Investment Highlights MALT LIQUOR SECTOR Slump in price of malting barley a boon for 2013 27 June 2012 NEUTRAL Low Soo Fang low-soo-fang@ambankgroup.com +603 2036 2292 Rationale for report : Sector Update (Maintained) Higher MLM growth forecast of 6%-7% We have raised our MLM growth forecast to 6%-7% for 2012-2013, up from 5%-6% previously. Our channel checks at selected F&B outlets within the Klang Valley suggest a relatively resilient demand, with the recent 3% price hike wellabsorbed by end-consumers. To recap, the higher pricing structure was implemented by both brewers Carlsberg Brewery Malaysia Bhd (CAB) and Guinness Anchor Bhd (GAB) back in May 2012. Robust beer volume growth seen Notwithstanding the effect from the Euro 2012 special event, the industry s longer-term upward growth trajectory remains intact. We see healthy demand growth well underpinned by: -1) the status quo in alcohol excise duty at RM7.40/litre; 2) positive consumer spending sentiment and; 3) on-going major A&P campaigns to boost sales. Slump in price of malting barley to drive margin expansion in 2013 - Robust beer volume growth aside and more importantly, we believe brewers are poised for an earnings upgrade from margin expansion on the back of cheaper input costs going forward. We see a sustained easing in prices of malting barley due to:- 1) additional global supply on increased plantings and favourable weather conditions, and 2) Flattish demand from Europe alongside the bearish macroeconomic outlook in the region. As it is, the current price of malting barley at EUR219/MT is down a further 12% from 2 months ago, extending its downward trend from the YTD high of EUR288/MT (Feb 2012). This brings the present price level on par to that last seen in 2009, prior to the heat wave-induced price surge in 2010. Much as we witnessed a notable margin expansion back then, we expect a similar re-run going into CY13F. EPS forecast raised by 7% to 9% - We anticipate a margin improvement of 2ppts to 3ppts for next year as new and cheaper inventories of malting barley filter through. Both brewers have locked in their respective raw material requirements for CY12. Next to excise duties, raw materials & packaging costs account for approximately 15%-17% of total operating costs. Consequently, our earnings forecasts for CAB and GAB have been nudged upwards by 7% to 9% for FY13F-14F. Our revised earnings models now suggest a 3-year earnings CAGR of 8% for GAB and a higher 10% for CAB. Dividend yield of 5% p.a. is still decent As we have seen, the recent share price rally comes in largely in line with the re-rating of the broader consumer sector, mainly due to rising interests by investors seeking a defensive portfolio strategy. Nonetheless, net dividend yields of 5% per annum (p.a.) are still decent especially in view of renewed uncertainties in the global capital markets. Re-affirm BUY on CAB, FV: RM14.00/share - We re-affirm our BUY recommendation on CAB with a higher DCF-based fair value of RM14.00/share post a revised long-term growth rate assumption of 4% vs. 3% previously. CAB remains our preferred pick for exposure to the brewery sector for its solid earnings prospects on the back of an expanding