1QFY22 came above our/consensus expectation thanks to the Chinese New Year campaigns in both Malaysia and Singapore which saw 27% and 4% hikes in earnings, respectively. Moving forward, we raise FY22E/FY23E earnings as we anticipate the on-trade channels to recover thanks to economic activities returning to normalcy along with the return of tourism activities. With that, we raise our call to OUTPERFORM with a higher TP of RM28.05.

1QFY22 above expectations. The group registered a PATAMI of RM94.5m which came above our/consensus full-year PATAMI expectation at 37%/36%, respectively. The group declared a dividend of 22.0 sen which came within expectations as we expect the group to continue its quarterly dividend payments.

YoY, revenue grew by 23% to RM653.9m thanks to higher sales volume due to the successful execution of the Chinese New Year (CNY) campaign and the relaxation of Covid-19 restrictions driving sales in both Malaysia (+27%) and Singapore (+14%) operations. With an increase in marketing investments and consumer promotions, the group’s core brands, Carlsberg Danish Pilsner and Carlsberg Smooth Draught, returned to growth. Meanwhile, the group’s associate Lion Brewery recorded a 70% increase in associate contribution to RM6.8m. However, due to the devaluation of Sri Lankan Rupee (Rs.) in 1QFY22, Rs. foreign exchange conversion with Ringgit plunged by 40% resulting in an unrealised foreign exchange loss of RM28.7m. Thus, after adjusting for the unusual unrealised foreign exchange loss, the group’s core net profit rose by 55% to RM94.5m from RM61.1m in 1QFY21.

QoQ, due to the abovementioned reasons, the group’s revenue rose by 21% (Malaysia: +15%, Singapore: +35%) which boosted core PATAMI by 41%.

Better quarters ahead. With Singapore scraping its Covid-19 curbs in 2QFY22 and Malaysia transitioning into the endemic phase whereby businesses such as the hospitality and food and beverages industries are allowed to resume normal operating hours, the easing of Covid-19 restrictions will be key drivers in speeding up the group’s earnings. Moreover, with entertainment outlets in Malaysia operating effective 15 May 2022, this should further help the group recover revenue from their on-trade channels which previously contributed an estimated two-third to the group sales. Moreover, major sporting events this year such as FIFA World Cup, Asian Games and more should further spur the growth in on-trade channels. Lastly, the current economic crisis in Sri Lanka may result in lower associate contribution moving forward. However, their contribution to group profit before tax (PBT) is immaterial at c.5%.

Post results, we raise our FY22E/FY23E earnings by 12%/15% to account for higher sales from its on-trade channels.

Upgrade to OUTPERFORM from MARKET PERFORM with a higher TP of RM28.05 (from RM23.10) based on FY23E PER of 26.0x (slightly below 0.25SD of its 5-year mean). While escalating commodity prices may raise costs pressure which may be passed on to consumers, we believe due to the inelastic nature of beer demand, this may not be exceedingly disruptive to earnings. With unchanged excise duties on beers and reopening of the economy and tourism sector, we are optimistic of the group’s outlook.

Risks to our call include: (i) weaker-than-expected sales volume, and (ii) higher-than-expected operating expenses.

Source: Kenanga Research - 25 May 2022