Carlsberg’s  1Q14  results  came  in  line  with  our  and  consensus expectations, with revenue increasing 15% q-o-q on stronger sales from the Chinese New Year festive period. We continue to expect a difficult 2014 for the local brewers amid dampened consumer sentiment and we leave  our  forecasts  unchanged.  Upgrade  to  NEUTRAL  (from  Sell)  but maintain our DCF-based FV of MYR11.55.

• Results in line. Carlsberg’s revenue increased to MYR445.9m (+15% qo-q; -5.3% y-o-y) in 1Q14 as its seasonally  stronger  sales volumes were attributed  to  the  Chinese  New  Year  festivities.  Earnings,  however,contracted  18.3%  q-o-q  –  though  marginally  up  3.5%  y-o-y  –  on  the weaker showing  of  its Singapore operations.  This was  due  to the  25% excise  duty  increase  in  February.  The  quarter  under  review  comprises 29% and 28% of our and consensus full-year estimates respectively. W e deem  this  in  line,  as  we  are  expecting  weaker  quarters  ahead  on dampened  consumer  sentiment,  especially  from  its  Singapore operations.
• Outlook. We continue to expect a challenging 2014 for local brewers, as consumers are growing more cautious in their spending  behaviour. We opine  that  beer  consumption  may  experience  a  5%  decrease  in  2014 followed by a marginal 1% growth in 2015. We believe that consumers would  have  then  grown  accustomed  to  the  higher  cost  of  living  and should start spending again on discretionary items.
• Forecasts  and  risks.  With  the  results  coming  in  line,  we  make  no changes to our earnings forecast. The key risks include: i) stronger-thanexpected sales volume growth, and ii) lower operating expenses.
• Investment  case.  We  are  upgrading  our  call  to  NEUTRAL,  as  we believe  that  investors  have  mostly  priced  in  the  weaker-than-expected sales  volume  growth.  Nonetheless,  we  remain  cautious  on  Carlsberg,given its rich valuations and waning yield appeal, as the spread between its  yield  and  the  10-year  Malaysian  Government  Securities  (MGS)  has narrowed  to 70-80bps vs the historical  10-year average of 280-290bps. We  derive  our  unchanged  FV  of  MYR11.55  from  a  DCF  valuation (WACC:  8.1%,  TG:  2.5%).  This  implies  FY14F/FY15F  P/Es  of 19.4x/19.7x.

Source: RHB