1H19 earnings of RM152.9m (+13%) and interim dividend of 16.1 sen are within expectations. Going forward, we believe the group’s earnings defensive nature can be further bolstered by its growing premium beer portfolio. In addition to the group’s stable growth trajectory, a decent dividend yield of c.4% is also deemed to be attractive in the present market uncertainties. That said, we upgrade our call to OP with higher TP of RM25.95, based on FY20E PER of 26.0x.

Within expectations. CARLSBG recorded 1H19 core net profit of RM152.9m, coming in within our/consensus forecasts at 52%/51%, respectively. Dividend of 16.1 sen per share (YTD: 37.6 sen per share) is also deemed within expectations.

Better results YoY. 1H19 core net profit jumped 13%, largely led by: (i) stronger sales in both Malaysia and Singapore, underpinned by robust growth momentum for its premium segment (+22% volume growth), coupled with (ii) more efficient A&P spending in Singapore which kept its margin fairly stable at (1H19’s 15.1% versus 1H18’s 14.5%). Meanwhile, post-recovery from its flooding incident in 2017, the group’s associate Lion Brewery’s 1H19 earnings have normalised and registered at RM9.36m (from RM6.26m in 1H18, after stripping of oneoff insurance gains of RM4.7m).

For 2Q19, core net profit rose 2.2% YoY to RM65.3m, similarly due to the aforementioned reasons as the group’s attractive premium portfolio continued to drive growth on top of the group’s stable growing core beer. Sequentially, 2Q19 core net profit dipped 25.5% QoQ with 1Q19 being a seasonally stronger quarter on robust CNY sales.

“Premiumisation” to add fizz. Moving forward, we believe that earnings will be largely driven by continuous premiumisation as the group’s attractive premium beer portfolio continues to gain footing by tapping into the shifting consumer palate. Plus, the demand for beer remains inelastic, as we note that the previous price hikes from SST and cost-pass through adjustments had little impact towards overall consumer demand. We also find comfort in a potential improvement in operating environment going forward as we deem a further excise duty hike to be unlikely as this could worsen the illicit trade market situation of alcoholic beverages which the government is trying to curb. All-in, the group’s defensive earnings nature is further backed by rosy growth trajectory for its premium beer portfolio, added to by its decent yield of c.4%, which could provide some comfort in the midst of current market uncertainties.

Upgrade to OUTPERFORM with a higher target price of RM25.95 (from RM23.95) as we ascribed a higher PER of 26.0x (in-line with +2SD 3-year mean, from 24.0x). Post-results, we made no changes to our earnings assumption. At this juncture, we deem our valuations to be fair as we value CARLSBG at a premium against its peer HEIM despite the latter’s’ market leader position in Malaysia. While both operate in a defensive business environment with healthy dividend returns, we note a shift in market share between the brewers. 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%) based on our back of the envelope calculations.

Risks to our call include: (i) Lower-than-expected legal market volume, and (ii) weaker demand for premium products

Source: Kenanga Research - 16 Aug 2019