Review

• Carlsberg reported its FY16 core net profit of RM205mn (-9% YoY). The results came below ours and consensus estimates at 92% and 89.3% respectively. The drop in core profit was due to one-off tax adjustments in prior year and higher deferred tax expense this year. A final and special dividend of 67.0sen was declared. Total dividend for FY16 amounted to 72.0sen, translating to a payout ratio of 107%.

• YoY, the group’s revenue grew marginally by 1.2% to 1.68bn. This was driven by price increase in Malaysia and higher export volume. PBT was flat as higher profit from operations was offset by loss of RM5.1mn (vs FY15 profit of RM16.1mn) incurred in an associate company, Lion Brewery (Ceylon), due to flood in Sri Lanka.

• Malaysia operations total revenue dropped 1.6% to RM1096.4bn. However, operating profit improved (18.3% YoY) mainly due to more efficient spending on sales and advertisements. In Singapore, revenue increased by 6.9% to RM583.1mn but the operating profit grew by only 3.7%. This was due to higher sales and marketing expenses and a one-off gain from brand incentive in 2015.

Impact

• We cut our FY17-18 earnings projections by 9.5% and 7.3% respectively after inputting FY16 numbers and revise our Malaysia segment volume assumptions lower by 1.3% for FY17/FY18.

Outlook

• Based on the subdued consumer sentiment and challenging macroeconomics observed in Malaysia and Singapore, we expect spending for discretionary items like malt liquor to be relatively weak.

• There might be more additional cost in the future if implementation of security ink goes through in Malaysia. We expect Malaysia sales growth to be relatively flattish.

• We project that Lion Brewery (Ceylon) will be back to profitable in FY17 as it has resumed full operation after the flood. To regain its market share, we expect higher market expenses for the next 2 quarters. Note that Lion Brewery used to command 85% of beer market share in Sri Lanka.

Valuation

• We lower our target price to RM15.41 (from RM15.52 previously) based on DCF methodology (COE: 7.6%, g: 2.5%). Maintain Hold on the stock.

Source: TA Research - 22 Feb 2017