• NEUTRAL, new TP of MYR25.70 from MYR25.10, 10% upside with c.4% FY22F yield. Carlsberg Brewery’s 9M22 results beat estimates on a stronger-than-expected sales momentum. Looking ahead, we believe earnings will be sustained by ASP adjustments and intensified marketing initiatives. That said, we believe its current valuation is fair, reflecting the recovery prospects, and do not see a compelling reason to stretch our valuation. We prefer Heineken Malaysia (HEIM MK, BUY, TP: MYR30.50) for its cheaper valuation (trading at a c.10% discount to Carlsberg).

• Carlsberg’s 9M22 results were above expectations. Core net profit of MYR261m (+93% YoY) amounted to 85% of our and Street full-year forecasts, on a better-than-expected sales momentum. Post-results, we raise FY22-23F earnings by 5-8%. Correspondingly, DDM-derived TP rises to MYR25.70 (inclusive of a 4% ESG premium). Our TP, implying 22x P/E FY23F, is on par with the implied valuation ascribed to its peer, HEIM. We believe this is justified, taking into account HEIM’s market leadership in Malaysia, which is balanced by Carlsberg’s diversified earnings base.

• Results review. YoY, 9M22 sales surged 46% to MYR1.8bn, thanks to the broader reopening of economies, which spurred a strong recovery in the on-trade channels, whilst 9M21 was also a low base as the company was affected by plant closure. Note that the revenue also represents a 7% increase vs 9M19, a pre-pandemic base. Thanks to the robust topline growth, 9M22 operating profit more than doubled to MYR342m, with the margin widening by 6ppt to 19% - on this, we believe price adjustments and an improved product mix have also played a part. QoQ, 3Q22 sales were flat at MYR572m, with the effects of a price increase offset by the lower sales volume. Meanwhile, 3Q22 operating profit fell 18% to MYR102m on higher production costs arising from higher commodity prices. 9M22 DPS totalled at 63 sen (9M21: 10 sen)

• Strong fundamentals to withstand headwinds. Management expects Carlsberg’s outlook to remain challenging – given the global inflationary pressures, supply chain disruptions and further cost pressure. We also believe that a slowdown in global economies will also be a major risk, dampening consumer sentiment and spending. To mitigate the challenges, Carlsberg may ramp up marketing efforts to engage with consumers, to defend its market share. In addition, efficiency gains to optimise costs should also be the top priority to maintain profitability, whilst we also expect innovative product launches to entice consumer spending. As such, we believe the elevated volume will be sustainable and – together with the price adjustments and normalisation in the effective tax rate post-Cukai Makmur – forecast FY23F earnings growth of 6%. Downside risks to our call include unfavourable regulatory changes and major losses in market share. The opposite of these factors would represent upside risks.

Source: RHB Research - 14 Nov 2022