CARLSBG’s 1QFY23 results met expectations. Its top line held up but higher marketing spend clawed into its bottom line. Looking forward, it remains wary of the impact of macroeconomic headwinds on consumer spending. We fine-tune down our FY23F and FY24F earnings by 1% and 3%, respectively, but tweak our TP up by 2% to RM23.50 (from RM23.05) as we roll over our valuation base year. Maintain MARKET PERFORM.10 May 2023

Within expectations. 1QFY23 core net profit met expectations, accounting for 25% of both our full-year forecast and the full-year consensus estimate. The declared dividend of 21.0 sen is also broadly within expectation as the group normally pays a larger dividend during the 4Q.

YoY, 1QFY23 revenue inched up 1% as the negative impact on its sales volume due to an early Chinese New Year was cushioned by higher selling prices following a price hike in Jul 2022. Malaysian sales made up the majority of the growth as revenue increased 3.3% in the region whereas Singapore revenue actually contracted by 4.4%. However, the group’s EBITDA contracted 2.5% as it raised its marketing spend to a more normalised level on economy reopening. Contributions from its Sri Lankan Associate, Lion Brewery (Ceylon) PLC, also fell, by 52%, due to the devaluation of the Sri Lankan Rupee against the MYR.

Overall, core earnings fell by 6.3% as the higher costs and lower associate gains clawed into the bottom line. While the price hike was largely effective in defending the group’s top line, margins contracted as marketing spend normalised on economy reopening.

QoQ, 1QFY23 revenue only increased by 8%, similarly, due to an early Chinese New Year (a year ago, in the absence of an early Chinese New Year, 1QFY22 revenue jumped 21% QoQ). EBITDA and core net profit grew by 27% and 34%, respectively, from a low base in the preceding quarter due to impairments.

Outlook. The outlook for FY23 continues to be mixed for the group remaining wary of macroeconomic pressure on consumption as it has already seen a minor drop in sales volume. While the price hike managed to offset the volume drop in 1QFY23, sustained inflationary pressure could dent consumer spending power and results in lower sales volume going forward. The group also foresees rising costs stemming from raw material and extended supply chain disruptions as a potential headwind. On a brighter note, the return of tourists and international travel, recovering from the pandemic lows, is expected to be positive for the group. Incoming tourists should bolster consumption slightly which may partially offset the drop in local sales.

Forecasts. We fine-tune down our FY23F and FY24F earnings by 1% and 3%, respectively, as we impute slightly lower sales volumes. We continue to like CARLSBG for: (i) the relatively resilient demand for its products amidst an inflationary and dampened consumer sentiment environment, and (ii) its generous dividend policy with 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. The expected dividend yield of 4.6% is also less enticing under the current high interest rate environment.

Maintain MARKET PERFORM. We raise our TP by 2% to RM23.50 as we roll over our valuation basis to FY24, applying a slightly lower FY24F PER of 20x (vs 21x previously) which is consistent with the industries historical 1-year forward average. We also impute a 5% discount based on a 2-star ESG rating as appraised by us (see Page 4). Risks to our call include: (i) more restrictions on the sales of alcoholic products, (ii) higher taxes on alcoholic products, (iii) illicit trade cannibalising the legal market, and (iv) rising input costs.

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

Source: Kenanga Research - 10 May 2023