We are maintaining our NEUTRAL stance on the sin sector.
Nevertheless, we are optimistic on the brewery sector given its defensive
earnings and decent dividend yields ranging from 4%-5%, underpinned by the
midsingle digit growth in the malt liquor market (“MLM”) volume. We prefer CARLSBG
(OP; TP: RM14.22) for its diversified geographical exposure and its decent
earnings CAGR of 16.4% versus GAB (MP; TP: RM17.10) of 8.8%. On the other hand,
we have a MARKET PERFORM call on BAT (TP: RM 66.30) as it has a much more
convincing outlook than JTI (Not Rated) as the former also manufactures for
other regional markets, which could help it mitigate its domestic exposure
risk.
Brewery
Sub-segment
No excise duty hike,
a relief for now. To recap, no excise duty hike was announced for the 8th
consecutive year in the recent budget
tabled in September-12. It was a relief for brewers like GAB (MP; TP: RM17.10) and CARLSBG (OP; TP: RM14.22) as we believe that in the absence of any
excise duty hikes, the MLM volume will continue to grow at midsingle digit in
2013. However, the underlying risk would be the announcement of an excise duty
hike right after the much anticipated General Election (“GE13”). In the event
of a 15% hike in excise duty, we believe that would still be a minimal impact
to the brewers given their ability to pass through the cost.
Gen Y, the key driver
for growth. Generally, Malaysia has
a young demographic profile with a median age of 27.6 years known as Gen Y and
Non-Malays make up 50% of Malaysia’s population of 29.3m (inclusive
non-citizen) while Gen Y in this category (c.6.5m) makes up 22% of the total
population. Based on statistics, Gen Y spends about 3% and 18% of their total
expenditure in tobacco & alcohol, and restaurants & hotels
respectively. Hence, we believe that Gen Y will be the key driver for MLM
growth thanks to their rising purchasing power and disposable income due to
urbanisation and also given that they are the fastest growing workforce in the
country.
Premium segment the
next growth node. With the trend of the MLM market shifting from coffee
shops to pubs and restaurants, we believe that
the premium segment will be the next growth node for brewers as the
segment attracts a younger population and more female drinkers with brands like
Strongbow and Hoegaarden by GAB and CARLSBG, respectively.
Tobacco
Sub-segment
Cigarettes’ TIV
improved YoY. The 3Q12 and 9M12
total industry volume (“TIV”) for tobacco continued to improve 7.1% and 5.1%
YoY respectively. This is because 1Q12 saw a consumption increase after the
absence of an excise hike in Budget 2012. In addition, we reckon that the 3Q12
consumption was boosted by the improved sales of Marlboro Ice Blast by Phillip
Morris as we saw a 3Q12 YoY decline in volume in both BAT and JTI. The TIV YTD registered
sales of 10.9b sticks. Historically, the 9M TIV usually makes up 78.0% of the
yearly consumption of cigarettes. Thus, we believe that the 2012 TIV will
likely end the year higher YoY with about 13.9b sticks, implying its first
positive growth rate of 5.2% since 2004.
Pretty flat 2013?
Nevertheless, premium cigarette price has increased by 20 sen in Oct 2012 across
the board as the Royal Malaysian Customs had lifted the ex-factory pricing of
cigarettes by between 26% and 58%. Moreover, the illicit trades also edged
higher during the second wave (Jul to Sep) by 0.2bbp to 34.9%. Coupled with the
uncertainty of future tax hikes, we are cautiously optimistic on the tobacco
outlook for 2013 and are estimating a flat growth sales volume of 13.9b sticks.
We still prefer BAT (MP; TP: RM66.30) for now as the company also manufactures
for other markets such as Brunei, Australia, Philippines and Cambodia, where
its contract manufacturing volume has increased by 46.6% YoY.
Source: Kenanga
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