1Q19 earnings of RM87.6m (+15%) and interim dividend of 21.5 sen declared are within estimates. Going forward, we anticipate a more sustainable local market to buffer against potential weakness in Singapore and possibly flattish associate contributions going forward. Upgrade to MARKET PERFORM with a higher TP of RM23.00 (from RM21.80) as we roll over our valuation base year to FY20E.

1Q19 within. 1Q19 core PATAMI of RM87.6m is within our/consensus expectations, making up 30% of respective full-year estimates, on the back of Chinese New Year (CNY) seasonality. An interim dividend of 21.5 sen is also deemed within expectations.

YoY, 3M19 revenue of RM659.9m (+20%) was supported by growth in both Malaysia (+24%) and Singapore (+11%) sales. Local numbers were partially driven by higher post-SST prices in addition to better demand for premium offerings. Meanwhile, Singapore enjoyed stronger sales returns from its CNY marketing efforts. However, operating profits only improved by 11%, as group margin of 16.9% (-1.4ppt) was dented by higher commercial-related investments in Malaysia. The group’s associate Lion Brewery drew earnings contributions of RM4.7m. As 3M18’s associate gains of RM5.6m included a one-off insurance settlement of RM4.7m in relation to a past flood in Sri Lanka, Lion Brewery’s contributions essentially expanded by +500%. Adjusting for this abovementioned settlement, 1Q19 core earnings for the group registered at RM87.6m (+15%).

QoQ, 1Q19 sales increased by 26% against 4Q18, attributed by the stronger festive spending in 1Q19. However, while Malaysia saw a strong 61% operating profit growth in Malaysia, Singapore experienced a 29% decline, possibly dragged by heavier marketing spend to stimulate the softer spending. Overall, this translated to 1Q19 core PATAMI growth of 30%.

Banking on the local market to drive growth. We anticipate that the Singapore market could be challenged by slowing market demand and threats in the medium term from the signing of the European Free Trade Agreement. In addition, we opine that there could be few expansionary opportunities from its Sri Lankan associates, given their already dominant position (c.80%) in a limited growth market. Hence, we believe the group would need to tap into the resilient demand from the Malaysian market to support earnings. Sticky demand appears to have softened any adverse impact from the higher SST-driven prices. Further, a higher premium brand mix could also serve as a means to garner a stronger niche-following as opposed to less premium products.

Post-results, we tweak our FY19E CNP by +0.5% as we incorporate FY18 annual audited numbers and expense breakdown.

Upgrade to MARKET PERFORM with a higher TP of RM23.00 (from RM21.80, previously). We roll over our valuation base year to FY20E against an unchanged 23.0x PER (in line with our ascribed valuations to HEIM), in line with its +1.0SD over 3-year mean. At this moment, we believe that valuations could be stretched, given the mixed outlook above. Sentiment for the stock could have been driven by previously strong earnings delivery, which we believe should still sustain given its resiliency and defensiveness. However, we believe that valuations should be capped against HEIM, given its larger domestic market share (60%) which is CARLSBG’s key avenue of growth in the near term.

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

Source: Kenanga Research - 17 May 2019