CIMB Research downgrades brewers after price surge, slower growth ahead

Managing director Hans Essadi said while it remained leery on the external environment, it would continue to strive to achieve solid performance in the next few quarters.

KUALA LUMPUR: CIMB Equities Research has downgraded Carlsberg Malaysia and Heineken Malaysia to Neutral after the share prices had surged since December 2015 while it foresees slower growth ahead.

The research house said since upgrading the brewery sector to Overweight at end-December 2015, it has recorded stock returns of 38.6%, higher than FBM KLCI’s return of 6% over the same period. 

“Year-to-date, the share prices of Heineken and Carlsberg have risen 19.4% and 13.7%, respectively. The strong share price performance was supported by stronger-than-expected results, thanks to robust malt liquor market (MLM)  volume growth of 5%-6% and rising operating efficiencies. 

“We opine that the sector’s FY17-19F dividend yields of more than 5% appealed to investors amid a volatile market in 2016,” it said.   
 
CIMB Research projects MLM volume growth in 2017F to slow to 2%-3% on-year versus the estimated 5%-6% in 2016. 

This is likely due to the lack of festive periods and global sporting events this year, which were periods of high beer consumption in the past. 

This is in contrast to 2016, when global sporting events such as Euro 2016 and Olympics 2016 were held. 

“Nevertheless, we still expect MLM volume growth in 2017F, albeit slower, sustained by more product launches and various promotional activities,” it said. 

The research house also said recently, the authorities have increased efforts to minimise the availability of bootleg liquor in Malaysia. 

“Although we view these efforts positively, we doubt that they would boost legal market volumes meaningfully in the near term. 

“With consumer sentiment in Malaysia persistently weak in recent times, the significant price differential between legal and bootleg beer is likely to cause consumers to continue to turn to illicit products. 

“We estimate that illicit beer makes up 20%-30% of the total MLM market currently,” it said. 

CIMB Research said the sector valuation was now close to historical five-year mean price-to-earnings (P/E).

Currently, the sector is trading at 18.5 times one-year forward P/E, which is slightly higher than the historical five-year mean of 18.4 times. 

“We opine that the brewery sector’s valuation is unlikely to trade above the current level given: i) persistent regulatory risk, ii) wide availability of illicit beers, especially in East Malaysia, and iii) weak consumer sentiment, which would dampen volume growth. However, we believe the sector’s FY17-19F dividend yields of 5.0%-6.1% would provide support to current share price levels,” it said.

CIMB Research said the sector now appears fairly valued, as there is no major re-rating catalyst in sight.

However, it advised investors to accumulate brewery stocks as yield plays in the event of any share price weakness. 

“Heineken remains our top pick for its diversified portfolio and dominant market share in Malaysia. Downside/upside risks: weaker/stronger MLM volumes and increase/decrease in excise duties,” it said.