CARLSBG’s FY22 results came in within our expectation but below consensus. Despite benefitting from the economy reopening, its margins took another hit during 4QFY22, partially due to a one-off impairment. It expects FY23 to be somewhat challenging given macroeconomic headwinds. We maintain our FY23F earnings, TP of RM23.05 and MARKET PERFORM call.

Beat market forecasts. FY22 core net profit (adjusted for unrealised forex losses) met our forecast but missed consensus estimate by 10%. The final declared interim dividend of 25.0 sen brings the total up to 88.0 sen, below our expectations of 106.0 sen but broadly in-line with the group’s payout ratio during the pandemic period.

YoY, FY22 revenue grew 36.1%, benefitting from both the recovery of sales volume following the economy reopening as well as the price hike during 3QFY22. In terms of segmental performance, Malaysia revenue growth remained robust throughout the year, increasing 43% as sales volume recovery and stronger premium brands performance bolstered performance. Singapore revenue grew by a softer 21.1% with the lifting of pandemic restrictions and return of festive celebrations. Contributions from its Sri Lankan associate, Lion Brewery (Ceylon) PLC, also grew 41.8% (after accounting for one-time surcharge tax) as sales in the region saw strong recovery despite the geopolitical situation.

Overall, its core earnings grew 57.1%, driven largely by the improved sales volume. The price hike was largely effective in defending margins from the elevated raw material prices as the group has largely returned to pre pandemic levels of profitability.

QoQ, 4QFY22 revenue increased 7.2%, driven by the seasonal uptick in sales volume before Chinese New Year. However, EBITDA fell 14.7% due to an increase in marketing spend as well as one-off impairments amounting to RM9.4m. Overall, net profit fell 8.9%, largely due to the increase in costs.

We attended CARLSBG’s analyst briefing and the key takeaways are as follows:

1. The group foresees FY23 to be challenging given the current macroeconomic situation. It expects headwinds stemming from consumer sentiment being dampened by inflationary pressure and recessionary fears in the near-term. The group also commented that consumption in 2023 so far has been slightly softer, especially post Chinese New Year as evidenced by a minor downtick in on-trade volume.

2. The group did not provide exact guidance on dividend payout ratio but is content with the 85% paid out during FY22. While it declined to comment on whether it would be returning to pre-pandemic levels of near 100% payout, the group did mention that it is evaluating the deployment of its cash reserves across its operations.

3. The group continues to foresee volatility in raw material costs. While its margins have remained relatively intact due to the price hike, prices of raw materials still remain elevated compared to pre-pandemic. As such, the group continues to maintain a higher level of inventory as a hedge against any fluctuations in commodity prices. Conversely, if prices do fall, it will be largely positive as volume has remained broadly stable despite the price hike.

4. It also guided for marketing expenses staying elevated going into FY23 as it ramps up to pre-pandemic levels. The group will continue to push its products and advertising campaigns to capture additional market share in spite of the challenging year ahead.

Forecasts. We maintain our FY23F earnings but reduce our dividend expectations to 100.0 sen from 115.5 sen previously to bring it in-line with the lower payout ratio. We also introduce our FY24 forecasts.

We continue to like CARLSBG for: (i) its relatively resilient products demand amidst rising inflation and dampened 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 an unchanged 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 amidst a cloudy outlook. The expected dividend yield of 4.3% is also less enticing in the current high 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 - 24 Feb 2023