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CARLSBG – Fundamental Analysis FY15

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Fundamental Analysis of Carlsberg Brewery Malaysia Bhd by L. C. Chong

https://lcchong.wordpress.com/
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CARLSBG – Fundamental Analysis FY15

  1. 1. CARLSBG FUNDAMENTAL ANALYSIS Financial Year 2015 (31 Dec 2015) 12 April 2016 L. C. Chong (http://lcchong.wordpress.com and https://goo.gl/jjkq4P)
  2. 2. DISCLAIMER I am NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. Stock analysis in this presentation may not neutral because I have incorporated my risk appetite and principles in the analysis. All figures in MYR and in '000s, except per share data 2
  3. 3. DECLARATION OF INTEREST • At the time of writing, I owned shares of CARLSBG.
  4. 4. SCOPE • Figures and ratios are based on the figures reported in Annual Report or the latest Q4 Quarterly Report (QR) • Unless there is a need, this analysis will not include financial figures reported in Q1, Q2 and Q3 • I will provide QR result highlights in my blog • Valuation is not covered in this analysis • I will provide valuation in my blog.
  5. 5. CHANGES • 16 Nov 2015 – First write up of CARLSBG in PowerPoint format • 12 Apr 2016 – Update with FY15Q4 and Annual Report 2015 figures.
  6. 6. REFERENCES • Alcoholic (KLSE) – Peer Comparison • Annual General Meeting 2015
  7. 7. BUSINESS PROFILE
  8. 8. BUSINESS PROFILE • Principally engaged in the production of beer, stout, shandy and non-alcoholic beverages for distribution in the home market and for export while the other Group entities are primarily involved in the marketing and distribution of beer, stout, shandy, wine, liquor and non-alcoholic beverages • Beer and stout under its key brands (including licensed products) of Carlsberg Green Label, Carlsberg Special Brew, Kronenbourg 1664, Kronenbourg Blanc, Asahi Super Dry, Somersby Apple Cider, Somersby Pear Cider, SKOL beer, SKOL Super beer, Danish Royal Stout, Corona Extra, Connor’s Stout, Jolly Shandy and the non- alcoholic malt beverage Nutrimalt.
  9. 9. BUSINESS PROFILE (CONT.) To understand more about the product portfolio, you can visit Carlsberg official website.
  10. 10. BUSINESS PROFILE (CONT.) Source: iCapital 7 Mar 2014
  11. 11. OWNERSHIP SUMMARY CORPORATIONS (PUBLIC) 51% PUBLIC AND OTHER 31% INSTITUTIONS 15% CORPORATIONS (PRIVATE) 1.56% INDIVIDUALS/INSIDERS 1% Position Date: 12 Apr 2016
  12. 12. TOP 5 SHAREHOLDERS Holder Common Stock Held As At Date % of Total Shares Outstanding CARLSBERG A/S 155,932,500 27-Feb-2015 51.0% GREAT EASTERN LIFE ASSURANCE (MALAYSIA) BERHAD, INSURANCE INVESTMENTS 13,207,320 27-Feb-2015 4.3% ABERDEEN ASSET MANAGEMENT PLC 5,512,400 27-Feb-2015 1.8% NORGES BANK INVESTMENT MANAGEMENT 4,627,900 27-Feb-2015 1.5% BNY MELLON ASSET MANAGEMENT 2,716,126 28-Feb-2014 0.9% Position Date: 12 Apr 2016
  13. 13. OWNERSHIP ANALYSIS • The shareholder with the largest stake in CARLSBG is Carlsberg A/S with a 51% stake • CARLSBG is followed by Aberdeen Asset Management with a 1.8% stake, and Great Eastern Life Assurance with a 4.3% stake.
  14. 14. ECONOMIC MOATS
  15. 15. ECONOMIC MOATS • Cost Advantage (Wide) • GAB and CARLSBG are the only major players in Malaysia. They basically have the say in pricing even if they are under highly regulated environment. People won't stop drinking even if price increase • Raw materials make up 3-6% of total cost, and the prices of wheat and malt barley have declined by 23% and 20% respectively since Jan 2013. Hence, this should benefit GAB and CARLSBG, although not substantially, as raw material is not a major cost component (beer taxes make up 50-60% of total cost) • Growing premium brand sales • The typical 2-3% annual increase in average selling prices (ASP)
  16. 16. ECONOMIC MOATS (CONT.) Source: AmResearch 27 Mar 2014 MLM Volumes grows in long term even if high excise tax imposed.
  17. 17. ECONOMIC MOATS (CONT.) • Switching Cost (Narrow) • GAB and CARLSBG are the most popular brand here • There are many other foreign brands as well • Switching cost is not high • Network Effect (Narrow) • The more people drink beers, the higher revenue GAB is • The rise in contrabands in the market have come to a worrying level • Intangible Asset (Wide) • Formula of making breweries • Network of distribution • High customer loyalty
  18. 18. ECONOMIC MOATS (CONT.) • Efficient Scale (Wide) • Highly regulated • GAB and CARLSBG are the largest permitted breweries producer in Malaysia.
