Carlsberg Brewery Malaysia - Leveraging on new niche products

Carlsberg Brewery Malaysia (“CARLSBG”) is the next  brewer in Malaysia’s Malt Liquor Market (MLM) after Guinness  Anchor Bhd (“GAB”) with a market share of 40% (as at June-12). Going forward, with its niche product offering i.e. Super Premium  beers (Asahi & Kronenbourg), we expect CARLSBG market share to inch up by 1.5% by June-13 and its earnings to grow by 6.7%-12% in  FY12-13E. We like CARLSBG for its diversified market profile and its strength in the Super Premium segment coupled with its decent net dividend yields ranging from 4.4%-4.9% (based on a dividend payout ratio of 100%). Based on our scenario analysis on the potential hike in excise duties (+20%), CARSLBRG’s valuation will still warrant an  OUTPERFORM recommendation. Hence, we are initiating CARLSBG with an OUTPERFORM recommendation given its total return of 12% to our Target Price of RM14.10 (based on DCF valuation with a WACC of 8.6% and a long term growth rate of 1.5%).

Building up a niche market base. CARLSBG is a leader in the Super Premium segment albeit the segment is still relatively new and small (accounts for about 2% of the total MLM volume). We believe that the Super Premium segment will be the company’s Blue Ocean strategy where it will focus more in building up its forte and branding. We believe that CARLSBG will be better positioned to compete with GAB with its new locally brewed Asahi  and the fast-growing Kronenbourg. We expect this new segment to boost CARLSBG’s market share higher to 41.5% by June-2013.

Fairly stable demand for premium beers. We noticed that the demand for imported premium beers has grown mainly from the younger generation (Gen Y) due to their higher affordability and lifestyle splurge on food & beverages with statistics showing that 21.9% of their total expenditures are spent in tobacco, alcohol, restaurants and hotels. This trend and support from the younger group will be the base demand for CARLSBG’s premium/super premium beer products. 

Double-digit net margin to stay. Since the acquisition of Carlsberg Singapore in 2010, CARLSBG’s net margin has improved by a 2.5 ppt from 7.3% to 9.7% in 2010 and by another 1.3ppt to 11.2% in 2011 backed  by the demand and higher Average Selling Price (“ASP”) in Singapore.  Moving forward, we expect CARLSBG’s FY12 net margin to hover at 11% and its earnings to grow by 6.7% supported by its lucrative Singapore operations and Super Premium brands despite it having a smaller market share of 40% (June-12) in Malaysia compared to GAB (60% as of June-12).

Dividend yield play.  Historically, the company’s dividend payout ratio is at about 100% except for 2008 and 2009 (the acquisition period for Carlsberg Singapore). Going forward, the management has guided that it will be unlikely for the dividend payout ratio to rise higher than the 100% level as it wants to remain prudent in retaining sustainable a cash balance for the operation. As such, we do not expect any special dividend to be made in the near term. However, assuming a dividend payout ratio of just 100%, CARLSBG will still be able to deliver decent net dividend yields of 4.4%-4.9% in our FY12-13E. 

OUTPERFORM with a potential capital upside.  We like CARLSBG for its diversified market profile and its strength in the Super Premium segment. Hence, we are initiating CARLSBG with an OUTPERFORM recommendation given its total return of 12% to our Target Price of RM14.10 based  on DCF valuation with a WACC of 8.6% (based on a risk premium of 6.8%, risk-free rate of 3.1% and a beta of 0.83) and a long term growth rate of 1.5%.

Source: Kenanga