register 2% growth at RM299.0m. Losses from its Sri Lankan associate, Lion Brewery was nearly neutralised from a profit-making quarter. Thanks to lower effective taxes at 21.2% (-4.6ppt), FY17 PATAMI registered at RM221.2m (+8%).

QoQ, 4Q17 top-line registered flattish growth (<2%) in both markets. Operating profit was better by 18% mainly due to the heavy impact from trade offer adjustments in the Singapore market in 3Q17. Profit from associate of RM2.7m was offset by higher taxes during the period. 4Q17 PATAMI came up to RM50.0m (+17%).

Brewing nicely. The group’s growing performance continued to be attributed to the successful launch and marketing of premium products. While we believe that less premium products registered uninspiring sales volume due to weaker consumer sentiment, the mid-year 2018 World Cup could potentially reinvigorate demand. Lion Brewery’s recent earnings could provide some relief that operation has fully recovered from the May 2016 flood. Recall that in FY15, associate gains from the group amounted to RM16.1m. Management had announced that it would be adopting a 100% dividend policy. In addition to this, management also expressed the intention to declare at least c.75% of its quarterly earnings as quarterly interim dividends. We are positive with this development as it provides investors with greater visibility of their investment returns.

Post-results, we trim our FY18E earnings by -1.7% on slightly weaker SGD/MYR assumptions. We also increase our FY18E dividends to 82.0 sen (from 78.0 sen) to be closely in line with the new dividend policy. We also introduce our FY19E numbers.

Upgrade to OUTPERFORM with a higher Target Price of RM17.65 (from RM15.05, previously). Our target price is based on a revised 19.0x PER as we relook at the stock’s 3-year mean PER and roll over our valuation base-year to FY19. Investors could react more positively with the turnaround of Sri Lanka operations. With the new dividend policy, the stock could offer yields of 4.9%/5.5% in FY18/FY19. CARLSBG is valued at a discount from its peer, HEIM (OP, TP: RM23.30) valuation of 20.0x FY19E PER given HEIM’s leading domestic market position and slightly better dividend yields (i.e. FY18E/FY19E: 5.1%/5.7%).

Risks to our call include: (i) lower-than-expected sales from both markets, and (ii) poorer demand for premium products.

Source: Kenanga Research - 15 Feb 2018