Stock Name: CARLSBG
Company Name: CARLSBERG BREWERY MALAYSIA BHD
Research House: AMMB
Malt liquor sector
Maintain neutral: We believe the malt liquor market (MLM) in Malaysia is back on a cyclical upward trend, with the industry forecast to grow at a decent 4% to 5% in 2011 and 2012. In contrast, average MLM growth was flattish at 0.5% to 1.5% per year over the last three years, with the exception of the estimated 4% to 5% FIFA World Cup-led growth in 2010.
The latest industry data reveals that consumption as measured in hectolitres (1HL = 100 litres) has surpassed its previous peak of 1.3HL in 2004/05 ' marking a significant industry turnaround. As we have seen, consumption has been stagnant over the years, ever since alcohol excise duty was raised from RM6 per litre to RM7.40 back in 2004.
Notwithstanding a slight moderation in consumption this year due to the absence of special world events, demand momentum should remain relatively steady moving forward, buoyed by the status quo of excise duties, more brewer-organised events and festivities, and the UEFA European Cup further out in 2012. We forecast higher advertising and promotion spending of RM160 million for Guinness Anchor Bhd (GAB) and RM245 million for Carlsberg Brewery Bhd (CAB) in 2011 (year-on-year: +2% to 3%).
Despite the upward pressure on soft commodity costs, brewers have successfully averted any significant margin erosion via forward purchases of raw ingredients of up to 10 to 12 months. Prices of malting barley, hops and wheat have surged 13% to 18% (last four months) on concerns of tight weather-related crop outputs, potentially translating into higher cost structures for brewers from 2012 onwards. Additional costs are mostly passed on to consumers through higher average selling prices (ASPs) as in the past, while annual price adjustments averaged 3% to 5%. Nevertheless, the stronger ringgit against the US dollar would bode well in providing some cushion against volatile imports. Raw ingredients and packaging materials constitute approximately 13% to 14% of revenue.
At the forefront of CAB's growth is rising earnings contribution from increased brewing capacity of Carlsberg Singapore. Carlsberg Singapore makes up 30% of group revenue at present. Industry prospects in Singapore are comparatively brighter, as it registered a faster growth rate of 8% to 9% in 2010 (twice that of Malaysia), while consumption per capita at approximately 25 litres is 19% higher than that in Malaysia.
On the other hand, GAB is expected to at least retain its 60% MLM market leadership in Malaysia. While lacking a strong premium beer to compete against CAB, the group has nevertheless grabbed overall MLM market share off CAB though its iconic Tiger beer. We expect the group to leverage on its stronghold of better margins on trade sales channels to boost consumption. Our earnings forecast model indicates a three-year compound annual growth rate of 4%.
For exposure to the MLM sector, we prefer CAB as valuations are more attractive. Unlike GAB, CAB is currently trading below the mean of its 10-year historical price-earnings ratio band. CAB's undemanding current price-to-book value of three times is near its mean, at a deep discount to GAB's seven times (equivalent to 2.5 standard deviation). For a stock offering comparable earnings per share growth and implied dividend yields, CAB's valuations are unjustifiably cheap. ' AmResearch, March 10
This article appeared in The Edge Financial Daily, March 11, 2011.
Company Name: CARLSBERG BREWERY MALAYSIA BHD
Research House: AMMB
Malt liquor sector
Maintain neutral: We believe the malt liquor market (MLM) in Malaysia is back on a cyclical upward trend, with the industry forecast to grow at a decent 4% to 5% in 2011 and 2012. In contrast, average MLM growth was flattish at 0.5% to 1.5% per year over the last three years, with the exception of the estimated 4% to 5% FIFA World Cup-led growth in 2010.
The latest industry data reveals that consumption as measured in hectolitres (1HL = 100 litres) has surpassed its previous peak of 1.3HL in 2004/05 ' marking a significant industry turnaround. As we have seen, consumption has been stagnant over the years, ever since alcohol excise duty was raised from RM6 per litre to RM7.40 back in 2004.
Notwithstanding a slight moderation in consumption this year due to the absence of special world events, demand momentum should remain relatively steady moving forward, buoyed by the status quo of excise duties, more brewer-organised events and festivities, and the UEFA European Cup further out in 2012. We forecast higher advertising and promotion spending of RM160 million for Guinness Anchor Bhd (GAB) and RM245 million for Carlsberg Brewery Bhd (CAB) in 2011 (year-on-year: +2% to 3%).
Despite the upward pressure on soft commodity costs, brewers have successfully averted any significant margin erosion via forward purchases of raw ingredients of up to 10 to 12 months. Prices of malting barley, hops and wheat have surged 13% to 18% (last four months) on concerns of tight weather-related crop outputs, potentially translating into higher cost structures for brewers from 2012 onwards. Additional costs are mostly passed on to consumers through higher average selling prices (ASPs) as in the past, while annual price adjustments averaged 3% to 5%. Nevertheless, the stronger ringgit against the US dollar would bode well in providing some cushion against volatile imports. Raw ingredients and packaging materials constitute approximately 13% to 14% of revenue.
At the forefront of CAB's growth is rising earnings contribution from increased brewing capacity of Carlsberg Singapore. Carlsberg Singapore makes up 30% of group revenue at present. Industry prospects in Singapore are comparatively brighter, as it registered a faster growth rate of 8% to 9% in 2010 (twice that of Malaysia), while consumption per capita at approximately 25 litres is 19% higher than that in Malaysia.
On the other hand, GAB is expected to at least retain its 60% MLM market leadership in Malaysia. While lacking a strong premium beer to compete against CAB, the group has nevertheless grabbed overall MLM market share off CAB though its iconic Tiger beer. We expect the group to leverage on its stronghold of better margins on trade sales channels to boost consumption. Our earnings forecast model indicates a three-year compound annual growth rate of 4%.
For exposure to the MLM sector, we prefer CAB as valuations are more attractive. Unlike GAB, CAB is currently trading below the mean of its 10-year historical price-earnings ratio band. CAB's undemanding current price-to-book value of three times is near its mean, at a deep discount to GAB's seven times (equivalent to 2.5 standard deviation). For a stock offering comparable earnings per share growth and implied dividend yields, CAB's valuations are unjustifiably cheap. ' AmResearch, March 10
This article appeared in The Edge Financial Daily, March 11, 2011.
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