We  are  downgrading  CAB  to  SELL,  with  a  lower  MYR11.31  FV  (from MYR13.32)  given: i) its rich valuations, ii) slowing MLM volume growth, and  iii)  a  possible  hike  in  beer  excise  duty.  We  believe  that  as  bond yields  rise,  companies  that  pay  high  dividends  despite  limited  growth should not  be trading  at high P/Es. Note that the stock is trading at +1 SD above its five-year historical mean.

- Volume slows.  Going forward, we think that malt liquor market (MLM) volume  growth may normalise, slowing to  around  2-3%.  The slowdown may  be  further  aggravated  by  a  ramp-up  of  Government’s  subsidy rationalisation efforts, the possible implementation of goods and services tax (GST), as well as a potential hike in excise duty on beer.

- More to lose.  We  reckon  CAB may be challenged by the events above due to greater exposure to modern on-trade channels, which are mainly patronised  by  price-sensitive  social  drinkers.  While  its  Singapore operation  provides  some  earnings  diversification,  it  is  facing  intense competition from imported beer.

- Forecasts  and  risks.  We  lower  our  CY13-14  industry  MLM  volume growth assumption to 1% (from 4%), while retaining  CAB’s market share target at 40%. Accordingly, we cut our FY13-14 net profit forecasts by 2-4%. The key risks to our forecasts are: i) an excise duty hike, ii) stronger sales volume, and iii) lower-than-expected raw and packaging materials costs.

- Investment  case.  We  are  raising  CAB’s  WACC  assumption  to  8.1% from  7.6%  after  lifting  our beta assumption to 0.9  from  0.79. This is to better reflect  its  recent price performance and  a  higher systematic risk moving forward. We now value  CAB  at  a lower  MYR11.31  FV  (WACC: 8.1%, TG: 2.5%) from MYR13.32, based on FCFF valuation. Given rising bond yields, we think that companies that dish out high dividends despite limited  growth  opportunities  do  not  deserve  to  trade  at  such  high  P/E valuations. We downgrade our call on the stock to SELL from Neutral.

Source: RHB