9M18 core PATAMI of RM205.0m (+20%) is above our estimate, mainly led by higher associate gains. 16.0 sen interim dividend declared was as expected. The Malaysian market could be softer under the new SST environment while the Singapore market could see higher competition. Postresults, we upgrade FY18E/FY19E earnings on higher associate gains and slightly better Malaysian performance. Maintain UP but with a higher TP of RM17.70 (from RM17.10).

9M18 above. 9M18 core PATAMI of RM205.0m amounted to 82%/78% of our/consensus full-year expectations. We deem this to be above our but within consensus estimates, mainly due to better-than-expected contribution from its Sri Lankan associate, Lion Brewery. Malaysian sales were also better than expected, subsequent to our previous adjustments for softer demand post-SST. However, the interim dividend of 16.0 sen declared was within our estimate.

YoY, 9M18 revenue of RM1.46b (+11%) was boosted by stronger Malaysian sales (+19%), which was offset by weaker Singapore performance (-5%). The Malaysian market could be supported by heavy forward buying during the “tax-holiday” period in June 2018 in addition to the World Cup football season. The Singapore market could have been dragged by stronger Ringgit affecting returns and poorer spending sentiment. The above translated into a better operating margin in Malaysia at 19.2% (+0.5ppt) but a weaker margin for Singapore at 15.1% (-0.9ppt) which could also be due to poorer operating synergies. Lion Brewery’s successful turnaround continued to generate strong associate contributions, at RM14.7m in 9M18 (from losses of RM2.9m in 9M17), RM4.7m of which were from insurance claims. Core PATAMI closed at RM205.0m (+20%), mainly thanks to better profit from Malaysia.

QoQ, 3Q18 sales of RM492.8m (+31%) was higher, possibly due to the demand spurt in Malaysia driven by forward buying pre-SST price hikes. However, heavier marketing spend during the period dragged EBIT margin to 16.9% (-2.3ppt) to an EBIT of RM83.1m (+4%). Core profits for 3Q18 registered at RM65.0m (+2%) due to lower associate returns.

Bracing for post-SST. With SST finally kicking in for Malaysia, it is anticipated that on-trade sales (i.e. at F&B establishments) would be dented, having to bear the brunt of both taxes. We anticipate demand to be skewed towards the off-trade market (i.e. retails, supermarkets), albeit being a lower margin channel. Still, the group’s continued emphasis on its premium mix could bolster the overall performance in the local scene. The Singapore market may still be experiencing pressures from the introduction of the European Free Trade Agreement by end-2018, which could open it up to highly aggressive price competition from duty-free competitors. Lastly, the now stabilised operations in Sri Lanka’s Lion Brewery and its positive contribution could support the group’s performance against any negative developments from either Malaysia or Singapore markets.

Post-results, we increase our FY18E/FY19E earnings by 4.3%/3.5% as we improve contributions from Lion Brewery. Additionally, we increase our Malaysian demand assumptions following the stronger results.

Maintain UNDERPERFORM but with a higher target price of RM17.70 (from RM17.10, previously). Our target price is based on an unchanged 19.0x FY19E PER (which is also within the stock’s 5-year Fwd. average PER). CARLSBG is valued lower than its peer HEIM (OP, TP: RM18.60) which we valued at 20.0x FY19E PER, owing to the latter’s leading domestic market position and decent dividend yields. Still, CARLSBG may provide dividend-seeking investors better visibility from its formalised dividend policy.

Risks to our call include: (i) higher-than-expected sales from both markets, (ii) better demand for premium products, and (iii) stronger-than-expected associate contributions.

Source: Kenanga Research - 3 Dec 2018