Guinness Anchor (GUIN MK, BUY, FV RM15.27, Last Close: RM13.00)

GAB’s 3QFY12 earnings saw y-o-y growth amid a growing beer industry but as expected, there was a sequential decline when compared to a stellar 2QFY12 that experienced strong festive-driven sales. The issuance of debt amounting to RM200m late last year increased  its  interest expense but the debt level still remains at very comfortable levels. Management  had also  previously hinted on the possibility of further capital structure optimization. We maintain BUY on GAB with a FV of RM15.27 and it is our favourite brewery pick given its well-established brands and stronghold in the resilient off-trade channel.

Within estimates. GAB posted 3QFY12 revenue of RM364.7m (+3.6% y-o-y, -22.1% qo-q) and net profit of RM51.5m (+5.2% y-o-y, - 21.7% q-o-q). Higher beer sales volume across the sector boosted y-o-y growth, while earnings were expectedly softer q-o-q as the lack of major festivities in the quarter moderated beer consumption (2QFY12 profits were up 19.2% q-o-q due to the Christmas and Chinese New Year holidays). Revenue and earnings for the 9-month period totaled RM1,277.7m (+12.1% y-o-y) and RM172.6m (+13.3% y-o-y) respectively, driven by strong volume growth among its key brands, particularly Guinness. 9MFY12 earnings represented 81.8% and 84.7% of our and consensus full-year forecasts,  which we deem  in line as 4Q earnings over the past 5 years have on average accounted for 17.9% of full-year earnings.

Interest cost rise after debt issuance. Following years of negligible borrowing costs, interest expense rose 13.2 folds y-o-y to RM1.9m after the issuance of commercial papers and medium-term notes totaling RM200m in Dec 2011 and Jan 2012. This comes after GAB’s attempt to optimize its capital structure, which also led to a RM0.60 per share special dividend payout in Dec 2011. Management has previously stated that its desired D/E ratio is still a little higher than where it currently stands, suggesting the potential for further debt raising or dividend payouts. Despite the increase in finance costs, the EBIT-to-interest expense is still at a very comfortable 37.0x.

Maintain BUY. We are keeping our earnings forecast unchanged for FY12 to FY14 as we don’t believe the upcoming Euro 2012 in Ukraine/Poland will have a significant impact on volumes. The revenue for 4QFY08, during which the Euro 2008 took place in Austria/Switzerland, accounted for just 21.0% of full-year revenue. We are keeping our FV unchanged at RM15.27, based on our FCFF valuation with a WACC of 7.5% and terminal growth of 2.0%. GAB remains our favourite brewery stock given its well established brands and stronghold in the resilient off-trade channel.

Source: OSK