market share and a deepening market penetration. A strong portfolio of premium beers and in-house brewing of imported labels (Asahi, Kronenbourg 1664 and Kronenbourg Blanc) will further bolster long-term growth. Maintain HOLD on GAB, FV: RM14.50/share We maintain our HOLD recommendation on GAB with a higher DCF-based fair value of RM14.50/share, as we upped our long-term growth rate assumption from 2% to 3%.GAB s dividend yield of 5% per annum (p.a.) as premised on a generous dividend payout of 90% is well supported by the group s strong brand equity and dominant MLM market share at 60%-62%. Additionally, the stock is a potential beneficiary of capital management initiatives which could result in the establishment of a higher dividend payout policy as part of management s effort to optimise its cost of capital. TABLE 1 : SECTOR VALUATION MATRIX Div Target Share Price EPS (sen) PE (x) P/BV ROE Potential Yield Price Rating (RM) CY12F CY13F CY12F CY13F (x) (%) (%) (RM) Upside (%) Carlsberg Buy 12.10 59.2 68.2 20.4 17.5 5.9 27.4 4.0 14.00 15.7 Guinness Hold 13.30 68.0 74.8 19.6 17.8 7.8 36.7 5.0 14.50 9.0 Source: Company, AmResearch estimates Share prices as at 26 June 2012 PP 12246/05/2013 (032379)
SLUMP IN PRICE OF MALTING BARLEY A BOON FOR 2013 Higher MLM growth forecast of 6%-7% We have raised our MLM growth forecast to 6%-7% for 2012-2013, up from 5%-6% previously. Our channel checks at selected food & beverage outlets within the Klang Valley suggest a relatively resilient demand, with the recent 3% price hike well absorbed by endconsumers. To recap, the higher pricing structure was implemented by both brewers Carlsberg Brewery Malaysia Bhd (CAB) and Guinness Anchor Berhad (GAB) back in May 2012. Industry s upward growth trajectory remains intact Notwithstanding the effect from the Euro 2012 special event, the industry s longer-term upward growth trajectory remains intact (See Chart 10). We see healthy demand growth well underpinned by: -1) the status quo in alcohol excise duty at RM7.40/litre; 2) positive consumer spending sentiment and; 3) on-going major A&P campaigns to boost sales. This brings the present prices on par to that last seen in 2009, prior to the heat wave-induced price surge in Russia which prompted the government s ban on exports to meet local demand (See Charts 1 and 2). Russia is the single largest exporter of barley behind the European Union, accounting for circa 12% of global exports. Much as we witnessed a notable margin expansion back then, we expect a similar re-run going into CY13F. Raising earnings forecast by 7% to 9% for FY13F- 14F We anticipate a margin improvement of 2ppts to 3ppts for next year as new and cheaper inventories of malting barley filter through. Both brewers have locked in their respective raw material requirements for CY12. Consequently, our earnings forecasts for CAB and GAB have been nudged upwards by 7% to 9% for FY13F-14F. Our revised earnings models now suggest 3-year earnings CAGR of 8% for GAB and a higher 10% for CAB. Slump in price of malting barley to drive margin expansion for brewers Robust beer volume growth aside and more importantly, we believe brewers are poised for an earnings upgrade from margin expansions