Kenanga Research & Investment

Carlsberg Brewery Malaysia - Rising Costs Begin to Bite

Publish date: Mon, 14 Nov 2022, 09:11 AM

CARLSBG’s 9MFY22 results came in within our, but above consensus, expectation. Its earnings continued to benefit from the reopening of the economy as sales volume continued to increase. However, margins deteriorated in 3QFY22, dented by rising costs and inflationary pressure. Post results, we fine tune our FY22 earnings forecast upwards by 2% but maintain our FY23 earnings. Maintain MARKET PERFORM with an unchanged TP of RM23.05.

Beat market forecasts. 9MFY22 core net profit (CNP) broadly met our expectation but beat consensus forecasts, accounting for 77%/80% of full year earnings, respectively, after adjusting for unrealised forex losses. The declared interim dividend of 19.0 sen brings the total up to 63.0 sen, in line with our full-year estimate of 106.0 sen as we expect the group to continue to pay interim dividends.

YoY, 9MFY22 revenue grew 46.3% as sales volume continued to benefit from the reopening of the economy. In terms of segmental performance, Malaysia lead the growth as revenue grew 59.7% YoY in the region following the recovery of on-trade sales. Singapore revenue also grew 19.6% YoY as COVID restrictions continued to ease. Contributions from its Sri Lankan associate, Lion Brewery (Ceylon) PLC, also grew 56.7% (after accounting for the one-time surcharge tax) as the region saw a similar recovery in consumption despite the ongoing economic crisis. Additionally, revenue also benefitted from the price increase on 1 June 2022.

Overall, its earnings grew 88.6% following the sharp increase in sales volume. While Cukai Makmur did bite into its earnings, the group continued to benefit from better economies of scale as it saw improved sales volume across its major operating segments.

QoQ, 3QFY22 revenue remained flat (-0.5%), as a decline in sales volume was cushioned by the price hike. Its EBITDA fell 17.4% due to rising input costs. Overall, its core net profit fell 5.2% as margins contracted across the board due to elevated commodity prices and inflationary pressures.

Outlook. While 9MFY22 performance was encouraging, the group saw the first signs of weakness in 3QFY22 as margins were eroded by elevated commodity prices and inflationary pressures. While raw material prices have come off slightly since the peak during the March-April period, they remain elevated. As such, we expect margin pressures to continue in 4QFY22.

Looking forward to FY23, the growth outlook for the sector seems muted given wider macro-economic factors. The pent-up demand for on-trade channels is expected to ease going into FY23 as the post-pandemic rebound tapers off. On a broader scale, global economic growth is expected to slow as rising interest rates and sustained inflationary pressures eat into consumer spending power.

Forecasts. We fine tune our FY22 forecast upwards by 2% but maintain our FY23 earnings forecasts.

We continue to like CARLSBG for: (i) its relatively resilient products demand amidst rising inflation and dampening consumer sentiment, and (ii) its generous dividend policy and expected dividend yields of c.4.5%. However, we remain wary of margin compression following the rising cost pressure as well as generally slower growth in FY23.

Maintain MARKET PERFORM. We maintain our TP of RM23.05 based on 21x FY23F PER, consistent with the industry’s historical average 1-year forward PER. We also impute a 5% discount based on a 2-star ESG rating as appraised by us (see Page 4). The group has begun to feel the pinch from rising cost pressure on its margins while the outlook remains cloudy. The expected dividend yield of 4.5% is also less enticing in the current rising interest rate environment.

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 the legal market, and (iv) rising input costs.

Source: Kenanga Research - 14 Nov 2022

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