Carlsberg’s 9M14 earnings of MYR148.7m  (+24%  YoY) were  above  our and consensus expectations, largely due to strategic cost management. Given  the  strong  quarter  and  better  performance  from  its  Singapore unit,  we  raise  our  TP  to  MYR12.80  from  MYR11.55  (6.7%  upside)  after our earnings revision and change of our valuation method to DDM (from DCF). Maintain NEUTRAL.  
 
Above  expectations.  Carlsberg’s 9M14 earnings of MYR148.7m were above our and consensus expectations, making up 82.6% and 77.7% of FY14 earnings forecasts respectively. Although sales were up by a mere 3.8%  YoY,  earnings  rose  24%  on  the  back  of:  i)  strategic  cost management, particularly at its Singapore unit, and ii) an improved price and  product  mix.  Sequentially,  3Q14  earnings  were  up  40.6%  QoQ, driven by: i) 15% increase in sales from trade stock-up ahead of Budget 2015 and stronger sales from Singapore, and ii) EBIT margin expansion to  17.7%  (2Q14:  13.8%)  from  ongoing  strategic  cost  management.  No dividend was declared for the quarter under review.  

Update on the bill of demands amounting to MYR56.1m. Carlsberg is still challenging the bills of demands received from the Royal Malaysian Customs on 19 Sep 2014. No provision  was recognised for the quarter under review and this will be reassessed again during FY14.  

Forecasts.  We  nudge  up  our  FY14/FY15  earnings  forecasts  by 5.6%/8% respectively after updating our sales and margins assumptions. We also take the opportunity to introduce our FY16 projections. Key risks to our recommendation are: i) weaker-than-expected sales volume, ii) an excise  duty  hike,  and  iii)  payment  of  the  MYR56.1m  bills  of  demand (29.5% of FY14F earnings).

Maintain NEUTRAL with a revised TP of MYR12.80 (from MYR11.55). We  replace  our  DCF  valuation  methodology  with  that  of  a dividend discount model  valuation  (DDM)  (CoE:8.4%,  TG:  3%)  given Carlsberg’s consistent dividend payouts in tandem with earnings growth as well as the brewery sector being a fairly mature industry. Our revised DDM-derived  TP  of  MYR12.80  implies  FY15/FY16  P/Es  of  19.5x/18.5x respectively.  Although the stock’s valuation is not compelling at this juncture  relative  to  its  small  earnings  growth,  its  dividend  yields  for FY15/FY16 remain decent at 5.5%/5.8% respectively. 

Bottomline up despite flattish sales in Malaysia. Despite 9M14 sales in Malaysia declining marginally by 0.9% YoY on the back of: i) softer demand for beer, ii) higher taxes  imposed  by the  Government,  and  iii)  an  influx  of  imported  contraband  beers, operating profit was up 13.9%, driven by the ongoing strategic cost management as well as improved price and product mix.

Singapore continues to strengthen. Singapore 9M14 sales were up 21.6% YoY on the back of strong 3Q14 sales of MYR116.9m (+66.1% YoY, +17.3% QoQ) recorded. Operating profit went up by a higher quantum of 55.4% YoY due to: i) strategic cost management from  the  completion of  a  stock rationalisation program  in  1Q14,  ii)  an improved product mix after  addition of  brands to its portfolio, for instance the brisk-selling Asahi Super Dry. The new brands were added to the company’s portfolio after it acquired MayBev in 2Q14. 

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

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

Recommendation Chart

Source: RHB