Guinness Anchor - Operating efficiencies a boon to the bottom line BUY

- We reiterate our BUY recommendation on Guinness Anchor Bhd (GAB) with an unchanged DCF-based fair value of RM18.20/share.

- GAB delivered another strong set of results. Its annualised 2QFY13 net profit of RM123mil (+16% QoQ, +2% YoY) met both our, and street, estimates. 

- YoY, GAB’s revenue was down 10% on account of:- (1) the later  timing of FY13’s Chinese New Year celebration (Feb 10 vs Jan 23 in FY12); (2) reduction in volumes as it gradually phases out its Malaysian Duty Not Paid business (currently contributes <10% to revenue vs. 20% previously), and (3) overall market softness (volume growth was flattish).

- The drop, however, was cushioned by the sequentially higher revenue (+9.5%) as 9 days of sales from 1QFY13 was booked in 2QFY13. Its books closed early then to facilitate the migration of the company's new IT system on 1 Oct 2012.

- Despite its double-digit topline decline, GAB’s superior operational efficiencies had enabled its EBITDA margins to expand by 3ppts YoY to 22% in 1HFY13. A more streamlined product and channel mix coupled with tight cost control ensured earnings remain on an upward trajectory. QoQ, margin expansion was smaller at 1ppt.

- We believe GAB’s EBITDA margins will remain intact (~20%) going forward as management has not ruled out the possibility of a 3%-4% rise in prices should there be a need to mitigate higher input (namely malting barley and aluminium) costs. At the moment, they are adopting a wait-and-see approach, monitoring price inflation and market demand.

- In line with its higher payout ratio of 90%-95%, GAB declared a single tier interim dividend of 20 sen/share, double the interim dividend paid in previous years. The entitlement date has been fixed at 20 March 2013, with payment on 19 April 2013. 

- Following the 7-year excise duty status quo, management supposes that a hike may be due in the next 2-3 years. The rise is believed to be modest (compared to 2005’s +23%) as the domestic duty rate of RM7.40/litre is already among the highest in the world.

- We also understand that contrabands are becoming more of an issue in the malt liquor market. As it is, these illicits command ~85% of the East Malaysian market volumes while its presence in Peninsula is up from 5% previously. 

- Although GAB’s 1HFY13 earnings came in at the higher end of our forecasts, we are maintaining our numbers for now as we believe the buoyant sales demand in 3QFY13 (CNY make up 25% of full- year’s revenue, Jan 2013 MoM +180%) will be followed by a seasonally quieter 4Q13.

Source: AmeSecurities