We came away from a meeting with management feeling sanguine on the group’s outlook, banking on its: (i) on-going premiumisation growth story, yielding 5-year FY20E CAGR of 9% versus HEIM’s 5%, (ii) gain in market share over HEIM, coupled with (iii) stable dividend yield of c.4% which could offer some degree of defence amidst the current market uncertainty. Reiterated OP with higher TP of RM28.70 (from RM27.15) post-earnings upgrade.

Premiumisation to spur growth. Post-meeting, we felt reassured on management’s positive tone on its growing premium portfolio. The segment sustained double-digit volume growth (+22% versus Core Beer Brand’s +5%) in 1H19, which we believe has more potential for greater sales, after having successfully penetrated the market. That said, we believe the group is well-positioned to tap onto the growing trend for premiumisation which will translate into bigger market share and volume growth. Notably, the group prides themselves with its fastest growing premium brand, 1664 Blanc (1H19 volume growth of 55%), thanks to its unique taste and the lack of direct peer in the market, which should continue to serve as a key driver for the premium segment moving forward.

Stabilising regional stakes. Meanwhile, we also take comfort in the group’s steady Singapore operation (historically taking up c.30% of the group’s total operating profit). This is premised on: (i) a more favourable forex translation, (ii) relatively stable demand, coupled with (iii) the delay of the EU Free Trade Agreement to 1Q20 which should ease foreign competition, at least for this year. On the other hand, its Sri Lanka associate which is the market leader in its region (control c.80% of the local market share) has also seen stabilising numbers post-recovery from its flood incident in FY16. However, we wish to highlight that the aftermath of the terrorist attack earlier in Sri Lanka may still affect domestic spending there, hence possibly dampening the performance for the year.

Setting the scene. Going forward, the group is also poised to benefit from a potentially improved operating environment mainly in East Malaysia (from previous c.30-35% to c.25-30%), as authorities appear more effective in clamping down contraband beer. This will most likely divert demand back to the legal market, thus benefitting the brewers. On top of that, we are also of the view that further excise duty hike in the upcoming Budget 2020 is unlikely, as this would only worsen the illicit trade market situation.

Post meeting, we tweaked our FY19-20E earnings upwards by 1.1-5.6% as we pencilled in slightly better volumes for both its Malaysia and Singapore operations.

Reiterate OUTPERFORM with a higher TP of RM28.70 (from RM27.15) as we ascribed an unchanged PER of 27x (in-line with +2SD 3-year mean), but on higher earnings lifted by our firmer earnings assumptions. All-in, we continue to like CARLSBG for: (i) its premiumisation growth story which yields a 5-years earnings CAGR of 9% in FY20E against HEIM’s 5% of the same, (ii) continual gain in market share not just over HEIM but against the illicit market too, coupled with (iii) consistent dividend yield of c.4% which could offer some degree of defence amidst the current market uncertainty.

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

Source: Kenanga Research - 4 Oct 2019