1Q18 core PATAMI of RM76.1m (+13%) is broadly within expectation. The 20.0 sen dividend declared is deemed to be within. The group is likely to be supported by improved domestic spending and better product mix but dragged by tepid Singapore contribution. Maintain MARKET PERFORM but with a higher TP of RM18.25 on slightly better net earnings adjustments on an unchanged 19.0x FY19E PER.

1Q18 broadly within estimates. 1Q18 core PATAMI of RM76.1m is broadly within our/consensus numbers, accounting for 32%/30% of respective full-year expectations. The interim dividend of 20.0 sen declared was within expectations.

YoY, 3M18 revenue grew by 12% to RM548.5m as Malaysian sales (+21%) benefited from a later CNY period and less forward purchases as compared to CNY 2017. This could also be due to distributors loading up stock pending the price adjustments in April 2018. However, Singapore sales declined by 8% as spending may be dampened by anticipated tightening of fiscal policies and currency depreciation. EBIT margin fell slightly to 18.3% (-0.9ppt), possibly dragged by the slowing operations in Singapore. On the flipside, the group’s associate, Lion Brewery is successful in staying in the black as it progressively recovered post-flood. However, of the RM5.6m contributions, RM4.7m was from the remainder of insurance reimbursements on flood damages. On the back of lower effective taxes, 3M17 core earnings (less insurance claims) grew by 13% to RM76.1m.

QoQ, 1Q18 sales improved by 31% against 4Q17, primarily from a 40% increase in Malaysian revenue, possibly thanks to the abovementioned factors. The growth in EBIT margins by 2.5ppt is likely the result of better economies of scale with the higher sales volume, boosting EBIT by 52%. This translates to a similarly strong 52% growth in 1Q18 core PATAMI.

More cheers locally. The expansion in Malaysian demand is likely to carry on for most parts of the year, as spending could pick up from: (i) zeroing of GST, (ii) the 2018 World Cup, and (iii) earlier CNY 2019 season, which could benefit 4Q18 with higher forward buying. Additionally, the encouraging growth from premium variants could also be a boon to earnings in the near term. Meanwhile, the softening Singapore market could be further aggravated by the strengthening of the Ringgit. While associate Lion Brewery is thought to have begun commissioning its factory in 2H17, we believe more time would be required for it to regain its sales order and optimise production levels to contribute meaningfully to the group.

Post-results, we boost our FY18E/FY19E core earnings slightly by 2.1%/3.4%. This is mainly premised on better Malaysian numbers but with less optimistic Singaporean demand. Our dividend assumption is also increased in line with our earnings revision due to the 100% payout policy formalised in February 2018.

Maintain MARKET PERFORM but with a higher Target Price of RM18.25 (from RM17.65, previously). Our target price is based on an unchanged 19.0x FY19E PER but supported by the higher revised earnings. CARLSBG is valued lower than its peer HEIM (OP, TP: RM23.30) which is valued at 20.0x FY19E PER, owing to its leading domestic market position and slightly better dividend yields (i.e. FY18E/FY19E: 4.6%/5.1%). Still, CARLSBG may provide dividend- seeking investors better visibility with its policy of a 75%-minimum profit payout per quarter and 100% full-year payment.

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

Source: Kenanga Research - 18 May 2018