1HFY22 results beat expectations due to a stronger-than-expected rebound in consumption as pandemic restrictions were lifted. We raise our FY22/FY23 net profit forecasts by 11%/7% but cut our TP by 18% to RM23.05 (from RM28.05) to bring our valuations more inline with the sector’s historical average (vs. at a premium previously) as well as to reflect the ESG element. Downgrade to MARKET PERFORM from OUTPERFORM as share price upside has been exhausted, in our view.

Above expectations. CARLSBG’s 1HFY22 core net profit (CNP) of RM171.2m (after adjusting for unrealised forex loss) beat expectations, accounting for 60% of our, and 61% of consensus, full-year estimate. The variance against our forecast came largely from a stronger-than-expected recovery in sales volume as well as market share gain in the group’s premium product offerings. The declared interim dividend of 22.0 sen brings the total dividend for the year to 44.0 sen, in line with our full-year estimate of 103.7 sen as we expect the group to continue paying its quarterly dividend.

YoY, 1HFY22 revenue grew 39.4% on a strong rebound in consumption as pandemic restrictions were lifted. 1HFY22 CNP grew by a stronger 67.3% driven by strong performance from its high-margin premium brands (+41%) coupled with better economies of scale on sharply higher sales, partially offset by a higher effective tax due to Cukai Makmur.

In terms of operating profits by geographical segment, Malaysia surged 90.3%, Singapore jumped 63%, while its Sri Lanka-based associate still rose 23.4% despite the economic crisis and a one time surcharge tax amounting to Rs.1,194m (approximately RM14.8m).

Outlook. In response to elevated operating costs, the group implemented a price increase on its on-trade channels from 1 July 2022. This marks the second price increase in less than a year, with the last increase at November 15th 2021. Historically, demand had been insensitive to price hikes. However, on the back of a broad-based inflation that is eating into the spending power of consumers, we believe the brewery industry may not be spared this time around.

The pending national budget also presents the risk of an increase in excise duty, given that the industry has not seen an increase in the duty since the rebasing of calculations in 2016.

We raise our FY22F/23F earnings by 11%/7%, to reflect the strong 1H performance, the price hikes from 1 Jul 2022 and its market share gain in the premium brand segment, partially offset by a downtick in demand from 2HFY22 and cost pressures. However, we cut our TP by 18% to RM23.05 based on 21x FY23F PER (from RM28.05 based on 26x FY23F PER previously) largely to reflect a higher risk premium on the back of high inflation and to bring our valuations more inline with the sector’s historical forward PER. We also impute a 5% discount to our TP to factor in a 2-star ESG rating as appraised by us (see Page 4). Coupled with a decent performance in share price in recent months which we believe has exhausted its upside, we downgrade the stock to MP from OP.

Risks to our call include: (i) more restrictions on the sales of alcoholic products; (ii) higher taxes on alcoholic products; (iii) illicit trade eating into legalised market; and (iv) rising input costs.

Source: Kenanga Research - 21 Aug 2022