Fair Value : RM12.40 | Recom : Market Perform

Focusing on premium segment for growth. Carlsberg is keeping up its effort to grow its premium beer segment, which will be driven by its premium brands, Asahi and Kronenbourg 1664. As Carlsberg is aware of the volume growth constraint domestically, it is skewing its product mix towards the premium segment to grow its revenue and to improve its margins. The price point of a premium beer is typically 15% higher than a mainstream beer such as Carlsberg Green Label. The group is aiming for a 20% market share of the premium beer market by FY12-13 and is targeting the premium segment to account for 20% of its total revenue.

Asahi and Kronenbourg 1664 well accepted. Carlsberg’s two locallyproduced premium brands, Asahi and Kronenbourg 1664, have been progressing well in FY12. YTD performance of both brands has exceeded Carlsberg’s internal targets. In particular, Asahi made significant inroads with >4,000 distribution points and achieved brand awareness of >40%.

No excise duty increase in 2013 budget but lingering concern on potential excise tax hike after general election. No excise duty increase in the 2013 budget will provide short-term relief for stocks such as Carlsberg. Nevertheless, there is a lingering concern that an off-budget hike in excise duty may be in the works after the general election and may weigh on Carlsberg’s share price nearer the general election date.

Around 50% of raw material needs secured for FY13. Carlsberg has fully secured its raw material requirements for FY12 but has only secured around 50% of its raw material needs for FY13. While it may add volatility to its FY13 margin, we believe it may not necessarily be negative as its key raw material prices are stabilising or weakening in recent weeks. A considerable portion of Carlsberg’s raw material (e.g. malted barley and hop) procurement is made at global group level for economies of scale.

Forecasts. Our forecasts are largely unchanged.

Risks. Key investment risks include: 1) possibility of excise duty hike after the general election; 2) weaker-than-expected growth in TIV; 3) decline in Carlsberg’s market share; and 4) sharp increase in raw material prices may erode margin.

Investment case. We maintain our Market Perform call on the stock with an unchanged DCF-derived fair value of RM12.40 based on a WACC of 8.2%. While we remain positive on Carlsberg’s push into the premium segment, we are neutral on the group as we believe it is currently traded at stretched valuation. It is traded at 18.1x of FY13 EPS which is at the high-end of its historical forward PER trading range.

Source: RHB Research - 9 Oct 2012