Stock Name: CARLSBG
Company Name: CARLSBERG BREWERY MALAYSIA BHD
Consumer sector
We have turned more constructive on the consumer sector, in particular on selected food and beverage (F&B) companies within our consumer universe. We believe peaking inflation with softening commodity prices are strong drivers for potential earnings upside of consumer stocks from 2H11 onwards.
An absence of intensified worries over high inflation and higher disposable income should provide support to increased consumption levels. While consumption of consumer goods and services are relatively more resilient compared with other industries, easing inflationary pressures could be a further boost to top line growth of consumer companies. Our in-house economist forecasts July inflation rate to inch up further from June's 3.5% year-on-year'' (a 27-month high) due to the upward adjustments in energy tariffs, before retreating.
In addition to the confluence of structural and cyclical issues, we observe that most global commodity prices have fallen off their peaks on weak recovery in the developed world and slower growth in emerging markets. China, the world's largest importer of various commodities, recently posted a slower GDP of 9.5% for 2Q, against 9.7% in the previous quarter. Should most commodity prices see a notable slowdown towards end-2011, and as raised average selling prices (ASPs) are sustained, we see room for margin expansion on the back of lower input costs. With the exception of sugar and milk, other key input costs such as corn, wheat, cocoa and tapioca starch are trending downwards, 5% to 19% off year-to-date (YTD) peaks.
Across our coverage of consumer stocks, large caps with pricing power and market share leadership have largely outperformed the market by +6% at +27% YTD.
Smaller and medium-sized caps on the other hand were down by as much as 21% in the same period, mainly due to margin compression as a result of high raw materials prices. In this current environment, we prefer staples over discretionaries. Smaller and medium-sized F&B manufacturers are likely to see higher earnings upside potential arising from margin expansion.
Our top 'buys' are Three-A Resources Bhd (3A) and Cocoaland Holdings Bhd as gross margins for both stocks have been hard hit in the past few quarters. Margin expansion should therefore be stronger. Raw materials dominate the bulk of operating costs at 40% to 50% on average. We like 3A for its long-term earnings transformational growth as underpinned by product and capacity expansion from its China joint venture with Wilmar International. We also like Cocoaland for its aggressive but well-defined capacity expansion plans in gummies and high-growth PET 'hot-filling' technology within the beverages industry.
Potential beneficiaries of a lower cost structure include F&B giant Fraser & Neave Holdings Bhd (F&N) and KFC Holdings Bhd (KFCH) for their superior pricing power and focus in niche markets. Stabilising malting barley and hops in 2H11 ' key inputs for brewers ' may also partially offset the price surge effects seen in 1H. Depending on the magnitude, this could potentially translate into better than expected margins in 2012 for Carlsberg Brewery and Guinness Anchor Bhd. ' AmResearch, Aug 1
This article appeared in The Edge Financial Daily, August 2, 2011.
Company Name: CARLSBERG BREWERY MALAYSIA BHD
| Research House: AMMB | Price Call: BUY | Target Price: 8.30 |
Consumer sector
We have turned more constructive on the consumer sector, in particular on selected food and beverage (F&B) companies within our consumer universe. We believe peaking inflation with softening commodity prices are strong drivers for potential earnings upside of consumer stocks from 2H11 onwards.
An absence of intensified worries over high inflation and higher disposable income should provide support to increased consumption levels. While consumption of consumer goods and services are relatively more resilient compared with other industries, easing inflationary pressures could be a further boost to top line growth of consumer companies. Our in-house economist forecasts July inflation rate to inch up further from June's 3.5% year-on-year'' (a 27-month high) due to the upward adjustments in energy tariffs, before retreating.
In addition to the confluence of structural and cyclical issues, we observe that most global commodity prices have fallen off their peaks on weak recovery in the developed world and slower growth in emerging markets. China, the world's largest importer of various commodities, recently posted a slower GDP of 9.5% for 2Q, against 9.7% in the previous quarter. Should most commodity prices see a notable slowdown towards end-2011, and as raised average selling prices (ASPs) are sustained, we see room for margin expansion on the back of lower input costs. With the exception of sugar and milk, other key input costs such as corn, wheat, cocoa and tapioca starch are trending downwards, 5% to 19% off year-to-date (YTD) peaks.
Across our coverage of consumer stocks, large caps with pricing power and market share leadership have largely outperformed the market by +6% at +27% YTD.
Smaller and medium-sized caps on the other hand were down by as much as 21% in the same period, mainly due to margin compression as a result of high raw materials prices. In this current environment, we prefer staples over discretionaries. Smaller and medium-sized F&B manufacturers are likely to see higher earnings upside potential arising from margin expansion.
Our top 'buys' are Three-A Resources Bhd (3A) and Cocoaland Holdings Bhd as gross margins for both stocks have been hard hit in the past few quarters. Margin expansion should therefore be stronger. Raw materials dominate the bulk of operating costs at 40% to 50% on average. We like 3A for its long-term earnings transformational growth as underpinned by product and capacity expansion from its China joint venture with Wilmar International. We also like Cocoaland for its aggressive but well-defined capacity expansion plans in gummies and high-growth PET 'hot-filling' technology within the beverages industry.
Potential beneficiaries of a lower cost structure include F&B giant Fraser & Neave Holdings Bhd (F&N) and KFC Holdings Bhd (KFCH) for their superior pricing power and focus in niche markets. Stabilising malting barley and hops in 2H11 ' key inputs for brewers ' may also partially offset the price surge effects seen in 1H. Depending on the magnitude, this could potentially translate into better than expected margins in 2012 for Carlsberg Brewery and Guinness Anchor Bhd. ' AmResearch, Aug 1
This article appeared in The Edge Financial Daily, August 2, 2011.
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