going forward. This will come on the back of cheaper input costs, notably malting barley and packaging costs such as aluminium cans. Next to excise duties, raw materials & packaging costs account for approximately 15%-17% of total operating costs. Excise duties are the largest determinant at roughly 63%-65% of total operating costs. Sustained easing in malting barley prices due to demand & supply fundamentals We see a sustained easing in malting barley prices due to:- 1) additional global supply on increased plantings and favourable weather conditions and; 2) Flattish demand from Europe alongside the bearish macroeconomic outlook in the region. As it is, the current price of malting barley at EUR219/MT is down a further 12% from 2 months ago, extending its downward trend from year-to-date high of EUR288/MT (February 2012). Dividend yield of 5% per annum is still decent As we have seen, the recent share price rally comes in largely in line with the re-rating of the broader consumer sector, mainly due to rising interests by investors seeking a defensive portfolio strategy. Nonetheless, net dividend yields of 5% per annum (p.a.) are still decent especially in view of renewed uncertainties in the global capital markets. Re-affirm BUY on CAB, fair value of RM14.00/share We re-affirm our BUY recommendation on CAB with a higher DCF-based fair value of RM14.00/share, post a revised long-term growth rate assumption of 4% versus 3% previously (WACC: 9%). CAB remains our preferred pick for exposure to the brewery sector for its solid earnings prospects on the back of an expanding market share and a deepening market penetration. A strong portfolio of premium beers and in-house brewing of imported labels (Asahi, Kronenbourg 1664 and Kronenbourg Blanc) will further bolster long-term growth. AmResearch Sdn Bhd 2
Maintain HOLD on GAB, fair value of RM14.50/share We maintain our HOLD recommendation on GAB with a higher DCF-based fair value of RM14.50/share, as we upped our long-term growth rate assumption from 2% to 3% (WACC: 9%). GAB s dividend yield of 5% per annum (p.a.) as premised on a generous dividend payout of 90% is well supported by the group s strong brand equity and dominant MLM market share at 60%-62%. Additionally, the stock is a potential beneficiary of capital management initiatives which could result in the establishment of a higher dividend payout policy as part of management s effort to optimise its cost of capital. AmResearch Sdn Bhd 3
CHART 1 : PRICE TREND OF MALTING BARLEY (2010 - JAN 2012) CHART 2 : PRICE TREND OF MALTING BARLEY (AS AT JUN 2012) AmResearch Sdn Bhd 4
CHART 3 : EASING ALUMINIUM FUTURES TO LIFT MARGIN PRESSURE ON PACKAGING COSTS CHART 4 : SECTOR ENJOYS VALUATION PREMIUM FOR ITS DEFENSIVE ATTRIBUTES AmResearch Sdn Bhd 5
CHART 5 : PE(X) TREND OF CAB CHART 6 : PE(X) TREND OF GAB CHART 7 : P/B TREND OF CAB CHART 8 : P/B TREND OF GAB AmResearch Sdn Bhd 6
CHART 9 : COMPARISON OF PRODUCT PORTFOLIO Source: CAB, GAB, AmResearch CHART 10 : UPTREND IN TIV REMAINS INTACT Source: CAB, GAB, AmResearch estimates AmResearch Sdn Bhd 7
CHART 11 : ALCOHOL EXCISE DUTY AT STATUS QUO Source: CAB, GAB, AmResearch estimates CHART 12 : MLM VOLUME DOMINATED BY BLONDE BEER Source: CAB, GAB, AmResearch AmResearch Sdn Bhd 8