  19. 19. ECONOMIC MOATS (CONT.) 74.7% 69.1% 64.6% 74.9% 69.5% 62.3% 66.4% 54.6% 84.7% 69.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31 ROIC & CROIC ROIC % CROIC %
  20. 20. ECONOMIC MOATS (CONT.) • Since FY11, CARLSBG has been enjoying very high efficiency in generating profits and free cash flow • In FY14, CROIC was higher than ROIC • Share of profits from associates increased from 5,878 (FY13) to 10,991 (FY14) • Lower capex (FY13: 29,955; FY14: 11,116) • Even if persistently weak consumer sentiment and contrabands beers, CARLSBG still enjoy extremely high ROIC and CROIC in FY15 • By MorningStar’s definition, CARLSBG has a very wide economic moats.
  21. 21. FINANCIAL PERFORMANCE
  22. 22. PROFITABILITY 15.2% 16.0% 15.7% 17.3% 17.6% 13.5% 14.0% 14.5% 15.0% 15.5% 16.0% 16.5% 17.0% 17.5% 18.0% 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31 EBITA EBITA Margin %
  23. 23. PROFITABILITY (CONT.) • In the past 5 years, even if CARLSBG facing challenges in market and economy, CARLSBG’s EBITA has been increased from RM225.8m (FY11) to RM292.3m (FY15) • CARLSBG’s latest EBITA margin is 17.6%, rated as Ba.
  24. 24. LEVERAGE & COVERAGE 0.09 x 0.02 x 0.15 x 0.17 x 0.10 x 0.00 x 0.02 x 0.04 x 0.06 x 0.08 x 0.10 x 0.12 x 0.14 x 0.16 x 0.18 x 2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31 Debt / EBITDA By Moody’s benchmark, CARLSBG’s leverage is rated as Aaa.
  25. 25. LEVERAGE & COVERAGE (CONT.) 51.26 x 50.42 x 45.46 x 53.73 x 42.50 x 0.00 x 10.00 x 20.00 x 30.00 x 40.00 x 50.00 x 60.00 x 2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31 Coverage EBIT/Interest By Moody’s benchmark, CARLSBG’s coverage is rated as Aaa.
  26. 26. LEVERAGE & COVERAGE (CONT.) 558.8% 1954.1% 170.1% 213.1% 327.5% 0.0% 500.0% 1000.0% 1500.0% 2000.0% 2500.0% 2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31 Coverage Retained Cash Flow to Debt By Moody’s benchmark, CARLSBG’s coverage is rated as Aaa.
  27. 27. LIQUIDITY -40 -20 0 20 40 60 80 100 2011-12-31 2012-12-31 2013-12-31 2014-12-31 2015-12-31 Cash Conversion Cycle Cash Conversion Cycle Days In Inventory Days In Receivables Days Payable Outstanding CARLSBG is using other people money to run business.
  28. 28. GROWTH DRIVERS
  29. 29. GROWTH DRIVERS • The exposure in Singapore has grown to 29% (FY15) from 22.3% (FY14) • It provides an outlet for the Group to diversify the risk away from the local market, which is dogged by persistent weak consumer sentiment and contraband’s beers • 24 Oct 2014 – The acquisition of the MayBev stake by Carlsberg Singapore Pte Ltd was completed in April 2014 • MayBev supplies Carlsberg Singapore with brands including Asahi, which is the second largest premium beer brand in the republic • With MayBev in its stable, Carlsberg Malaysia expects synergistic values, as the brands carried by the former could be integrated and marketed as part of Carlsberg Singapore’s portfolio. Apart from Asahi, MayBev distributes Nikka whisky and other liqueur and vodka brands.
  30. 30. GROWTH DRIVERS (CONT.) • Aggressive marketing efforts and the introduction of new brands by key rivals may take away some market share • The nationwide Carlsberg's Barclays Premier League promotion campaign gained positive traction and helped build further consumer support behind the flagship brand, Carlsberg Green Label • Improved brand portfolio with a large variety of premium/super premium beer offerings • Diversified geographical revenue sources • Carlsberg will aim to move up the price point in its portfolio via its price mix. Its premium beer business has gone up 10 percentage points from 2011 to 2013.
