FY18 core PATAMI of RM272.5m (+14%) and full-year dividend of 100.0 sen are above expectations. A stronger product portfolio could continue supporting its Malaysian market thanks to sticky demand. In Singapore, it could face higher competitive pressures in the near term while associate gains are expected to plateau. Current valuations appear stretched on softer growth potential. Maintain UP but with a higher TP of RM18.00 (from RM17.70).

FY18 above. FY18 core PATAMI of RM272.5m came in above our expectation but is within consensus, arriving at 106% and 103% of respective full-year estimates. The positive deviation was due to: (i) better-than-expected product mix and domestic sales, and (ii) strongerthan-expected performance of its Sri Lankan associate, Lion Brewery. Total dividends of 39.0sen and special dividend of 9.3sen (FY18: 100.0sen, or 110% payout) is also above our 86.5 sen expectation, coinciding with the higher earnings.

YoY, 12M18 revenue of RM1.98b (+15%) was achieved thanks to a 22% growth in Malaysian sales. Singaporean sales, however, saw a slight decline (-<1%). The higher proportion of premium brands in the group’s Malaysia portfolio likely contributed to the improved results. On the other hand, its Singapore operation’s full-year performance could have been dragged by stronger ringgit and poorer spending sentiment. However, operating margins only improved slightly at 17.5% (+0.2ppt) as higher marketing spend in Malaysia was offset by the normalising Singapore operation (following a one-off trade adjustments in FY17). Lion Brewery registered a solid associate contribution of RM21.0m (from losses of RM0.2m in FY17), of which RM4.7m was from insurance claims. This suggests the segment is fully optimised post the 2017 flooding in Sri Lanka. 12M18 core PATAMI closed at RM272.5m (+14%).

QoQ, 4Q18 sales of RM525.7m (+31%) was better due to seasonal yearend festive strengths while greater marketing spends in conjunction likely caused operating margins to dip to 16.0% (-0.9ppt), translating to operating profit growth of 1%. Core PATAMI for 4Q18 registered at RM67.4m (+4%) on the back of higher associate gains.

Chance for further growth? Locally, on-trade sales could continue to be supported by the growing presence of premium products with more sticky demand, amidst post SST prices. Less premium segments could continue to lean towards the off-trade markets (i.e. retails, supermarkets). Rising commodity prices (i.e. malt, barley) could dent future profitability but could be buffered by the better product mix. The Singapore market may continue to see challenges by way of the recently signed European Free Trade Agreement which removes import duties into the country, possibly leading to an influx of foreign competition. Sri Lanka’s operation appears to demonstrate stable results, mainly on Lion Brewery’s dominant market share in the country (i.e. c.80%). However, the low market growth may suggest less exciting earnings outlook from here.

Post-results, we slightly raise our FY19E CNP by 1.8% as better Malaysian sales are offset by lower expectations from Singapore. Additionally, we introduce our FY20E numbers.

Maintain UNDERPERFORM but with a higher target price of RM18.00 (from RM17.70, 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. Valuations at present (of 23x PER) could be stretched as the recent rally may not have factored in the less aggressive earnings growth outlook for the group.

Source: Kenanga Research - 15 Feb 2019