• SELL with new MYR32.50 TP from MYR28.50, 16% downside plus c.3% yield. Carlsberg Brewery’s FY19 results are in line, from the commendable performance from both key markets. Weighing the risk-reward, it is trading at a c.40% premium over its close peer and offers unattractive prospective dividend yields. On the downside, the exposure in Singapore will lead to greater uncertainty over the impact arising from the COVID-19 outbreak, whilst competition from cheaper imports could pose further challenges. Switch to Heineken Malaysia (HEIM MK, BUY, TP: MYR35.00).

• Results within expectations. Carlsberg reported FY19 core earnings of MYR294m (+7.9% YoY). FY19 revenue rose 13.8% YoY to MYR2.3bn, driven by growth across the Malaysia and Singapore markets on volume growth in all major product segments – spurred on by continuous marketing investments. FY19 operating profit only grew by 8% to MYR374.9m, mainly due to higher marketing spending. FY19 DPS of MYR1.00 is unchanged from FY18. Post-results, our FY20-21F earnings are largely maintained.

• Management has not decided whether to raise product prices like Heineken Malaysia did, but we believe it will eventually do so to protect margins. In the absence of new products last year, sales growth momentum may slow. That said, the sector should continue to benefit from the enforcement drive embarked on by the authorities, which resulted in a reduction in contraband trade. On top of that, consumer uptrading to premium brands, and the flexibility to adjust selling prices to pass on the increase in production costs are other key drivers of earnings growth.

• Our DDM-derived TP rises to MYR32.50 from MYR28.50. Our TP implies 31x FY20F P/E, over +2SD from the 5-year mean – which is consistent with the valuation ascribed to Heineken Malaysia. Carlsberg is trading at a c.40% premium over Heineken Malaysia, and its FY20F dividend yield is compressed to 2.6%, vs the 10Y MGS yield of 2.9%.

• We believe the share price and lofty valuation could hold up until the MSCI benchmark buying is over by the month-end. What awaits shareholders pursuant to that, is the relatively higher degree of uncertainty on what impact the COVID-19 outbreak will have on consumption. The Singapore exposure (27% of FY19 operating profit) renders Carlsberg more vulnerable and poses higher downside risks. Management has also highlighted the challenges from cheaper imports in Singapore, following the introduction of the European Free Trade Agreement in 4Q19. Weighing the risk-reward, we prefer Heineken Malaysia over Carlsberg on its more reasonable valuation and absence in the challenging Singapore market.

• Risks to our recommendation include market share gains and successful new product launches.

Source: RHB Research - 24 Feb 2020