TABLE 2 : CAB FINANCIAL DATA Income Statement (RMmil, YE 31 Dec) 2010 2011 2012F 2013F 2014F Revenue 1,368.2 1,489.4 1,612.5 1,690.7 1,784.9 EBITDA 190.1 233.7 255.8 291.0 308.9 Depreciation (17.7) (20.1) (21.3) (20.2) (21.2) Operating income (EBIT) 172.4 213.6 234.5 271 287.7 Other income & associates 5.5 7.9 5.5 5.5 5.5 Net interest (1.3) (1.2) (0.3) (0.3) (0.3) Exceptional items 0.0 0.0 0.0 0.0 0.0 Pretax profit 176.5 220.4 239.6 275.9 292.8 Taxation (42.4) (53.0) (57.5) (66.2) (70.3) Minorities/pref dividends (0.9) (1.2) (1.2) (1.3) (1.3) Net profit 133.2 166.2 180.9 208.5 221.3 Core net profit 133.2 166.2 180.9 208.5 221.3 Balance Sheet (RMmil, YE 31 Dec) 2010 2011 2012F 2013F 2014F Fixed assets 143.9 146.6 172.5 182.2 191.0 Intangible assets 406.4 410.9 410.9 410.9 410.9 Other long-term assets 26.7 33.8 33.4 33.4 33.4 Total non-current assets 576.9 591.4 616.8 626.6 635.4 Cash & equivalent 101.2 72.2 72.7 128.4 181.8 Stock 48.8 62.5 60.2 62.1 65.5 Trade debtors 207.3 231.1 237.3 248.9 262.7 Other current assets 4.6 3.7 4.9 7.1 7.1 Total current assets 361.9 369.5 375.1 446.5 517.1 Trade creditors 212.9 214.2 230.7 238.0 251.0 Short-term borrowings 53.0 22.3 17.3 12.3 7.3 Other current liabilities 10.2 17.3 94.3 110.0 114.4 Total current liabilities 276.0 253.8 342.3 360.2 372.7 Long-term borrowings 0.0 0.0 0.0 0.0 0.0 Other long-term liabilities 74.1 76.0 76.0 76.0 76.0 Total long-term liabilities 74.1 76.0 76.0 76.0 76.0 Shareholders funds 586.1 627.1 569.7 632.9 699.9 Minority interests 2.7 3.9 3.9 3.9 3.9 BV/share (RM) 1.92 2.05 1.86 2.07 2.29 Cash Flow (RMmil, YE 31 Dec) 2010 2011 2012F 2013F 2014F Pretax profit 176.5 220.4 239.6 275.9 292.8 Depreciation 17.7 20.1 21.3 20.2 21.2 Net change in working capital 67.6 (55.4) 12.6 (6.1) (4.3) Others (39.3) (30.5) (63.0) (71.7) (75.8) Cash flow from operations 222.5 154.5 210.6 218.3 234.0 Capital expenditure (25.1) (28.5) (30.0) (30.0) (30.0) Net investments & sale of fixed assets 0.0 0.0 0.0 0.0 0.0 Others (193.8) 6.9 0.0 0.0 0.0 Cash flow from investing (218.9) (21.6) (30.0) (30.0) (30.0) Debt raised/(repaid) 44.4 (30.7) (5.0) (5.0) (5.0) Equity raised/(repaid) 0.0 0.0 0.0 0.0 0.0 Dividends paid (58.5) (127.3) (174.7) (127.3) (145.3) Others (5.1) (4.8) (0.4) (0.4) (0.4) Cash flow from financing (19.2) (162.7) (180.0) (132.6) (150.7) Net cash flow (15.6) (29.8) 0.5 55.7 53.3 Net cash/(debt) b/f (59.9) 0.9 5.5 60.7 58.3 Net cash/(debt) c/f 48.4 49.9 55.5 116.2 174.5 Key Ratios (YE 31 Dec) 2010 2011 2012F 2013F 2014F Revenue growth (%) 30.9 8.9 8.3 4.9 5.6 EBITDA growth (%) 62.8 22.9 9.5 13.8 6.1 Pretax margins (%) 12.9 14.8 14.9 16.3 16.4 Net profit margins (%) 9.7 11.2 11.2 12.3 12.4 Interest cover (x) 129.8 181.6 683.4 789.2 838.4 Effective tax rate (%) 24.0 24.0 24.0 24.0 24.0 Net dividend payout (%) 99.8 101.0 70.4 69.7 69.7 Debtors turnover (days) 57 54 53 52 52 Stock turnover (days) 14 14 14 13 13 Creditors turnover (days) 45 52 50 51 50 Source: Company, AmResearch estimates AmResearch Sdn Bhd 9
