We feel cautiously optimistic on the group’s outlook, premised on its attractive premium brands portfolio driven by their growing popularity in addition to more counteractive measures against contrabands. However, better performance locally could be undermined by challenges in other segments (i.e. Singapore). Maintain MP but raise our TP to RM23.95 (from RM23.00) on a higher applied valuation (24.0x FY20E PER), slightly above HEIM (which is pegged at 23x).

Premiumization to drive growth. Apart from growing its mainstream products (i.e. Carlsberg beers), the group is also committed to building its premium brands portfolio (Asahi, Connor’s, 1664 Blanc and Somersby), which saw a commendable volume growth of 20% in FY18 (versus mainstream brands’ growth of 12%). Albeit selling at lower volumes, the encouraging growth level is also on the back of higher selling prices, which fetch a higher profit. That said, we believe that premiumization may be the key drivers for both Malaysia and Singapore operations going forward, as the group continues to gain footing with its premium offerings, by tapping on the growing trends, hosting sampling events as well as targeted marketing to specific demographics.

Legal volume to recover? We note that contraband beer remains as one of the key challenges for the group with it taking up c.20-25% of West Malaysia’s market share, likely driven by the pricing disparity. On a more positive note, the government’s intensified efforts to clamp down the illegal beer market may be slowly bearing fruits, premised on the increased numbers of raids by customs and related authority to clamp down illegal alcohol sellers. Additionally, public awareness on the risks of consuming illegal alcoholic beverages could be more ubiquitous with the rise of methanol poisoning cases reported this year. With these factors looking to impede the supply and demand for contrabands, the business environment for brewers may be more conducive as consumers could migrate back to the legal market.

Buoyed by sticky demand. While several price hikes occurred with the reintroduction of SST in Sept 2018 and the cost-pass through in April 2019, we believe that there could be little impact towards overall consumer demand, stemmed by its inelastic nature. Meanwhile, we deem a further hike in excise duty to be unlikely going forward, as this could worsen the illicit trade market situation of alcoholic beverages which the government is trying to curb. On the other hand, its Singapore market is poised to remain challenging in anticipation of the introduction of European Free Trade Agreement earliest in 4Q19; which could likely shift demand towards cheaper imports from Europe. This could threaten the group’s market share there, anticipated to be at c.30%.

Maintain MARKET PERFORM with a higher target price of RM23.95 (from RM23.00, previously) as we ascribed a PER of 24x (in-line with +1.5 S.D. 3-year mean). At this juncture, we deem our valuations to be fair as we value CARLSBG at a slight premium against its peer HEIM despite the latters’ market leader position in Malaysia, as we take comfort in CARLSBG’s defensive earnings nature amidst improving operating environment, which is supported by a decent dividend yield of c.4.0%. Furthermore, we also note that for the past three years, CARLSBG has been gaining market share (from 37% to 41%) at the expense of HEIM’s declining market share (from 63% to 59%).

Risks to our call include: (i) higher/lower-than-expected legal market volume, and (ii) stronger/weaker demand for premium products.

Source: Kenanga Research - 10 Jul 2019