Post-analyst  briefing,  we  reiterate  our  view  that  2014  will  be  a challenging  year  for  brewers  as  consumers/drinkers  are  becoming more cautious on  spending. We continue to recommend  a SELL on the stock, with an unchanged FCFF-based FV of MYR13.49. Our divestment case  is  primarily  premised  on  its  rich  valuations  and  waning  yield appeal.

• A  new  Tiger  in  town.  According  to  management,  Guinness’  newly launched beer,  Tiger Radler (TR), has gained good traction and has met internal expectations so far. At the moment, TR is made  only available to some  6.5k F&B outlets and it will  be retailed from next month onwards.This new variant targets the “fringe drinkers” and “non-beer drinkers”.
• Other highlights.  i) In the next 3-6 months, Guinness will be extending another core brand as well as  introducing  a new premium brand into the market,  ii)  Guinness’  traditional  on-trade  sales  have  come  under pressure lately but its modern on-trade sales  are still thriving, iii) its 2014 Chinese New Year (CNY) sales were  not as strong compared to 2013’s, and iv) downtrading into cheaper beers was seen.
• Outlook.  We expect 2014 to be a challenging year for local brewers  as consumers/drinkers  are  becoming  more  cautious  on  spending.  In  our view,  beer consumption may  decline  by  5%  this year,  followed by a 1% growth in 2015, as we believe consumers will have grown accustomed to the  higher  cost  of  living  expenses  and  will  begin  spending  again  on discretionary  items  next  year.  Please  see  our  full  report  dated  19  Feb 2014 – Brewery – Skipping a Beat.
• Forecasts  and  risks.  No  changes  to  our  forecasts.  Key  risks  are:  i) stronger sales volume, and ii) lower-than expected opex.
• Valuation and recommendation.  We continue to recommend a SELL on Guinness, with an unchanged FCFF-based FV of MYR13.49 (WACC: 8.5%, TG: 2.5%). This implies FY14/FY15 P/Es of 19.4x/18.0x. We are still negative on the stock given its rich valuations and  waning  dividend yield appeal.

Key Takeaways From Analyst Briefing

• Tiger  Radler,  which  targets  the  “fringe drinkers”  and  “non-beer  drinkers”,  has  been gaining good traction
• Traditional  on-trade  sales  have  come  under pressure lately but modern on-trade sales are still thriving
• We  expect  industry  beer  volume  to  contract 5%  in  2014,  followed  by  a  1%  increase  in 2015
• Maintain SELL and MYR13.49 FV

A new Tiger in town
Guinness’ newly-launched beer,  Tiger Radler  (TR), has been in the market for the past  three months  and  according  to  management,  it has gained  good  traction  and has  met internal expectations so far.  Brewed locally, TR  is  a mix  of  Tiger Beer  and natural lemon juice. The name Radler means “cyclist” in German. The beer has been around  since  1920s,  invented  by  Franz  Xaver  Kugler  for  some  13k  cyclists  who unexpectedly visited his pub. Kugler  had insufficient beer supply at that time  so  he added lemon juice to meet the demand.

At the moment, TR is made only available to 6.5k F&B outlets (vs the total of 25k outlets which Guinness currently supplies  to) and it will be retailed from next month onwards. We understand that this new variant targets the “fringe drinkers” and “nonbeer drinkers” and hence, it should not be cannibalistic in nature. Additionally, in the next 3-6 months, Guinness will be extending another core brand in 
order to adapt to changing consumer taste and  looking to introduce a new premium brand into the market.

Traditional on-trade segment under pressure
We  gather  that  Guinness’  sales  mix  between  on-trade  and  off-trade  segments  is 80%:20%, compared with 60%:40% about 3-4 years ago. In the on-trade segment, the  split  between  modern  and  traditional  channels  is  equal  at  50%.  However, management  shared  that  its  traditional  on-trade  sales  have  come  under  pressure lately  given  that  drinkers  here  are  typically  from  the  low  income  group,  while  its modern  on-trade  sales  are  still  thriving,  fuelled  by  drinkers  from  the  high  income bracket.

In addition, management said that this year’s  Chinese New Year (CNY) sales were not  as  strong  compared  to  2013’s.  It  also  noted  the  trend  of  downtrading  from  its mainstream  brand,  Tiger  Beer,  to  its  economic  brand,  Anchor  Beer.  What  is  of greater concern is  the easy access to illicit and counterfeit beers,  which  may entice price-sensitive drinkers to downtrade to this segment.

Outlook for 2014
Despite a  softer  outlook for  consumer  discretionary  spending, management expects industry beer sales volume to see flat to moderate growth. However, we expect 2014 to be a challenging year for local brewers as consumers/drinkers are becoming more cautious  on  spending. In our view,  beer consumption may  decline by  5% this year, followed  by  a  1%  growth  in  2015,  as  we  believe  consumers  will  have  grown accustomed to the higher cost of living expenses and will begin spending again on discretionary  items  next  year.  Please  see  our  full  report  dated  19  Feb  2014  – Brewery – Skipping a Beat.

Forecasts and risks
No changes  to our  forecasts. Key risks are: i) stronger sales volume, and ii) lower than-expected opex.

Valuation and recommendation

We continue to recommend a SELL on Guinness,  with an unchanged FCFF-based FV  of  MYR13.49  (WACC:  8.5%,  TG:  2.5%).  This  implies  FY14/FY15  P/Es  of 19.4x/18.0x. We are still negative on the stock given its rich valuations and  waning dividend  yield  appeal,  as  the  spread  between  the  10-year  Government  bond  yield has narrowed to 30-40bps, from the historical 10-year average of 280-290bps.

Financial Exhibits

SWOT Analysis

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

Recommendation Chart

Source: RHB