Tuesday, July 3, 2012


Investor confidence in the two local listed brewery stocks, Guinness Anchor Bhd (GAB) (RM12.86) and Carlsberg Brewery Malaysia Bhd (RM10.86), has been quite strong. Both stocks have fared well over the past few months. And expectations for better than market average returns, including yields, appear upbeat.

The positive expectations are predicated partly on the relative resilience and continued growth in domestic consumption amid a weaker external environment. The job market is still robust, while the recent pay hike for civil servants bodes well for overall income growth prospects.

Mid-single digit industry growth expected
Demand for malt and liquor products has been on an uptrend. Industry volume sales are expected to expand in the mid-single digit range this year. Spared from tax increases for the past few years, the last hike was back in September 2005, brewers have been able to gradually raise selling prices to offset rising costs. Case in point, the companies have indicated a 3% to 4% price increase this month, similar in quantum to the hike this time last year, to pass on higher raw material such as malt costs.

The higher volume sales and selling prices have in turn enabled both GAB and Carlsberg to improve their margins and earnings over the past few years. This is expected to remain the case going forward.

Volume sales and price increases underpin earnings expansion
GAB’s net profit grew from RM126 million in FY08 ended June to over RM181 million in FY11, equivalent to a compound annual growth rate (CAGR) of nearly 13% per year. In addition to rising demand, growth was driven by steady market share gains by the company’s stable of brand names, which include Tiger beer, Guinness stout and Heineken beer. GAB is estimated to have roughly 60% share of the local beer and stout market currently, up from roughly 46% a decade ago.
For the first half of the current financial year, net profit was up 17% y-o-y to RM121 million. This was on the back of 16% turnover growth that was boosted by an early Chinese New Year. Taking into account a slower 2HFY12, we estimate net profit to total roughly RM201 million, up 11% from FY11.

Looking slightly further ahead, we forecast the company’s net profit to expand to RM219 million in FY13. At the current price of RM12.86, the stock is trading at roughly 18.5 times our annualised earnings for 2012 and 17 times for 2013.

The continued earnings growth will support GAB’s dividend stream. Indeed, companies, especially those with expectations of steady cash flow from operations, appear increasingly open to raising their cash distributions to shareholders and taking on more debt, in part to take advantage of the prevailing low interest rate environment.

GAB’s net yield estimated at 9.3% for FY12 and 5.1% FY13
With a mounting cash pile, GAB made a special dividend payout of 60 sen per share in January and an interim dividend of 10 sen per share last month. By comparison, dividends totalled 54 sen per share for the whole of FY11. We expect a final dividend of about 50 sen per share, assuming a 90% profit payout ratio for FY12 (excluding the special dividend). Thus, dividends are estimated to total some RM1.20 per share, which would earn shareholders a net yield of 9.3% at the current share price.

The company had net cash of RM46 million as at end-2011 before the special and interim dividend payments, which would take it into a net debt position currently. Nevertheless, we expect GAB to revert to a net cash position by end-FY12. Assuming a similar payout ratio going forward, dividends are estimated at some 65 sen per share in FY13, which would give shareholders a net yield of 5.1%.

While GAB has had the upper hand in terms of gaining market share domestically, Carlsberg has expanded its operations base to include the Singapore market. Carlsberg’s net profit expanded at an even stronger CAGR of nearly 30% between 2008 and 2011, thanks to the earnings boost and operational synergies from Carlsberg Singapore, which was acquired in 4Q09. Net profit grew from RM76 million in 2008 to RM166 million in 2011.

We estimate net profit at RM171.9 million for the current year to increase further to RM187.5 million in FY13. Based on our earnings forecast, the stock is now trading at a price-earnings ratio of 19.5 for 2012 and 17.8 for 2013.

Carlsberg banks on premium beer to drive growth
The company expects sales from Singapore, which accounted for roughly a quarter of total sales last year, to expand at double the pace of the low single digit growth estimated for the domestic market.

The other key growth driver is the premium beer market, where it carries a large portfolio of brand names to cater for different consumer segments. Carlsberg estimates its share of this faster growing segment at about 16% at the moment. It targets to raise this to 20% by end-2012 and 50% over the longer term.

The company started brewing the Asahi Super Dry beer late last year and intends to produce two other brands, Kronenbourg 1664 and Kronenbourg Blanc, later this year. The locally produced beer will result in additional cost savings, including on logistics and import duty and better margins.

In addition to earnings growth, we expect Carlsberg to maintain a high dividend payout ratio. The company had net cash totalling RM50 million as at end-2011. Net dividends totalled 43.5 sen per share in 2010 and 54.9 sen in 2011, equivalent to 100% to 102% of profit. Assuming a 100% payout going forward, net dividends are estimated at 55.8 sen per share in 2012 and 60.9 sen in 2013. That translates into net yields of 5.1% and 5.6% for the two years at the current price of RM10.86.

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.

This article appeared in The Edge Financial Daily, April 13, 2012.

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