No tax hikes for brewers

Brewery stocks Guinness Anchor Bhd and Carlsberg Brewery Malaysia Bhd were given a boost, being spared a tax hike in Budget 2012. The last time the sector was slapped with higher taxes was back in 2005, with a net increase of about  8%. Given that Malaysia’s tax on beer is now the second highest in the world, the absence of a hike this year was within market expectations.

Total industry volume sales for beer and stout fared well last year, rebounding a strong 12% after a slight contraction in 2009. Demand grew through the first six months of this year and is expected to continue expanding going into 2012, albeit at a slower pace compared with that of last year. This bodes well for the earnings outlook for both local brewers.

Steady earnings growth forecast
Carlsberg’s turnover grew 5.6% in 1H11 to RM752.7 million on the back of both volume and price increases. Net profit was up a stronger 16.5% from the previous corresponding period to RM80 million. This is after taking into account higher-than-usual advertising and promotions expenses as well as additional costs for the new bottle related to the company’s global rebranding exercise in 2Q11, which resulted in lower 2Q11 margins compared with the first three months of the year. But we expect these expenses to normalise in 2H11.

Aside from higher selling prices and volume sales, we expect the better 1H11 margins were also due in part to synergies from its acquisition of Carlsberg Singapore. Sales from the latter accounted for just under a quarter of the company’s total sales in 1H11.

Volume sales for the company’s range of premium brands, including Hoegaarden and Kronenbourg, have been registering strong growth and will remain one of its key drivers for future growth, even though the segment is still small relative to overall sales.
We estimate net profit will total RM153.3 million this year, up 15% from a year ago, equivalent to 50.1 sen per share. We expect profit to grow further to about RM157 million in 2012.

The more modest growth expectations for next year are based on the assumption of higher raw material prices such as malt barley, which would be partly offset by the 3% to 4% increase in selling prices since April 2011. After peaking in July 2008, barley prices fell to a low in September 2009 but have since rebounded strongly — now trading some 25% higher than this time last year.

Carlsberg: Attractive valuations and yields
At the prevailing price of RM6.90, Carlsberg shares are trading at fairly attractive valuations relative to other high-yielding consumer stocks of roughly 13.8 times 2011 and 13.4 times 2012.

The company had net debt of about RM50 million as at end-June. Recall that the acquisition of Carlsberg Singapore in 2009 depleted the company’s cash hoard. But in the absence of major capital expenditure going forward, we expect its cash position will rebuild on the back of steady cash flow from operations. This could translate into a gradually higher dividend payout ratio over the longer term.

Between 2003 and 2007, prior to the acquisition, the company had been paying some 109% of annual net profit, on average. The payout dropped to 35% in 2008 and 51% in 2009, before rising back to 100% in 2010. Assuming a 70% payout ratio for 2011/12, gross dividends are estimated to total 46.8 sen and 47.9 sen per share for the two years. That will earn shareholders higher-than-market average net yields of about 5.1% to 5.2% at the current share price.

Guinness: Maintains market share gains
Guinness too reported solid growth in its last financial year ended June 2011. Turnover was up 9.6% year-on-year to RM1.49 billion while net profit increased by an outsized 18.8% to RM181.4 million.

The margin expansion was attributed to higher volume sales, selling prices, improved efficiency as well as cost savings. Like Carlsberg, Guinness’ latest 4QFY11 earnings were dampened by additional costs, in this case to restructure its distribution channels. But the exercise should result in greater efficiency going forward.

The company has been doing very well over the past few years, gaining market share with its stable of brand names including Tiger, Guinness, Heineken and Anchor. It is now estimated to have roughly 59% share of the local beer and stout market, up from roughly 46% a decade back.

We forecast earnings will grow further to RM190.9 million and RM201.4 million in FY12 and FY13. At the current price, Guinness shares are trading at roughly 16.8 and 15.9 times our estimated earnings for the two years.

While its valuations are higher than Carlsberg’s, we expect the company’s dividend yields to be better, based in part on the strength of its balance sheet.

Dividend payout averaged  a steady 88% from FY07 to FY11
Guinness was sitting on cash totalling almost RM180 million as at end-June, or about 60 sen per share, with zero borrowings. The strong balance sheet and expected steady earnings and cash flow from operations will ensure the continuation of its generous dividend payout policy. Over the past five years, Guinness’ dividend payout has averaged at a steady 88%.

In line with the stronger earnings, the company raised total net dividends to 54 sen per share, equivalent to a payout of 90% of profit for FY11. The stock will trade ex-entitlement for final dividends of 44 sen per share on November 11.

Assuming a similar payout going forward, net dividends are estimated at 57 and 60 sen per share in FY12 and FY13. That translates into attractive yields of 5.4% to 5.7% for shareholders at the prevailing share price of RM10.60.


Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.

Written by Insider Asia