Carlsberg Brewery Malaysia Bhd 27-Feb-2015
Companies operating in the alcohol, tobacco and gaming industries, often termed as “sin stocks”, tend to derive resilient, recession-proof income with attractive dividends. As the economy turns decidedly more uncertain, investors should re-look some of these sectors for their defensive qualities.
One such stock is Carlsberg Brewery Malaysia Bhd (Fundamental: 2.3/3, Valuation: 2.1/3), which manufactures and imports beer, stout, shandy, and non- alcoholic beverages for distribution in Malaysia and Singapore. Its key brands include Carlsberg, Asahi, Kronenbourg, SKOL, Jolly Shandy and Somersby.
Despite challenges posed by consumer spending uncertainties and periodic higher alcohol taxes (taxes were raised most recently in 2005 and 2010), Carlsberg continues to provide steadily growing sales and profits, with stable profit margins. Part of this is due to its strong brands, introduction of new products and focus on improving operating efficiency and reducing costs.
Over the last five years, between 2009 and 2014, revenue increased from RM1.05 billion to RM1.56 billion, while net profit rose from RM76.14 million to RM183.93 million. Operating margin and net margins have been stable, averaging 15.8% and 11.2% respectively over the last four years.
For the past four years, Carlsberg’s annual payout ratio has ranged between 100 — 102%, yet its net gearing ratio remains very negligible at 2.7% in 3Q2014. In 2013, dividends totaled 61 sen, translating to a high yield of 4.8%.
The stock is currently trading at 15.5 times book with a trailing 12-month P/E of 18.3 times. Its closest rival Guinness Anchor is trading at 11.9 times book with a trailing 12-month P/E of 19.7 times.

This article first appeared in The Edge Financial Daily, on February 27, 2015.

-13

BEING thrown into the proverbial deep end when it comes to a big job is something most people fear. Especially so when the person is young and has to deal with a terrifying competitive landscape.

But whatever job pressure that lurks deep inside an executive, that surely isn't visible from Soren Ravn's veneer.

The 39-year old managing director of Carlsberg Brewery Malaysia Bhd (Carlsberg) looks relaxed as he steps in for this interview with StarBizWeek.
It's been exactly three years since he assumed this position when he sits down for this meeting, and during that period, the beer maker has managed to chart growing sales despite a challenging, competitive environment.

Still, Ravn, who is the youngest managing director in the history of Carlsberg Malaysia, realises that there's still much to do.

In an industry which is largely dominated by two players of which Carlsberg is currently number two, Ravn understands that there is a constant need to stay on top of the game.

“In 2010 when I came in, I decided to continue with the company's strategy at that time, which included using a wide portfolio of products to reach more customer segments,” he says.
Ravn had some help as Carlsberg had bought 70% of Luen Heng F&B Sdn Bhd in 2008. That deal allowed the brewer to gain access to a host of premium beer brands including Budweiser, Corona, Stella Artois, Becks and Fosters, Hoegarden and Jagermeister.

Ravn says that portfolio of beers changed the dynamics within Carlsberg and immediately made it more exciting for clients to work with it.

It also upped its ante on selling its premium brands owned by the group like Somersby Apple Cider and Kronenbourg as well as its third-party brand, Asahi Super Dry.

Upping the ante
The acquisition of Luen Heng allowed Carlsberg to move beyond being a one-brand company where sales of its flagship Carlsberg was the mainstay of its business.

It also meant that the company would have more arrows in its quiver when it came to taking on the competition predominantly in the form of Guinness Anchor Bhd (GAB).

“Our competitor had earlier transformed into a portfolio company rather than remaining a one-brand company.

“They gave us a hard time when they first started to invest in their three key brands against our one brand. They made very good progress and we were fighting hard.”

“We sort of finally realised that there was no way we could just rely on our number one beer, we had to have a portfolio to flank it. Then was when we started to get back some momentum.”
A host of new products opened doors for Carlsberg to get its products into more outlets and it also created a bit of buzz within the beer market.

