The two brewery stocks — Guinness Anchor Bhd and Carlsberg Brewery (M) Bhd — continue to be the favourites among investors. Shares for both companies have gained some 10% to 13% year-to-date, far outperforming the benchmark FBM KLCI, which declined 3% over the same period.
This is likely due in part to their relative earnings resilience as well as strong cash flow and steady dividend income stream — attractive traits amid prevailing uncertainties.
Volume demand for the malt liquor market has been trending steadily higher over the past few years on the back of rising domestic consumption and absence of government tax increases, which has also allowed the brewers to inch selling prices higher to offset rising costs.
This and economies of scale have translated into better operating margins for the two brewery companies — and stronger earnings.
This trend is expected to remain intact in the current year with demand expected to expand around the mid-single digit.
Both Guinness and Carlsberg reported earnings results for the fourth quarter of 2012 (4Q12) that were broadly in line with expectations, and supportive of growth going forward.
Better margins on economies of scale and product mix
Guinness’ turnover for the last quarter (the second quarter for its financial year ending June 2013 [2QFY13]) was down 8.3% year-on-year (y-o-y) to RM429.4 million. This was due to the fact that the Chinese New Year fell in the second week of February this year instead of January, which more than offset the additional nine days of sales brought forward from 1QFY13 as a result of the company’s information technology (IT) system migration exercise.
As such, the company indicated much stronger than usual sales in 3QFY13, bolstered by the spillover sales from the Chinese New Year period.
Positively, despite the drop in revenue, net profit increased slightly to RM66.2 million in 2QFY13, from RM65.8 million in the previous corresponding quarter. This was attributed to a combination of higher pricing, better product mix and cost management.
We forecast net profit to total RM228 million for the full FY13. This implies that Guinness’ shares are now trading at roughly 24.8 times our earnings estimate at the prevailing price of RM18.70.
Its valuations are notably higher than the average price-to-earnings ratio (PER) for the broader market, estimated at around 15 to 16 times currently. As such, further upside gain from here on could be limited, at least in the near to medium term.
Looking further ahead, its share price should rise gradually to reflect the growth in earnings going into the next financial year come July 2013. We forecast net profit will grow roughly 10% to RM250 million in FY14, which translates into a PER of about 22.6 times.
Shareholders should continue to earn fairly decent yields. The company intends to distribute some 90% to 95% of annual earnings back to shareholders.
The high payout ratio is supported by steady cash flow from operations and the strong balance sheet.
Guinness had net debt totalling just about RM166 million at end-December 2012.
We estimate dividends to be 72 sen per share for FY13 and 79 sen for FY14, which translates into fairly decent net yields of 3.8% to 4.2% at the current share price.
Double digit total returns from growth and yield
A similar pace of earnings growth is expected for Carlsberg, driven by both domestic sales as well as sales in Singapore. The company reported turnover growth of 6.4% to RM1.58 billion in 2012 while net profit increased by an outsized 15% to RM191.6 million.
As with Guinness, the margin expansion was due to a combination of higher selling prices, better product mix and improved processes.
For instance, Carlsberg is focusing on building the premium brands in its portfolio, which currently account for about 20% of total sales.
The segment carries better profit margins, which were bolstered further by the company’s move to produce two of the imported brands — Asahi and Kronenbourg — locally, thus saving on import duties, transport and handling costs.
Since acquiring the Singapore operations in the fourth quarter of 2009, capital expenditure has been relatively small. This and strong cash from operations have, in turn, translated into a high payout ratio, which averaged a shade higher than 100% in the past three years.
In view of its net cash of RM52.7 million at end-2012, barring any major acquisition, we expect the company to continue paying out all of its annual profits.
Dividends are estimated to be 69 sen per share for the current year. That would earn shareholders a net yield of 5%.
At the current price of RM13.80, the stock is trading at slightly lower valuations than Guinness, perhaps attributed, in part, to its higher market share (estimated at about 59%).
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.
