Come up to Carlsberg

Carlsberg Brewery Malaysia Bhd
(Dec 21, RM6.40)

Maintain “buy” at RM6.36 with revised target price of RM7.20 (from RM6.70): Although the brewery sector has done well with Carlsberg and Guinness’ share prices up 41% year-to-date against the FBM KLCI’s +18%, we remain buyers of Carlsberg.

We remove our previous forecast of a 5% hike in excise duties in 2011 and 2012 — resulting in higher net profits by 3.7% and 10.5% to RM135 million and RM155 million respectively. Our resultant discounted cash flow-based (DCF) target price (TP) rises to RM7.20 (+7.4%).

After six successive years now without a hike in excise duties, Malaysia remains the country with the second-highest level of duties for beer globally. In light of the government’s latest push to raise the country’s tourist-attractiveness quotient, it is likely that excise duties may yet stay unchanged for a few more years.

The year 2011 will be the second full-year since Carlsberg’s acquisition of its Singapore subsidiary in 4Q09. We expect synergies such as joint advertising and promotions (A&P) and a streamlined export arm to reap both cost savings and better revenue growth.

This should continue into at least 2012, putting Carlsberg in a better position to evaluate further overseas investments, such as its 24.6% stake in Lion Brewery in Sri Lanka.

Carlsberg will now have sufficient impetus and financial stability to seek viable growth opportunities that further enhance its competitive position.

For instance, we think Carlsberg should brew at least one popular, premium-priced brand to expand to better compete with its rivals’ premium brands.

This should raise Carlsberg’s earnings before interest, tax, depreciation and amortisation margin if successful, while simultaneously managing the extent of price competition for its key Carlsberg Green Label beverage.

Our DCF-based TP has been raised after removing imputed excise duty hikes.

At RM7.20, Carlsberg would trade at 14.3 times 2012 price-earnings ratio, which we consider undemanding in view of its earnings growth potential from overseas. — Maybank IB Research, Dec 21