Guinness Anchor - Growing off an established franchise BUY

- We are upgrading our recommendation on Guinness Anchor Bhd (GAB) from HOLD to BUY, with a raised DCF-based fair value of RM18.20/share (previously RM14.50/share), as we roll forward our base year to FY14F and cut its WACC to 8%.

- GAB had managed to grow its CY12 sales by 11% – comparable to its peer Carlsberg’s – despite the influx of imported beers. In tandem, it extended its market share by 2ppts to 60% as demand for its ‘Tiger’, ‘Guinness’ and ‘Heineken’ labels remained resilient. These 3 brands alone account for 90% of  GAB’s volumes.

- Looking ahead, we expect GAB’s topline to grow by 7%-8% for FY13F and FY14F underpinned by its dominance in the malt liquor market (MLM) and strong franchise value.

- We believe ‘Heineken’s’ volumes may spring a positive surprise following its latest packaging revamp in 1Q13 and the recently- concluded SGD5.6bil takeover of Asia Pacific Breweries by Heineken NV (together with Diageo PLC, GAB’s ultimate parent). Advantages to GAB include marketing and branding synergies.

- While we expect consumption to normalise in FY13F in the absence of special events, we believe the industry will achieve a decent 6%-7% MLM volume growth on the back of unchanged beer excise duty of RM7.40/litre and favourable domestic macro environment.

- GAB has continuously worked on rationalising its costs. Besides constant investment to modernise its brewery (RM120mil in past 5 years) and supply chain management initiatives, GAB had also recently streamlined its product mix and upgraded its IT infrastructure (Project Quantum).

- The above has resulted in superior EBITDA margins for the company with a 5-year historical average margin of 18%. This is 5ppts above that of CAB’s and we foresee this trend to continue. Looking ahead, we reckon GAB’s EBITDA margins will remain stable in FY13F and FY14F at ~20% as further gains are limited by an anticipated rise in raw material costs. 

- Given GAB’s greater operational efficiency, we reckon that most of its increase in revenue will filter down to its bottom line. Net profits are projected to grow by 8% in FY13F and FY14F to RM224mil and RM243mil, respectively.

- GAB’s capex will double to RM80mil in FY13F before slipping back to maintenance capex of RM35mil beginning FY14F following the booking of its Project Quantum expenses. GAB’s debt issuance, taken to optimise its cost of capital, will be used to fund these expenses.

- While no special dividends will be proposed in the  next 2-3 years, management has committed to higher payout ratios of 90%-95% (+5ppts). This translates into decent yields of 4.3% to 4.5% for FY13F and FY14F.   

Source: AmeSecurities