“But I could see that in terms of profitability we would never be able to match our competitor because what they did brilliantly was selling premium brands that were locally produced.”

In other words, GAB managed to sell their brands at a premium pricing using local production costs.

“That gave them a lot of money and they could use part of that money to whack us in the mainstream segment,” he recalls with a slight wince.

What happened next served Carlsberg well enough.
“We started to identify some of those premium brands that we had and assessed whether we could move them to local production so we could get a similar margin for our premium brands and we ended up with the two that we preferred Kronenbourg and Asahi.”

In December 2011, Asahi became Carlsberg's first premium beer brand to be produced locally and it started local production of Kronenbourg 1664 and Kronenbourg Blanc in the middle of last year.

“We then managed to get long-term deals in place and then really started to attack the premium segment.

“And that is what has been driving our growth over the last couple of years.”
The price point of a premium beer is typically 15% higher than a mainstream beer, according to analysts.

To get scale and to match its competitor, Carlsberg has continued to focus on its core range.

“What we want is to have all our outlets carry Carlsberg's Green Label, Kronenbourg, Asahi and Somersby, and then we want the Luen Heng portfolio to differentiate and spice things up.”

In totality, Carlsberg has 20 plus different beers, a large wine range and five to six key spirit brands.

“We try to mimic what our competitor has done but we also have something that they don't have which is Luen Heng.”

Revenue mix
Currently, about 80% of Carlsberg's revenue is from the mainstream segment which is primarily the Carlsberg Green Label. The balance of sales comes from premium beers and other brands.

Ravn says the company is looking to “quite dramatically” increase the contribution of its premium beers and other brands to around 40%. “That would be a healthy balance. We will like that to be the case in 5 years.”

Still, growth of its core products will not be sacrificed.
“Whenever Asahi is placed in an outlet, we will also put in our mainstream Carlsberg products and because Carlsberg has such a presence, it could get maybe 50% of the outlet's sales. That means that even though sales of our premium brands are growing, sales of our Carlsberg mainstream products will also grow.

“What we want is to grow our volume faster than the market, our revenue faster than volume and our profit faster than revenue.” “Basically, we need to take a 2% to 3% volume growth and turn it into a 6% to 7% revenue growth and a double-digit profit growth. That's our ambition,” Ravn says.

This will be achieved largely by growing its premium beers segment and improving efficiency processes across segments, including cutting wastage in raw material usage and of working hours. “We are also running a marketing effectiveness programme, which will look at the returns of our marketing investments. It's something we have to do with all the brands that we have. We need to make sure that we have scale.”

Because the company now has more product types, it can target different segments and collaborate with customers to host different types of social events.

“Our Somersby, for example, is very popular with the female crowd,” says Ravn. The beer maker would only be “looking at” a possible price increase in the next couple of months amid a trend of increasing raw materials. Carlsberg has not made a decision on that yet.

The last time it increased its product prices was in May last year when it bumped up prices by an average of 3%. But as Ravn has said before that with or without a product price increase, the company intends to outpace growth of the local beer industry by focusing on improving efficiency and leveraging on its product portfolio.

The beer market is likely to grow this year, albeit by single-digit, tracking the growth trend of the past few years. “We hope that after the general election, the Government will still consider excise duties as being too high as it is the second highest in the world. “I don't think there is much justification of going any higher than that.”

Brewing in the Lion City
Carlsberg's Singapore business, which currently contributes 25% of Carlsberg's total revenue, is growing nicely, Ravn says “Singapore is different compared with Malaysia because it is a much more open economy. There are no import duties and basically everybody can play even if you don't have a brewery.

“Singapore has high beer prices but everybody can come in and with players from China and Thailand around, there are a lot of cheap products coming in.” That basically means that competition is relatively stiff in the city-state.

Carlsberg has a 20% market share in Singapore and has been growing its volume better than the market in the 5% to 7% range in the past few years. It intends to continue to do this by riding on its product portfolio and selling more of its premium beers as it has been doing.

