We revise down Carlsberg’s FY14 earnings estimate by 3%, after cutting our  MLM  volume  forecasts  and  introducing  our  FY15  projections.  We expect  solid  4Q13  results (q-o-q and y-o-y)  –  which are due for release on 21 Feb  –  given its  typical stronger sales  during Oct-Dec and a lower base  of comparison in  4Q12.  Maintain  SELL,  with  our  FCFF-based  FV lowered to  MYR11.01 (from MYR11.31).

• Expecting  5%  drop  in  FY14  beer  sales.  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  &  risks.  After  reducing  our  MLM  volume  assumption  while retaining  Carlsberg’s  market  share  target  at  40%,  we  lower  our  FY14 earnings  estimate  by  3%.  We  also  introduce  our  FY15  forecasts.  The key risks to our forecasts include: i) stronger sales volume, and ii) lowerthan-expected opex.
• Strong  q-o-q  and  y-o-y  performance  seen.  Carlsberg  is  set  to announce  its  4Q13  results  on  21  Feb.  We  expect  strong  q-o-q performance  (revenue: +20%, net profit: +22%) given that: i) this year’s Chinese  New  Year  (CNY)  fell  earlier  in  January  vs  February  in  2013, which  should  boost  festive  beer  sales,  and  ii)  the  company  typically enjoys  a  seasonal  sales  uptick  during  the  Oct-Dec  period.  However, unlike Guinness, it should see better  y-o-y  figures (revenue: +26%, net profit: +16%) against its weak 4Q12 numbers.
• Divestment case.  Post-earnings revision, Carlsberg is still a SELL with a  lower  FCFF-based  FV  of  MYR11.01  (from  MYR11.31).  This  implies FY14/15  P/Es  of  19.7x/18.3x,  with  an  unchanged WACC  of  8.1%  and terminal  growth  (TG)  assumption  of  2.5%.  We  remain  negative  on  the stock given its rich valuations and declining yield appeal – as the spread between its dividend return vs the 10-year MGS yield has narrowed to only 30-40bps vs historical 10-year average of 280-290bps.

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Company Profile
Carlsberg (CAB) manufactures and distributes beer. Its key brands are Carlsberg Green Label, Asahi and Kronenbourg 1664.

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Source: RHB