• Keep NEUTRAL, new MYR22.70 TP from MYR25, 6% upside. Carlsberg Brewery’s 1Q23 results underperformed expectations on softer-than- expected sales and higher-than-expected marketing spending. Notwithstanding the uninspiring start to FY23, we believe the breweries will offer some defensiveness in this challenging market environment. The stock is fairly valued – trading below the 5-year mean P/E – while its FY23F yield of 4.5% should cap any further downside.

• Net profit of MYR85m (-7% YoY) met 24% of our and consensus full- year forecasts; fell short of the 29-30% historical average. The negative deviation could be attributed to softer-than-expected sales and higher-than- expected marketing expenses. Post results, we trim FY23-25F earnings by 5%. Correspondingly, our DDM-derived TP drops to MYR22.70 – implying 21x FY23F P/E, below the 5-year mean – as we tweak risks assumptions to account for the more challenging outlook and muted FY23F growth. We also imputed a higher ESG score of 3.3 (from 3.2), mainly to cater to the revised ESG weightage (please refer to the last paragraph).

• Results review. YoY, 1Q23 revenue inched up by 1% to MYR660m, driven by higher product ASPs, with the sales volume adversely affected by the shorter Lunar New Year period in 2023. 1Q23 operating profit dipped 5% to MYR108m, with the margin slipping 1ppt to 16.4%, dragged by higher marketing expenses and input costs. QoQ, 1Q23 revenue was 8% higher thanks to the Lunar New Year festivity. Together with a favourable swing in marketing expenses, 1Q23 core net profit jumped 22% QoQ. The group declared a first interim DPS of 21 sen (1Q22: 22 sen).

• Outlook. Carlsberg sees the uncertain global economic outlook and elevated inflation as its biggest challenges in FY23F. That said, it is hopeful of the consumption lift from the pick-up in tourism activities that should benefit the Malaysia and Singapore markets. We believe consumption volume is unlikely to grow from FY22’s high base, which was boosted by the economic reopening. We are also cautious on consumer spending and sentiment going forward, as disposable income will be pressured by rising interest rates and the high cost of living. That said, we believe beer will enjoy relatively resilient demand, and the price increases as well as normalised effective tax rates should cushion the impact of the aforementioned challenges. Downside risks: Unfavourable regulatory changes and major losses in market share. The opposite of these would constitute upside risks.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 10 May 2023