  31. 31. ISSUES/RISKS/CHALLENGES
  32. 32. ISSUES/RISKS/CHALLENGES • Highly regulated industry • Higher than expected raw material prices • Lower-than-expected total industry volume (TIV) • Continuous decline in market share • Small presence in the super premium segment • GST implementation, the government's plans to rationalize subsidies and inflation may reduce beer consumption, and will curb Malt Liquor Market (MLM) volume growth
  33. 33. ISSUES/RISKS/CHALLENGES (CONT.) • Competition will remain intense going forward as GAB will continue to invest in brand line extension • Contrabands – a rising concern • Muted by duty hike • 3 Mar 2016 – The government has gazette into law some changes to the methodology in which excise duty (ED) on beers and liquor is calculated. Previously the ED on beers was calculated as RM7.40/litre + 15% ad valorem tax. Effective 1/3/2016 the duty is calculated on basis of RM175 per 100% vol/litre. • 3 Mar 2016 – Brewery - A Relieving Excise Duty Revision
  34. 34. ISSUES/RISKS/CHALLENGES (CONT.) • 7 Mar 2014 - A beer brand that could make a bigger threat to CARLSBG's brands is the Tsingtao beer. The Chinese based company, Tsingtao Brewery Co Ltd, has set up its first overseas plant in Bangkok, Thailand as a significant step towards globalisation for its brand • Contrabands – a rising concern • Muted by duty hike • Competition from cheap foreign beers.
  35. 35. ISSUES/RISKS/CHALLENGES (CONT.) • The group’s exposure to Sri Lanka is through its 24.6% stake in Lion Brewery (Ceylon) Plc (Lion Brewery) • Lion Brewery faced capacity constraints, in particular in its canning line • This shortfall was met via imports, the landed cost of which is much higher than local production due to prohibitive custom duties • Consumer pricing remained the same irrespective of origin of production and this resulted in margin erosions • In order to address this, its capacity was expanded while its plant was upgraded • The population of Sri Lanka is around 20 mln people • Coupled with its economic growth and changing lifestyles, this may result in a bigger shift in domestic consumption towards beer over the longer term benefiting its sales.
  36. 36. ISSUES/RISKS/CHALLENGES (CONT.) • CARLSBG announced it had on Sept 19, 2014 received two bills of demand from the Selangor State Director of Royal Malaysian Customs with excise duty, sales tax and penalty claims amounting to RM56.4 million over a period of 30 months • Carlsberg refuted the liability on the demands and said it is seeking advice on the matter • Assuming Carlsberg recognises the claims by the customs, the group's full-year net profit may hit by as much as 25%.
  37. 37. EXCISE DUTIES
  38. 38. EXCISE DUTIES • Packaging and raw material costs, excise duties to the government are biggest cost item • Excise duties were last raised in the 2006 Budget by RM1.40 per litre to RM7.40 and propelled Malaysia into having the second highest duty on beer in the world after Norway • The excise taxes are imposed on a “per litre of alcohol basis” and would thus be felt evenly across all segments, including wine and spirits (whiskey, rum, brandy, etc.)
  39. 39. EXCISE DUTIES (CONT.) • The ad valorem taxes (15%) which are based on the monetary value of the beer • This means the tax burden on more expensive brands are higher • Other taxes would be import duties (RM5.00 per litre) and sales tax (5%).
  40. 40. EXCISE DUTIES (CONT.) Source: AmResearch 30 Sep 2013
  41. 41. EXCISE DUTIES (CONT.) Source: AmResearch 27 Mar 2014 MLM Volumes grows in long term even if high excise tax imposed.
  42. 42. GOING FORWARD
  43. 43. SHAREHOLDER RETURN Time Frame Date Bought at Original Value Dividend Received Unrealized Gain/Loss Current Return CAGR % 3-Y 2 Nov 2012 19.48 19,480 1,730 3,500 24,710 8.3% 5-Y 2 Nov 2010 11.24 11,240 2,780 11,740 25,760 18% 10-Y 2 Nov 2005 8.8 8,800 5,130 14,180 28,110 12.3% Assumptions: 1. Commission paid is ignored in this simulation 2. The current price is 22.90 (as of the time of writing) 3. Unit purchased is 1,000.
  44. 44. GOING FORWARD • I remain conservative and skeptical above volume growth in the brewery sector as some reports show that the industry is saturated. However, earnings should be sustainable at current levels • On the other hand, the better product mix with more investment and brand building on the premium brands, including Somersby Apple Cider, Somersby Pear Cider and Kronenbourg is expected to drive earnings growth as sales volume growth is expected to be subdued due to the soft consumer sentiment • The exposure in Singapore has grown to 37.6% from 24.0% a year ago which is positive as it provides a market for the Group to diversify away from the local market which is dogged by persistently weak consumer sentiment and contrabands beers.
  45. 45. GOING FORWARD • The Group’s effective cost management programmes, which had helped to reduce the impact of MYR depreciation on the operating costs • As expected, final DPS of 67.0sen was declared, bringing FY15 total DPS to 72.0sen (vs FY14: 71 sen), which DPS translates into a pay-out ratio of 96.9% • For FY16, it will be challenging for CARLSBG to pass on large price increases to consumers in view of • The softer environment • Anti-profiteering act which prohibits price increases if it increases profitability excessively. • I will continue to hold and accumulate CARLSBG in the future.

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