KUALA LUMPUR: The ongoing recovery in tourist arrivals in Malaysia and Singapore offers further upside potential to the brewery sector, said Hong Leong Investment Bank (HLIB) Research in its latest sector update.
According to the research firm, the tourist arrivals in Malaysian and Singapore have showed commendable recovery levels, although they remain below pre-pandemic levels.
"As of 8M23, foreign tourist arrival in Malaysia had reached a commendable 13 million, putting the nation on track to meet its 2023 target of 18m (+79.7% YoY) set by Tourism Malaysia.
"While this trajectory is encouraging, it remains notably below the pre-pandemic level of 26.1 million in 2019, offering further upside recovery potential," it said.
The recovery in Chinese tourist arrivals also bolsters the growth outlook, as the segment currently only makes up a modest 5.4% of tourist arrivals in Malaysia, below the pre-pandemic range of 8.8% to 11.9%.
This should be spurred forward by Malaysia's 30-day visa-free travel policy for Chinese and Indian visitors starting December 2023, said HLIB.
Similarly, Chinese tourist arrivals to Singapore are below pre-pandemic levels at 9.9%, as compared to 13.9% to 19%.
Meanwhile, HLIB also expects brewers to capitalise on easing raw material costs as brewers had raised their beer average selling prices in 2021-2022 in response to an increase in these costs.
"An avenue for margin expansion emerges post expiration of prevailing fixed-price contracts, enabling brewers to capitalise on lower raw material prices," said the research firm.
In addition, HLIB said its economics team is optimistic about a ringgit recovery in 2024 following the end of the Federal Reserve's rate upcycle.
The research firm projects an average US$-RM exchange rate of 4.44 and year-end level of 4.30.
At present, HLIB said Carlsberg Brewery Malaysia Bhd
and Heineken Malaysia Bhd are currently trading at an undemanding FY24 forward price-earnings of 17.1x and 17.9x, implying a 36.9% and 24.4% discount against its 5-year average of 27.1x and 23.7x, respectively.
The research firm has an "overweight" call on the brewery sector and "buy" ratings on both counters but sees more upside potential in Carlsberg following its steeper share price fall and undervalued Singapore operations.
HLIB has a price target of RM30.31 on Carlsberg and RM29.94 on Heineken, with the former brewer as its favoured pick.
It said Carlsberg's Singapore unit brings several advantages such as sales diversification, natural hedge against exchange rate fluctuations, reduced regulatory risk, and a brighter
sales outlook fuelled by robust purchasing power.
"Additionally, Carlsberg's operation in Singapore provides enhanced exposure to the reopening of the tourism sector.
"Noteworthy is the resilience of Carlsberg's Sri Lanka operations, with Lion Brewery recorded its best-ever earnings quarter in 3Q23, contrary to market concerns," it added.
