FY19 CNP of RM313.0m (+11%) missed our expectation. While we are of the view that the group’s sales growth will be sustained by its sturdy core brands and new launches moving forward, we are cautious over the Covid-19 outbreak which has dampened tourism and leisure activities. Following the recent stock price rally which bucked the falling trend of many Covid-19 affected consumer/hospitality related stocks, we now close our position and downgrade the stock to MARKET PERFORM with a revised TP of RM28.90.

Missed expectations. FY19 net profit of RM313.0m came in below expectations at 91% and 96% of our and consensus’ forecasts, respectively. We believe the shortfall is largely attributed to weakerthan-expected sales volume coupled with higher-than-expected marketing spends in 4QFY19. Nonetheless, a declared dividend of 66.0 sen, (full-year pay-out: 108.0 sen) exceeded our FY19 expectation of 95.0 sen.

More commercial spending. YoY, FY19 earnings rose 11%, largely riding on the back of robust sales growth (+14%) across all brands and new product launches (i.e. Heineken 0.0 and Tiger Crystal). However, EBIT margin contracted by 1.0ppt, which we believe was due to higher commercial spending. For the individual quarter of 4QFY19, net profit of RM91.2m registered a 9% drop YoY as higher revenue (+3%) was overshadowed by higher marketing spends for new product launches as well as Chinese New Year CNY) promotions. This led to a 4.2ppt contraction in EBIT margin to 17.8%.

QoQ, while sales growth continued to record a commendable 13% growth on sustained momentum for its core brands and new launches, higher marketing activations for CNY promos dragged net profit down by 12%. Similarly, this pressured a 4.9ppt contraction in EBIT margin.

Possible hit from Covid-19? Recap that due to rising costs, the group has announced price hikes of 5-7% for its portfolio of products effective March 2020. Nonetheless, we believe that this will not be overly disruptive to overall demand as beer demand has proven to be rather inelastic, as evidenced by minimal impact observed from prior price hikes. That said, we are of the view that the group’s sales growth will be sustained by its sturdy core brands as well as exciting new launches moving forward. While the group has highlighted that the CNY buying momentum will persist into 1QFY20, we are cautious over the recent Covid-19 outbreak which has dampened tourism and leisure activities and possibly the demand for beer too.

Post-results, we nudged our FY20E earnings by 1% to account for the foresaid price hikes and higher cost assumptions while also introducing new FY21E numbers.

Downgrade to MARKET PERFORM with higher TP of RM28.90 (from RM28.60) following an earning bump with an unchanged 24.0x FY20E PER (in-line with +1SD over its 3-year mean). While we like the name for its market leader position coupled with an improving operating environment on the effective clamp down of illicit beer, we are nonetheless cautious over its near-term outlook being dampened by the Covid-19 outbreak. While we believe the impact of the outbreak will be short-lived, the recent stock price run-up which exceeded our previous TP of RM28.60, prompts us to close our position and downgrade the stock to MARKET PERFORM. Risks to our call include: (i) strongerthan-expected sales volume, and (ii) lower-than-expected operating expenses.

Source: Kenanga Research - 24 Feb 2020