9MFY19 earnings of RM222.0m (+8.3%) exceeded our expectation at 75% as we expect a seasonally stronger 4QFY19. Post-results, we upped our FY19E/FY20E earnings upwards by 5.1%/4.6% on better non-Malaysian operations, raising TP to RM30.00 (from RM28.70). Maintain OP as we like the group for its rosy premiumisation growth story which yields 5-year earnings CAGR of 9% in FY20E against HEIM’s 5%. Dividend yield of c.4.0% is also decent.

Above expectation. CARLSBG’s 9MFY19 Core Net Profit (CNP) of RM222.0m came in slightly above our expectation at 75% of our forecast, but within consensus’ at 73%, as we expect 4QFY19 to be a seasonally stronger quarter on the back of CNY-led forward buying activities. The positive deviation is largely attributed to stronger-than- expected performance from its Singapore operation and Sri Lanka associate. A declared dividend of 17.0 sen (YTD: 54.6 sen) is deemed to be within expectations.

Better results overall. YoY. 9MFY19 CNP recorded an 8.3% jump, largely driven by robust sales momentum in both Malaysia (+19%) and Singapore (+7%). We believe the momentum was boosted by the group’s premiumisation efforts on top of its stable growing core beer segment, with its premium brands such as 1664 Blanc and Connor’s registering steady growth. Notably, we noticed a contraction in EBIT margin of 1.3ppt to 16.8%, which we opine could be due to higher marketing spends. Meanwhile, the group’s associate Lion Brewery continued to provide solid associate contribution of RM14.7m which grew 46% (from RM10.0m in 9MFY18, after stripping off one-off insurance gains of RM4.7m) post-recovery from a flooding incident in 2017.

For the individual quarter of 3QFY19, CNP rose 6% QoQ to close at RM69.2m, similarly led by inspiring sales growth in Malaysia (+15%) and Singapore (+8%).

Drink and be merry. Here forth, we reiterate our upbeat outlook as we believe the group is well-positioned to tap onto the growing trend for premium beers, which should translate into greater market share and volume growth. This is on top of an improved operating environment as authorities’ efforts to curb illicit beer seem to be working, with illicit market share thought to have contracted from c.30-35% to c.25-30%. While we are expecting its Singapore operation to remain sturdy on the back of stable sales momentum and favorable forex, the introduction of the EU Free Trade in 4QFY19 could exert some pressure on demand.

Post-results, we bumped our FY19E/FY20E earnings upwards by 5.1%/4.6% as we impute more generous growth for its Singapore operation and Sri Lanka associate.

Maintain OUTPERFORM with a higher target price of RM30.00 (from RM28.70) with an unchanged FY20E PER of 27.0x (in-line with +2SD 3-year mean). All-in, we continue to like CARLSBG for: (i) its premiumisation growth story which yields a 5-year 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% offering 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 - 27 Nov 2019