“We actually moved ahead of Malaysia in introducing our premium brands there. “Basically we are fighting against all these one-brand importers there. We can lock in outlets which then only carry our brands and this is how we outgrow the market.”

As a percentage, so far over the last two to three years, Carlsberg's volume in Singapore has been growing faster than in Malaysia although both markets have been growing profits by double-digits. “I expect we would be able to continue with a similar growth momentum for both Malaysia and Singapore; maybe there is more natural growth in Singapore but it also has many more players.”

Expansion plans
Carlsberg is growing its volumes and production by brewing beers it had not done in the past but there's no reason at the moment to look and add space or pour big money into its brewery in Shah Alam, Ravn says.
“We have always managed to squeeze out some capacity by looking at where the next bottleneck production is at. We expand capacity gradually every year without any heavy investment.”

The company also has some flexibility because Carlsberg, as part of a big group in Asia, has many breweries in the region. “Our strategy is to give priority to domestic volume, then Singapore, and then exports in order to fill up our brewery and get good scale.”

As for investing in new brands, in terms of portfolio composition, the company is happy with what it has.
“We will be focusing on our current premium brands which are Kronenbourg, Asahi and Somersby, and will be investing in these brands over the next two to three years. “In terms of new brands, Luen Heng may bring in some new things.”

The good thing about Carlsberg's model is if something exciting is happening in the world, it can move “very quickly” with Luen Heng, says Ravn. “They can just try out the brand and see if it works well. We can also sell it via the Carlsberg sales force and then if we feel we can really hit jackpot with the product, we can consider local production.”

Delving into investments, Ravn is looking forward to launch its sponsorship of the English Premier League (EPL) from the 2013/14 season. Carlsberg, which was the beer sponsor for Euro 2012, made a “very expensive” investment for that event, he says, with a laugh.

The company found that although the Euro championship was a great platform for sales, the timing of the matches was a problem here, with most matches being played in the wee hours of the morning. “The beautiful thing about the EPL is that the timing of the matches is fantastic, on Saturday and Sunday evenings around 9pm, and everyone has at least a match one wants to see every week.

“With 5 billion viewers throughout the season, this sponsorship is excellent for our brand.” Carlsberg has entered into a three-year partnership with the Premier League as the official beer partner of the Barclays Premier League. The partnership kicks off in August.

Carlsberg shares ended up 14 sen to close at RM13.80 yesterday.

在大选即将来临加上强调企业基本面的情况下，分析员认为投资者应该把握5大投资主题。

这个5大投资主题，分别是：
1）建筑合约加速颁发；
2）油气业资本开销持续；
3）啤酒业者料资本回退；
4）小型消费股有看头；
5）经济转型执行方案带动银行业。

Carlsberg and GAB taking divergent paths for profits

The Star Business By DANIEL KHOO  Saturday March 3, 2012

Carlsberg will bank on its overseas operations, in particular the growth from Asean markets, to drive its profits as it aims to transform Kuala Lumpur into its manufacturing hub, while GAB intends to continue its streak on focusing on the local market.

Analysts covering the stocks say that this will neatly pan out the heated competition at home.

At the same time, it would ensure that both companies continued grow, and that both the companies did not cannibalise each other's market share in Malaysia where growth (relative to the region) is perceived to be mature on the back of historical population trends.

In a recent press briefing on its financial results for its financial year 2011, Carlsberg says it intends to begin production of all of its premium beers locally once it sorts out final details of its production capacity.

In addition to already producing its flagship Japanese branded Asahi Super Dry locally, Carlsberg intends to begin production of its other premium beers Kronenbourg 1664 and Kronenbourg Blanc at its Kuala Lumpur facility within the next three to six months.

By doing this, Carlsberg managing director Soren Ravn says that the company would be able to save on tangible and intangible costs related to these products. Currently, Carlsberg imports the Kronenbourg 1664 andKronenbourg Blanc while it has just begun local production of the Asahi Super Dry.

This will potentially see Carlsberg increase its cost savings of RM5 per litre of imported beer, reduce its expenditure on logistics and substantially cut transportation costs.

