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Carlsberg Brewery Malaysia: Is 19.2X PE Expensive?
By: Peter Ng
Articles (81) Profile

For most of us, Carlsberg would likely be a common name among a plethora of alcoholic beverages available in most distribution channels such as supermarkets and convenience stores in Malaysia.

According to Maybank IB Research, the maker of Carlsberg in Malaysia, Carlsberg Brewery Malaysia (CBM) has an estimated market share of more than 40 percent of the entire Malaysian beer market as at 9M14.

Given the brand’s prominence, it is hard for anyone above the legal age of consuming alcohol not to have spotted it, or possibly stopping one from popping a can open and tasting it.

CBM’s primary business operations are in the production and marketing of alcoholic beverages that are for distribution in Malaysia as well as export to other countries.

Apart from Carlsberg, the group owns a portfolio of alcoholic beverages from other brands, including Asahi Super Dry, Corona Extra and Kronenbourg 1664 and many more.

Almost Uninterrupted Growth

Why should an investor be excited about the beer industry? There could be a few reasons, but the answer would most likely to include the exceptionally strong demand for beer driven by consumers’ insatiable thirst for these beverages.

This can be seen as CBM registered a 48.7 percent growth in revenue between the five years of FY09 and FY13. The company’s revenue accelerated in four out of five times in the same period except FY13 where it fell 1.9 percent to RM1,555.1 million.

Source: FactSet

The underlying reason for the slippage in revenue performance was mainly due to a one-off stock rationalisation exercise conducted by Carlsberg Singapore to reduce its inventory cover days, so as to allow its products to maintain its fresh quality.

In addition, the presence of contraband alcohol has not only affected the group but also the entire industry’s performance.

Corporations including CBM suffered revenue losses as sales are being directed into contraband alcohol, simultaneously, contrabands have also posed threats to all stakeholders including the government in terms of losses in tax revenue collection.

Although there are no guarantees as to when or would the Malaysian government even step up its measures to control the presence of contraband alcohol, however, given the aforementioned inefficiencies, I am inclined to think that it is just a matter of time before something materialises.

Nonetheless, regardless of the two reasons, the effect imposed on the consumption of alcoholic beverages and ultimately the revenue performance of CBM is likely to be short term and a reversal can be expected in the near future. After all alcohol is consumed despite the ups and downs, where some have even been led to think that consumption levels could experience a greater surge when things are falling apart.

Rock Solid Fundamentals

Beyond the earnings frontier, CBM holds a rock-solid balance sheet that leverages on merely RM40.4 million in loans and borrowings, representing less than 7 percent of its total assets. Granted that it has RM44.1 million in its cash hoard, this amount is more than enough to offset its borrowings.

As CBM is in its mature stage, the need to re-invest earnings to propel growth is relatively lesser, where capital expenditure to net operating cash flow ranged from 10.9 to 18.6 percent in the five-year period between FY09 and FY13.

The non-capital intensive nature of the group’s business is definitely an advantage for income investors, as this implies that there will be a larger residual free cash flow amount that can be paid out as dividends after capital expenditure is subtracted from net operating cash flow.

Next, CBM recorded a close to six-fold gain in dividend payments in the same five-year period where the latest payout amount in FY13 was recorded at RM0.61.

Noting a trend where the company has made several dividend payments that are significantly higher than the free cash flow amounts generated per year, this may lead some to question on the group’s dividend sustainability.

However, the gesture of returning excess cash amounts from a company’s balance sheet may not necessarily be a deal breaker, and that is, if the company has no plans to invest the cash amounts, it is a positive sign for the management to return them to shareholders instead.

Furthermore, as the oligopolistic industry is dominated by CBM and Guinness Anchor, with a combined market share that is in excess of 90 percent, and it therefore helps to relieve CBM from incurring large amounts of capital expenditure in order to grow or maintain its market position.

Last but not least, the capital structure of the group also alleviates the need of maintaining a large amount of cash on its balance sheet, since the group is primarily financed by equity backed by a debt-to-equity ratio of 14.8 percent as at FY13.

Valuations

On a historical basis in the five-year period between FY09 and FY13, CBM‘s price-to-earnings (PE) ratio varied between 14.5 to 20.3. Based on CBM’s FY13 earnings per share of RM0.60 and closing price on 16 January of RM11.50, CBM’s PE ratio is 19.2, which puts the group’s valuations in the rich territory.

When compared to its rival, Guinness Anchor, which is currently trading at 18.7 times its PE ratio, on a relative scale, both companies’ valuations appear to be fair.

While the current rich valuations may be a taboo for investors, however, given the current weak consumer sentiments for discretionary spending which is a category that alcohol falls under, this could potentially create entry opportunities for investors as earnings adjust downwards. At the end of the day, this does not represent a permanent change in consumption patterns unless people begin to visit bars for Coca Cola.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.


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