• Maintain BUY with new MYR22.20 TP from MYR22.70, 14% upside and c.5% yield. Carlsberg Brewery’s FY23 results missed expectations on weaker-than-expected profit margin. That said, we continue to like the brewery sector for the steady demand for beer and continuous operational efficiency gains to mitigate cost inflation. We believe the current valuation at -1.5SD is unwarranted considering the muted regulatory risks, with political stability and the largely contained contrabands market. Generous dividend payout ratio will be supported by robust cash flow generation.

• FY23 results were below expectations. Core net profit of MYR319m (-4% YoY) met 95% and 96% of our and Street’s estimates. The negative deviation could be attributed to higher-than-expected input costs and/or marketing spending. Post results, we trim FY24F-25F earnings by 3% and introduce FY26F earnings (+8% YoY). Correspondingly, our DDM-derived TP drops to MYR22.20 (inclusive of a 6% ESG premium), which implies 20x FY24F P/E and represents a discount to peer Heineken Malaysia (HEIM MK, BUY, TP: MYR30). This is justified by the latter’s market leadership in Malaysia and higher dividend payout ratio.

• Results review. YoY, FY23 revenue fell 6% to MYR2.3bn with Malaysia (-7%) and Singapore (-4%) due to normalisation of demand from a high base as well as soft consumer sentiment on the back of inflationary pressures. In addition, the timing of the Lunar New Year (2023: 22 Jan vs 2024: 10 Feb) was unfavourable to the company’s FY23, with the 2023 festive sales partially frontloaded in FY22. As a result, FY23 core PBT dipped 8% to MYR419m, with margin eroding by 0.4 ppt to 18.6%, which we believe is a function of higher input costs notwithstanding the full reflection of ASP adjustments. QoQ, 4Q23 revenue jumped 13% to MYR581m on positive year-end seasonality but 4Q23 core net profit fell 6% due to marketing expenses incurred ahead of the Lunar New Year.

• Outlook. Whilst the upcoming implementation of subsidy rationalisation and higher consumption taxes should impact consumption, we expect Carlsberg’s topline growth to be sustained by the relatively inelastic demand for beer and healthy legal TIV. In addition, the premiumisation strategy will continue to drive favourable ASP and target the higher income groups that are more insulated from the inflationary pressures. Meanwhile, the company announced plans to further upgrade its production facilities to drive operational efficiency. This will be effective in mitigating any input cost inflation arising from unfavourable FX and hike in service tax with management expecting commodity prices to stay stable.

• Risks to our recommendation include an unfavorable regulatory change and weaker-than-expected consumer sentiment.

Source: RHB Research - 8 Feb 2024