Carlsberg’s 1Q15 earnings of MYR47.2m were below expectations due to lower contribution from its Malaysian arm given pre-GST trade destocking in March and EBIT margin contraction. Maintain NEUTRAL with a revised TP of MYR13.80 (8% upside). We expect sales to pick up in Malaysia in 2Q15. Investors should look to buy on weakness given the stock’s defensive attributes and decent yields.

• 1Q15 earnings below expectations. Carlsberg’s 1Q15 earnings of MYR47.2m were below our/consensus expectations, accounting for 21%/22% of FY15 earnings forecasts respectively. 1Q15 earnings slid 9.7% YoY on the back of: i) lower sales volume from its Malaysian arm due to a combination of trade destocking in March from customers opting to maintain minimal stock in the lead-up to the goods and services tax (GST) implementation in Apr 2015, and higher trade stocking last year ahead of the price increase in Apr 2014, and ii) contraction of EBIT margin to 13.2% (1Q14: 15.1%).
• Poor showing at Malaysian arm. Carlsberg’s Malaysian arm saw a 12.8% YoY drop in 1Q15 sales due to the reasons mentioned above. Nevertheless, we expect sales to pick up in 2Q15. Although its Singapore arm recorded a strong 1Q15 sales growth of 38.4% YoY, EBIT was flattish as we note that its margin contracted to 9.1% (1Q14: 12.2%) possibly due to downtrading. The strong sales growth was attributed to sales volume growth, contribution from the MayBevacquisition and a lower base in 1Q14 due to stock rationalisation.
• Forecasts and risks. In view of the subdued 1Q15 results and the recent disposal of its 70%-owned subsidiary, Luen Heng F&B SB, we trim our FY15-17 earnings forecasts by 4-6%. Key risks to our forecasts include: i) weaker-than-expected sales volume, ii) an excise duty hike, and iii) payment of the MYR56.1m bills of demand (26.2% of FY15F earnings).
• Maintain NEUTRAL with lower MYR13.80 TP. Following our earnings revision, we trim our DDM-based TP to MYR13.80 (implies 18.6x FY16F P/E, from MYR14.10). Although valuations are not especially compelling with the stock currently trading at 17.2x FY16F P/E (its 5-year average P/E at 16.6x), investors should look into buying on weakness given itsdefensive attributes and decent yields of 5.4-6.1% for FY15F-17F.