GAB (FV RM15.27 - BUY) Company Update: More Expensive Beer Awaits

Stock Name: GAB
Company Name: GUINNESS ANCHOR BHD

Research House: OSK

Price Call: BUY

Target Price: 15.27

During yesterday's analyst briefing, GAB shed some light onits brands' performance (albeit no concrete figures were given) and itsnear-term plans. GAB's premium brands saw strong  volume growth from posh bars and pubs, whilethe early CNY boosted supermarket sales in December. It has also indicated itsintentions to raise prices starting from end-March and its tolerance for higherdebt levels. We raise our FY12-FY13 earnings forecast by 2.7-1.3% on higher volumeand price expectations. Maintain BUY at FV RM15.27.

Premium brands shine.GAB's 1HFY12 revenue grew by 15.8% y-o-y, largely driven by  the following two factors:  (i) strong Guinnessand Heineken performance, with Heineken's volume growing by double digits, and(ii) the earlier-than-usual Chinese New Year for 2012. The modern on-tradesegment (posh bars and pubs) drove Guinness and Heineken's volume growth,  with GAB claiming that at least 80% of newbars and contract renewals across the country choose GAB as their beersupplier.

CNY effect comesearly. The earlier Chinese New Year, meanwhile, boosted the offtradesegment (supermarkets) as consumers stocked up to entertain guests at home duringthe festive season. Retailers and dealers have procured their supplies from GABin Dec 2011 in anticipation of robust consumer patronage in early January.Hence, it is not fair to make comparisons between 1HFY12 and 1HFY11, as1HFY12's volume was skewed by the earlier-festive-season factor.

Asahi not seen as amajor threat. Given Carlsberg's aggressive introduction of various brandsto target the premium beer segment, there will naturally be questions on GAB's strategyof maintaining its market share in this segment. Aside from highlighting Malaysiandrinkers' brand loyalty, the company also mentioned Asahi's weak presence outsideof Japan (Asahi is the beer Carlsberg has chosen to invest in to compete with Heineken). While emphasizing that the company will continueto be prudent and not take competition lightly, GAB highlighted Carlsberg'sunsuccessful attempts in the past to introduce new brands,  including Tuborg (to compete  with Heineken) and Skol (to contend withAnchor).

Price increase andpotentially more borrowing. GAB will increase its prices at endMarch at arate of 3-4% following escalating raw material costs. We also gathered that whileGAB is comfortable with its current D/E ratio of 0.3x, it  is receptive to a  slightly higher ratio, thus implying that itwill potentially take on more borrowings (and/or dish out more dividends).Capital expenditure for FY12 stands at around RM75m, which is higher than theusual RM30m-50m per year due to a brewery infrastructure investment project.

Source: OSK188