Ravn recently told the press that the intangible savings would be a fewer occurrence of Carlsberg running out of stock of those brands during peak periods, and that it would be able to sell beer fresh to its customers.

Carlsberg is also poised to launch two more premium beer brands for its customers some time this year. It is learnt that the company is collaborating with various artists - both local and international and is poised to ink a marketing and promotion campaign with them in conjunction with this launch.

Meanwhile, Carlsberg, which is beginning to reap the fruit of the consolidation of its Carlsberg Singapore Pte Ltd as a wholly-owned subsidiary, sees future growth coming from outside of Malaysia instead of from within the country due to the local market being already “saturated”.

“Next year we expect that Singapore will grow twice as fast as Malaysia, and Malaysia will see single-digit growth. Market growth this year will only be a couple of percent (while) Singapore will grow around 6%,” Ravn says.

On this note, Carlsberg intends to eventually transform Kuala Lumpur as its regional manufacturing hub to cater for all of the Asian region.

“Asia is quickly becoming a global leader and the Asean region holds significant potential due to burgeoning economic prosperity. Focus is on Asia and how it can contribute towards global growth, on this score, we are strategically increasing the number of brands to be manufactured in Malaysia,” Ravn said in an interview with StarBizWeek.

“To produce here is a lot more profitable. We are looking to be a regional hub but we will take this step by step. We will start with Singapore, which is under me now,” Ravn said.

“Last year, we produced almost 1.4 million hectolitres and we can still expand on that and we still have some exports that we can manage without having any capacity issues to supply to the domestic market in the next five years,” Raven adds at the recent press briefing.

GAB's managing director Charles Ireland says the company will continue to focus on the Malaysian market and is confident of it because of growing wealth which will eventually translate into higher disposable income for the populace.

“We will keep aiming to grow at our past five years' compounded annual growth rate of 11.5%. Some say that the market is saturated but we still see it otherwise and we can prove it with our track record in the past 10 years,” Ireland says, adding that GAB continues to see the Malaysian market as its future due to the potential upside growth from very low levels of per capita consumption of beer.

GAB contends the high excise duties imposed on beer, despite Malaysia having one of the lowest disposable incomes per capita, is keeping consumption of beer in check. However, it still sees Malaysia as a long term investment.

“We will keep investing in Malaysia as this is producing superior returns for our shareholders. Feedback from our majority shareholder and the minorities have been positive - they have been happy with our performance over the past 10 years and they are confident we will be able to deliver returns for them,” Ireland adds.

GAB also sees the domestic market recording a mid single-digit volume growth for the next five years and expects sufficient capacity to meet demand. At the same time, however, GAB says that it will invest RM75mil for its financial year 2012 ending June 30 to ensure it will have sufficient “brewing capacity flexibility”.

In a press statement to Bursa Malaysia in conjuction with the announcement of its recent half year financial performance, Ireland says its performance is in line with expectations and that its domestic business is performing well despite seeing a reduction in its duty free and export volume due to its strategy to focus on the local market.

“We are certainly ramping up our various initiatives to ensure that our position remains solid and that we are able to deliver the performance our shareholders have come to expect,” Ireland says in the statement.

GAB recorded growth of 17% year-on-year in its net profit to RM121.03mil from RM103.33mil on the back of revenues also surging by 16% to RM913.95mil in its first half financial performance.

On a quarterly basis meanwhile, GAB said that its net profit grew by 2% due to “a one-off reversal of costs over-accrued in the previous financial year” on the back of quarterly revenues growing by 11%.

“With the exclusion of this reversal, the like-for-like profit before tax for the quarter ended Dec 31, 2011 grew by 18%,” GAB says in the statement.

Despite the changing dynamics and the different routes for growth both Carlsberg and GAB are adopting for growth, one thing in common for both companies at present is that the Malaysian market continues to be the main contributor to earnings.

Recent developments indicate that both Carlsberg and GAB will diverge from here and tap future growth from different geographical sources.

Differing strategies for growth still do not change the fact of the unique value that each individual brand possesses.