• Maintain NEUTRAL, with new TP of MYR25.10 from MYR23.80, 4% upside. Similar to peer Heineken Malaysia (HEIM MK, BUY, TP: MYR29.20), Carlsberg Brewery’s 1H22 results surprised on the upside thanks to stronger-than-expected topline recovery. We believe the current valuation is fair, with recovery prospects largely priced in. We opt not to stretch the valuation further considering the regulatory risks and earnings downside potential from its associate that is dependent on the development of Sri Lanka’s economic crisis.

• 1H22 results were above expectations. Core net profit of MYR184m (+78% YoY) met 66% of our and consensus’ forecasts largely on stronger- than-expected topline recovery. Post results, we raise FY22F-24F earnings by 4-9%. Correspondingly, our DDM-derived TP rises to MYR25.10 (inclusive of a 4% ESG premium). The new TP implies 23x FY23F P/E, on par with the implied valuation ascribed to peer HEIM. We believe this is justified, taking into account the latter’s market leadership in Malaysia, which is balanced by CAB’s diversified earnings base.

• Results review. YoY, 1H22 sales jumped 39% to MYR1.2bn on the back of sharp sales rebound in Malaysia (+47%) and Singapore (+23%) following the broader reopening of economies, which facilitated consumption recovery, particularly at the on-trade channels. 1H22 PBT surged 84% to MYR247m with margin expanding by 4.8ppts thanks to the robust topline growth and prudent cost control. QoQ, 2Q22 revenue dipped 12% to MYR574m on weaker seasonality as 1Q22 was boosted by the Lunar New Year festival. Notwithstanding the softer sales, 2Q22 operating profit grew 9% to MYR124m on more favourable product mix, and likely, a function of lower marketing expenditure too. 2Q22 ETR spiked to 28% from 22.9% in 1Q22, which caused 2Q22 core net profit to only inch up by 1% to MYR93m.

• Outlook. After achieving stellar 1H22 results, the challenges lying ahead include supply chain disruption, volatile commodity prices, and rising inflation. We understand that the price increase has been implemented in 3Q22 to pass on the higher production costs. In addition, management will continue to bank on premiumisation and product innovation as key strategy focuses to drive growth. Essentially, we foresee sustainable volume recovery, particularly at the on-trade segments on the back of broader containment of the pandemic and economy recovery. These should underpin the 49% earnings growth in FY22F, notwithstanding the higher tax expenses arising from Cukai Makmur.

• Risks to our recommendation include unfavourable regulatory changes, and a major loss in market share.

Source: RHB Research - 22 Aug 2022