While we still like the group for its premiumisation story and persistent yield of c.3%, its recent stock price rally may be overdone. Unlike many other consumer/hospitality related stocks which fell sharply on the recent Covid-19 outbreak (likely to dampen its 1QFY20), CARLSBG has surprisingly bucked this falling trend. It is all the more reason why we are advocating a “sell-on-strength” strategy, capitalizing gains on this rally. Downgrade to UP with a lower TP of RM29.00 following an earnings revision.

Missed expectations. FY19 Core Net Profit (CNP) of RM294.0m (arrived at after stripping off one-off insurance claim and impairment loss) came in below expectations at 95%/97% of our and consensus’ forecasts. We believe the shortfall is largely owed to higher-thanexpected operating expenses, possibly due to higher marketing spends for the Chinese New Year promotions in 4QFY19. A declared dividend of 45.4 sen (full year: 100.0 sen) is well within expectations.

A stronger year overall. YoY, FY19 CNP rose 8% on the back of robust sales momentum observed in both Malaysia (+16%) and Singapore (+9%). The sustained momentum is anchored by the group’s stable core brands – Carlsberg Smooth Draught and Calrsberg Danish Pilsner, on top of its persistent premiumisation efforts with premium brands such as Kronenbourg 1664 Blanc and Connor’s Stout registering double-digit growth momentum. This was, however, slightly shadowed by a contraction in EBIT margin (-0.9ppt), which we opine could be due to higher marketing activations. Meanwhile, the group’s associate Lion Brewery registered an associate contribution of RM19.3m (after adjusting for RM3.0m one-off impairment loss) which slid 8%, likely dragged by a lackluster consumer sentiment.

QoQ, 4QFY19 recorded revenue of RM573.9m (+6%) leading CNP (+4%) to close at RM72.0m. The better results were led similarly by the foresaid reasons.

Near-term outlook clouded by Covid-19. Moving forward, the group persists to be well-poised 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 combat the illicit beer seem to be effective. Nonetheless, we are bracing for a potentially weaker 1QFY20 as the recent Covid-19 outbreak has greatly impacted the tourism industry in both Malaysia and Singapore, hence exerting pressure on beer demand. While the management remains confident on the group’s sturdy fundamentals and ability to weather through this storm, it is highlighted that a prolonged threat from the Covid-19 outbreak could be detrimental to the group’s earnings prospects.

Post-results, we cut our FY20E earnings by 3% and introduce new FY21E numbers as we impute more conservative volume growth for both Malaysia and Singapore as well as higher cost assumptions.

Downgrade to UNDERPERFORM with a lower TP of RM29.00 (from RM30.00), following an earnings revision with an unchanged FY20E PER of 27.0x (in-line with +2DS 3-year mean). Since our last issued report on 27 Nov 2019 with an OUTPERFORM call and TP of RM30.00, the stock has risen c.44% following its inclusion into the MSCI Global Standard Index. While we still like the group for its premiumisation growth prospects and consistent yield of c.3%, we believe its recent stock price rally could have been overdone. Hence, we are ascribing a tactical 'UNDERPERFORM' call, advocating a 'take-profit' or 'sell-onstrength' strategy to realise gains from this recent rally. Risks to our call include: (i) higher-than-expected sales volume, and (ii) lower-thanexpected operating expenses

Source: Kenanga Research - 24 Feb 2020