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Tuesday, November 29, 2016

Brokers Report: Carlsberg Brewery Malaysia - Dragged Down by Flood

Maintain PERFORM with lower target price (TP) of RM14.30

9M16 core net profit of RM157.9m (+2.6% YoY) missed our (66%) and market (66%) expectations. As expected, no DPS was declared. Weakness in Sri Lanka is not a big concern as production has resumed and earnings contribution is not too high. Outlook remains challenging on the back soft of consumer sentiment. FY16E/FY17E earnings trimmed by 7%/3%. Maintain MARKET PERFORM on CARLSBG with lower TP of RM14.30 (from RM14.70).

9M16 below expectations. 
9M16 core net profit of RM157.9m (+2.6% YoY) was below expectations, accounting for 66% of our in-house forecast and 65% of consensus. The negative deviation can be attributed to the weaker-than-expected performance in Sri Lankan operations. Note that 9M15 core net profit has been adjusted for impairment loss of RM12.5m arising from the divestment of Luen Heng F&B Sdn Bhd (LHFB) in May 2015. No DPS was declared, as expected.

YoY, the Group reported 9M16 revenue of RM1.2b which was flattish (+0.6%) as compared to RM1.2b in 9M15. The growth would have been 6.7% after adjusting for the loss of sales arising from LHFB disposal, according to the Group with both operating markets recording healthy top line growths (Malaysia: 4.9%, Singapore: 10.6%). Meanwhile, 9M16 operating profit grew 7.5% to RM208.5m driven by both operating markets as well as effective cost management. However, Sri Lankan associate (25% stake) dipped into the red with loss of RM1.9m (from 9M15 net profit: RM 10.9m) mainly due to excise duty hike and a severe flood that disrupted local production. As a result, 9M16 net profit only inched up by 2.6% to RM157.9m.

QoQ, 3Q16 reported revenue of RM393.3m was 0.6% lower as compared to 2Q16. Sales contributions from both operating markets were lacklustre, dragged down by weak consumer sentiment. Meanwhile, operating margins from both operating markets eroded which we believe the scenario was owing to higher marketing expenses in between the quarters. This coupled with the deeper loss in Sri Lankan associate (-RM1.7m vs ?RM0.2m in 2Q16) dragged 3Q16 net profit down by 15.1% to RM43.6m.

Sri Lankan weakness not too damaging. 
We are not too concerned with the loss-making associate as production has resumed on Nov 2016 (after being shut down for 3 months) and the losses will not affect the cash flow generation while earnings contribution is low at 7% in FY15. The Group expects the subdued consumer sentiment and challenging macroeconomics to remain in the near-term. However, we think innovation in product launches and effective marketing activities will continue to drive consumption. Besides, better product mix with more investment and brand building on the premium brands, including Somersby Apple Cider, Somersby Pear Cider and Kronenbourg to drive earnings growth as sales volume growth is expected to be subdued due to the soft outlook moving forward.

Trimming forecasts. 
We cut FY16E/FY17E earnings forecasts by 7%/3% to account for weaker-than-expected performance in Sri Lankan associate.

Maintain MARKET PERFORM with lower Target Price of RM14.30 (from RM14.70). 
Correspondingly, with the earnings cut, our TP is lowered to RM14.30, based on unchanged 17.6x FY17E, which is on par with its three-year mean.

Source: Kenanga Research - 29 November 2016

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