Post-analyst briefing, we reiterate our view that 2015 will likely beanother challenging year for the brewers after a tough 2014, due to cautious consumer spending on discretionary items as well as the potential of an excise duty hike. As valuations are not compelling at this juncture, we maintain our NEUTRAL call with a higher DCF-based FV of MYR13.10 (from MYR12.80). 

Likely another challenging year ahead. While management deemed 2014 to be the toughest in recent years, we expect 2015 to be yet another challenging year for the brewers due to more cautious discretionary spending, a growing presence of contraband beers and an anticipated excise duty hike in the upcoming budget. 

Other highlights. Despite a decline in FY14 sales volume, Guinness Anchor (Guinness) will continue to focus on new launches of premium brands as the next growth engine while enhancing its existing brand experience. Management expects its advertising and promotion efforts tocontinue to reach out to new customers/drinkers. 

Forecasts and risks. Given that we expect sales volume to decline in FY15/16F and average selling prices (ASPs) to rise from the passing on of higher costs and increased sales of premium brands, we trim our FY15/16F revenue forecasts by 2.6%/5.1% respectively. Accordingly, we trim our FY15/16F earnings estimates by 2%/1.9%. The key risks include: i) slower-than-expected sales volume, ii) an excise duty hike, iii) intensified competition from contraband beer. 

Valuation and recommendation. We maintain our NEUTRAL call on Guinness, with a higher DCF-based FV of MYR13.10 (from MYR12.80) after incorporating a lower 9% COE (from 9.6%) as we tweak our stock beta assumption and cut our terminal growth rate to 2.2% from 2.5%. This implies FY15/16F P/Es of 20.5x/19.3x respectively. We reiterate our view that valuations are not compelling at this juncture considering the company’s likely miniscule growth moving forward, its unappealing dividend yield as well as the challenging industry outlook.

Briefing Highlights 

Sales volume falls. FY14 saw a 3.9% decline in revenue due to lower overall sales volume, although we gather from management that its premium brands recorded improved performance. Among its top-three selling brands, Heinekenremained the top performer followed by  Guinness and Tiger. Moving forward, Guinness will continue to focus on new launches of premium innovation while expanding its existing brand experience to drive growth. 

MYR18m hike in excise duty costs for FY14.While there has been no official announcement on excise duty hikes in the past year, we understand that the Royal Malaysian Customs has changed the basis for the excise duty valuation, resulting in higher duty payments from 1 Nov 2013. The higher valuation was attributed to the inclusion of advertisement and promotional expenses and royalty incurred by Guinness and its wholly-owned subsidiary. We note that Guinness has not as yet passed on the cost hike to its consumers. As the new valuation methodology is not in line with international rules, there is no indication that it will be revised and we expect the impact from the hike to spill over to the upcoming financial year. Tough operating environment in FY14.Management stated that FY14 was the toughest in recent years. The key factors include: 
(i)  A decline in consumer confidence due to subsidy rationalisation 
(ii)  A weaker MYR, which has depreciated 7% since last May 
(iii) A growing presence of contraband beers with a >100% increase in the number of outlets selling contraband beers from 2011 to 2013 
(iv)  A decline in the number of tourists 
(v) Bad weather 
(vi)  Intense competition from imported beers with high alcohol content that are priced 25-40% cheaper than locally-produced beers 

Outlook for 2015. While management sees a challenging and competitive year ahead, it remains confident that growth should be stronger and also sustainable in the coming years. However, we expect 2015 to be even more challenging than 2014 as consumers are becoming more cautious on discretionary spending due to rising cost of living, subsidy rationalisation and the impending implementation of the goods and services tax (GST). Furthermore, we expect an excise duty hike in the upcoming budget after a hiatus of nine years, with the last duty increase being in Sept 2005. Forecasts and risks. We tweak our forecasts assumptions on expectations of a decline in FY15/16F sales volume, but raise our ASP assumptions as we anticipate prices to increase and sales to comprise more premium brands. Hence, we trim our sales forecasts by 2.6%/5.1% for FY15/16F and accordingly, tweak lower our FY15/16F earnings estimates by 2%/1.9%.

Valuation and recommendation. We maintain our NEUTRAL call on Guinness, with a higher FV of MYR13.10 (from MYR12.80). Note that we tweak our beta assumption to 0.8x from 0.9x and cut our terminal growth rate assumption to 2.2% from 2.5% to reflect the changing stock beta as well as industry outlook. We reiterate our view that valuations are not compelling at this juncture, considering the company’s likelytimid growth moving forward, its unappealing dividend yield as well as the challenging industry outlook.

Source: RHB