TABLE 3 : GAB FINANCIAL DATA Income Statement (RMmil, YE 31 Dec) 2010 2011 2012F 2013F 2014F Revenue 1,368.2 1,489.4 1,612.5 1,690.7 1,784.9 EBITDA 190.1 233.7 255.8 291.0 308.9 Depreciation (17.7) (20.1) (21.3) (20.2) (21.2) Operating income (EBIT) 172.4 213.6 234.5 271 287.7 Other income & associates 5.5 7.9 5.5 5.5 5.5 Net interest (1.3) (1.2) (0.3) (0.3) (0.3) Exceptional items 0.0 0.0 0.0 0.0 0.0 Pretax profit 176.5 220.4 239.6 275.9 292.8 Taxation (42.4) (53.0) (57.5) (66.2) (70.3) Minorities/pref dividends (0.9) (1.2) (1.2) (1.3) (1.3) Net profit 133.2 166.2 180.9 208.5 221.3 Core net profit 133.2 166.2 180.9 208.5 221.3 Balance Sheet (RMmil, YE 31 Dec) 2010 2011 2012F 2013F 2014F Fixed assets 143.9 146.6 172.5 182.2 191.0 Intangible assets 406.4 410.9 410.9 410.9 410.9 Other long-term assets 26.7 33.8 33.4 33.4 33.4 Total non-current assets 576.9 591.4 616.8 626.6 635.4 Cash & equivalent 101.2 72.2 72.7 128.4 181.8 Stock 48.8 62.5 60.2 62.1 65.5 Trade debtors 207.3 231.1 237.3 248.9 262.7 Other current assets 4.6 3.7 4.9 7.1 7.1 Total current assets 361.9 369.5 375.1 446.5 517.1 Trade creditors 212.9 214.2 230.7 238.0 251.0 Short-term borrowings 53.0 22.3 17.3 12.3 7.3 Other current liabilities 10.2 17.3 94.3 110.0 114.4 Total current liabilities 276.0 253.8 342.3 360.2 372.7 Long-term borrowings 0.0 0.0 0.0 0.0 0.0 Other long-term liabilities 74.1 76.0 76.0 76.0 76.0 Total long-term liabilities 74.1 76.0 76.0 76.0 76.0 Shareholders funds 586.1 627.1 569.7 632.9 699.9 Minority interests 2.7 3.9 3.9 3.9 3.9 BV/share (RM) 1.92 2.05 1.86 2.07 2.29 Cash Flow (RMmil, YE 31 Dec) 2010 2011 2012F 2013F 2014F Pretax profit 176.5 220.4 239.6 275.9 292.8 Depreciation 17.7 20.1 21.3 20.2 21.2 Net change in working capital 67.6 (55.4) 12.6 (6.1) (4.3) Others (39.3) (30.5) (63.0) (71.7) (75.8) Cash flow from operations 222.5 154.5 210.6 218.3 234.0 Capital expenditure (25.1) (28.5) (30.0) (30.0) (30.0) Net investments & sale of fixed assets 0.0 0.0 0.0 0.0 0.0 Others (193.8) 6.9 0.0 0.0 0.0 Cash flow from investing (218.9) (21.6) (30.0) (30.0) (30.0) Debt raised/(repaid) 44.4 (30.7) (5.0) (5.0) (5.0) Equity raised/(repaid) 0.0 0.0 0.0 0.0 0.0 Dividends paid (58.5) (127.3) (174.7) (127.3) (145.3) Others (5.1) (4.8) (0.4) (0.4) (0.4) Cash flow from financing (19.2) (162.7) (180.0) (132.6) (150.7) Net cash flow (15.6) (29.8) 0.5 55.7 53.3 Net cash/(debt) b/f (59.9) 0.9 5.5 60.7 58.3 Net cash/(debt) c/f 48.4 49.9 55.5 116.2 174.5 Key Ratios (YE 31 Dec) 2010 2011 2012F 2013F 2014F Revenue growth (%) 30.9 8.9 8.3 4.9 5.6 EBITDA growth (%) 62.8 22.9 9.5 13.8 6.1 Pretax margins (%) 12.9 14.8 14.9 16.3 16.4 Net profit margins (%) 9.7 11.2 11.2 12.3 12.4 Interest cover (x) 129.8 181.6 683.4 789.2 838.4 Effective tax rate (%) 24.0 24.0 24.0 24.0 24.0 Net dividend payout (%) 99.8 101.0 70.4 69.7 69.7 Debtors turnover (days) 57 54 53 52 52 Stock turnover (days) 14 14 14 13 13 Creditors turnover (days) 45 52 50 51 50 Source: Company, AmResearch estimates AmResearch Sdn Bhd 10
Published by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: (03)2070-2444 (research) Fax: (03)2078-3162 Printed by AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15th Floor Bangunan AmBank Group 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: (03)2070-2444 (research) Fax: (03)2078-3162 The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 11