• Maintain BUY and MYR22.20 TP, 14% upside and c.5% yield. Carlsberg Brewery’s 1Q24 results met expectations on festive demand and cost discipline. Steady margin underpinned by its premiumisation strategy and price increases will be the main earnings growth driver as consumer sentiment is likely to remain subdued on elevated inflationary pressures. Its current valuation is undemanding considering the diminished regulatory risks with the political stability as well as decent dividend yield.

• Carlsberg’s 1Q24 results were within expectations. Net profit of MYR88m (+3% YoY) accounted for 26% of our and consensus forecasts. Post-results, we make no changes to our earnings forecasts and DDM-derived TP of 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 more generous dividend payout.

• Results review. YoY, 1Q24 revenue climbed 10% to MYR726m thanks to a more favourable Lunar New Year timing in 2024 (longer selling period vs 1Q23). In addition, volume was aided by front loading before the price increase in April. Together with an improved performance of its Sri Lanka associate, 1Q24 PBT jumped 15% to MYR127m. That said, net profit growth was capped by a higher effective tax rate or ETR of 31% arising from foreign withholding tax in Sri Lanka. QoQ, 1Q24 revenue was 25% higher, with both Malaysia (+33%) and Singapore (+6%) operations boosted by the Lunar New Year festivities. As a result, 1Q24 saw a 35% QoQ surge in operating profit to MYR120m. First DPS of 22 sen was declared for 1Q24 (vs 1Q23: 21 sen).

• Outlook. Carlsberg expects volume adjustments in 2Q24F following the strong buying in 1Q24 before the price increase, which was taken to offset cost inflation and protect profit margin. Meanwhile, the company’s strategy will continue to revolve around enhancing its premium portfolio and optimising operational efficiency. We believe these are effective measures to mitigate the soft market environment where consumer sentiment is cautious on the back of inflationary pressures. Furthermore, we believe the downside to consumption will be cushioned by the less elastic demand for beer and effective clampdown on contrabands. In addition, the recovery in tourist arrivals should bode well for the brewery players.

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

Source: RHB Research - 14 May 2024