9MFY20 CNP of RM107.2m (-52% YoY) missed expectations on worse-than-expected Covid-19 disruptions. However, we believe the current weakness could be an opportune time to build position in the group, which has displayed a pre- Covid-19 track record of inelastic beer demand and generous dividend pay-out. Maintain OP with higher TP of RM23.55 on upgraded valuations to reflect more assured recovery in FY21.

9MFY20 disappointed. 9MFY20 Core Net Profit (CNP) of RM107.2m (after stripping off one-off custom bill of demand of RM7.2m) missed expectations at 60% and 59% of our and consensus’ forecasts, respectively. This is despite the upcoming 4Q being a seasonally stronger quarter (takes up c.33% of full-year earnings) backed by festive buying. The negative deviation could be largely owed to slower- than-expected recovery post lockdown as on-trade channels remain disrupted amidst the resurgence of Covid-19 cases. The absence of dividend is expected.

Overall weaker set of results. YoY, 9MFY20 revenue slipped 24%, attributable to: (i) decline in beer volume led by the suspension of brewery operations during MCO, as well as (ii) disrupted on-trade channels as restaurants and coffee shops’ businesses remained slow since the start of the pandemic while pubs and entertainment outlets (without restaurant licenses) are still not allowed to operate. Despite the group’s effort to streamline its cost base for FY20 (i.e. more prudent commercial and marketing spends), the decline in the top-line outpaced that of fixed costs, leading to a steeper dive in earnings of 52%.

Sharp sequential rebound. QoQ, 3QFY20 revenue rose 87% on the back of the swift recovery in beer volume, as consumers began to return to on-trade channels following the easing of movement restrictions. As a result of that, the group swung back into CNP of RM61.3m (versus 2Q CNL of RM11.0m).

Look beyond the near-term headwinds. We highlight the possibility for a softer 4Q ahead as profitability is likely to be plagued by weaker beer demand (especially from the on-trade channels) amid the stricter SOPs imposed to contain the resurgence of local Covid-19 cases. That said, we believe that investors should look beyond the near-term weakness, and instead focus on the prospect of earnings recovery which is looking much brighter given recent vaccine developments, which could eventually result in full re-opening of on-trade channels and the uplift of travel restrictions upon successful local and global deployment.

Post-results, we cut FY20E/FY21E earnings by 20.2% and 9.7%, respectively, by pencilling in more realistic recovery assumptions. Given the current circumstances, we opted for a more conservative stance for our forecast dividend pay-out by maintaining FY20E dividend payment at 20.0 sen and FY21 to 90.0 sen.

Maintain OUTPERFORM with higher TP of RM23.55 (from RM22.95), premised on an upgraded FY21E 25.0x PER (from 22.0x previously). The ascribed PER is closely in-line with its 3-year mean and to reflect more assured recovery and forward earnings momentum in FY21. Given its pre-Covid-19 track record of inelastic beer demand and generous dividend pay-out, the stock could be viewed as a strong candidate for “recovery plays”. Risks to our call include: (i) weaker- than-expected sales volume, and (ii) higher-than-expected operating expenses.

Source: Kenanga Research - 27 Nov 2020