We are downgrading GAB and Carlsberg to NEUTRALs from BUYs following their share price rally by 13.0% and 16.3% respectively over a span of seven weeks. Industry prospects remain benign while their corporate governance practices are exemplary although dividend yields are at historic lows. All said, GAB and Carlsberg’s yield premium over 10-year MGS has narrowed to 1.1ppt. With no BUYs within the sector, we downgrade Breweries from OVERWEIGHT to NEUTRAL.

Right call on Breweries. Within the consumer sin sector, we like breweries for their resilient and stable demand, strong cash flow and good corporate governance, which are very attractive qualities amid uncertain global economic conditions. Since early 2012, the brewers have been outperforming the FBM KLCI index, with their share prices rising by as much as 38.8% and 70.7% respectively for GAB and Carlsberg. In the meantime, the index has appreciated by a smaller 10.7% to its all-time high in January 2013.

Industry prospects still benign. We believe the steady volume growth and an improving product mix will continue to drive GAB and Carlsberg’s earnings. The brewers are likely to continue to see improving ASPs and wider margins, thanks to strengthening premium beer sales. Of late, however, the industry has been seeing softening volume growth, possibly driven by: i) the recent evening showers, which have affected on-trade sales, and ii) increased spending consciousness ahead of the general election. Consumers may be holding on to their wallets in anticipation of policies that may lead to lower disposable income, e.g. the introduction of the goods & services tax and a potential cut in petrol subsidy.

Slimmer dividends in store. The yields of both brewers have thinned following their recent share price appreciation. GAB’s dividend yield has fallen below 4.0%, with its current 3.7% yield being its lowest since the turn of the millennium – at 2.8ppt lower than the counter’s last nine-year average of 6.5%. The share’s yield premium above that of Malaysian 10-year Government bonds has also narrowed to 0.2ppt from the average 2.4ppt. Meanwhile, Carlsberg’s dividend yield of 4.6% remains decent but is at its lowest since early-2010, at 1.2ppt below its nine-year average of 5.8%. The counter’s yield spread above that of 10-year Government bonds benchmark has compressed to 1.1ppt from a nine-year historical average of 1.7ppt.

Source: RHB