We revise downwards  Guinness’  FY14/15 earnings estimates  by 8%/5% after cutting our MLM volume forecast. The company’s 2QFY14 results are due for release on 20 Feb and we expect a weak y-o-y performance on  soft  beer  demand  but  there  should  be  improvements  q-o-q  given historical seasonality in October-December.  We reiterate our  SELL call with a new FCFF-based MYR13.49 FV (from MYR15.19).

• Expecting  a  5%  drop  in  beer  sales  in  FY14.  We  think  2014’s  beer consumption  may  experience  a  sharper  slowdown  instead  of  the  +1% projection  we  expected  earlier.  Thus,  we  cut  our  malt  liquor  market (MLM)  volume  growth  estimates  to  -5%  but  retain  our  +1%  FY15 forecast. We think consumers will  adjust  to the higher cost of living by next year and will begin spending more on discretionary items again.
• Forecasts  and  risks.  After  cutting  our  MLM  volume  assumption  while retaining Guinness’ market share target at 60%, we lower our FY14/15 earnings estimates by 8%/5%.  Key risks to our forecasts  are: i) stronger sales volume, and ii) lower-than expected opex.
• Weaker  y-o-y  but  should  improve  q-o-q.  Guinness  is  slated  to announce  its  2QFY14  results  on  20  Feb  and  we  expect  weak  y-o-y performance  (revenue:  -10%;  earnings:  -9%)  on  the  back  of  soft  beer demand.  There  should  be  improvements  q-o-q  (revenue:  +19%;earnings: +22%) given: i) the earlier Chinese New Year holiday this year (Jan  2014  vs  Feb  2013)  that  will  drive festive  beer  sales,  and  ii)  that sales will experience a seasonal rise in the October-December.
• Divestment case.  We reiterate our SELL call on the stock with a new FCFF-based  MYR13.49  FV  (from  MYR15.19).  This  implies FY14/FY P/Es  of 19.4x/18.0x after inputting a higher  8.5% WACC (from 7.8%) as we adjust our capital structure assumption to an  80:20  equity:debt ratio (from 70:30). Guinness has been paring down its borrowings and there are no indications of any capital management initiatives. We leave our terminal growth rate unchanged at 2.5%. For now, we are still negative on  the  stock  given  its  rich  valuations  and  fading  yield  appeal ,  as  the spread between its dividend returns  and  the 10-year  Government bond yield has narrowed to 30-40bps (historical10-year average: 280-290bps).

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Company Profile
Guinness Anchor is involved in the manufacture, sale and distribution of beer. Its key brands are Tiger, Guinness and Heineken.

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Source: RHB