Carlsberg Brewery - Regional manufacturing hub in the brew BUY

- We re-affirm our BUY rating on Carlsberg Brewery Malaysia Bhd (Carlsberg) with a higher DCF-based fair value  of RM11.50/share, vs. RM10.40/share previously (WACC: 9.2%). 

- Despite the stock’s relative outperformance YTD, we believe current share price has not fully reflected Carlsberg’s full potential. We see long-term transformational earnings growth underpinned by the group’s aspiration to become a regional manufacturing hub with a strong focus on imported labels. Our LTG rate is tweaked upwards to 2.7% (+1ppt).

- Carlsberg is on schedule to add two more imported labels for in-house production in the next 3 to 6 months,  in addition to locally brewed ‘Asahi Super Dry’. The identified beers being ‘Kronenbourg 1664’ and ‘Kronenbourg Blanc’ originate from France, unlike Asahi which has Asianorigins. 

- More importantly, local production of the labels yields higher profitability given reduced transportation and logistics costs due to absence of a RM5.00/litre import duty. Though cost savings is negligible at present, we expect rising earnings contributions in tandem with higher beer volumes moving forward. As it is, draught production of ‘Asahi Super Dry’ for the mass market is expected to commence soon over the next few weeks. Premium labels contribute circa 10% to group revenue.

- Given Carlsberg’s idle brewing capacity and the stronger pricing power imported labels command, we would not be surprised should the group secure rights for exports to other countries in the region, apart from Singapore. As an indication, ASP for Asahi is ~10% higher than mainstream Carlsberg Green Label, while Kronenbourg’s is ~10% higher than Asahi’s. 

- In the immediate term, the group may raise ASP by 3%-4% by end-1H to compensate for higher raw material costs which are up some 20% YoY. Fortunately, price of malting barley has been flattish and the group has secured 2/3 of its raw ingredient requirements for FY12F. We also expect Carlsberg to intensify A&P in the coming months to leverage on 2012 Euro Cup, of which the group is the official sponsor.

- Balance sheet is strong with net cash of RM50mil (FY11F) and free cash flow yields of 6%-7%. Our conservative dividend payout assumption of 70% p.a. implies an upside potential to our dividend yield of 5%-6%. Valuations are also attractive at current levels, with the stock trading at only 6x P/B – or at a 50% discount to peer Guinness Anchor Bhd (GUIN Mk Equity, Hold).   

Source: AmeSecurities