Time to sober up -brewery business

by **Cals** Fri 28 Jun 2013, 11:46

Time to sober up

Business & Markets 2013

Written by CIMB Research

Friday, 28 June 2013 11:08

Breweries
Downgrade to neutral (from overweight): We believe that valuations for the brewery sector have topped out. Carlsberg Brewery (M) Bhd and GUINNESS ANCHOR BHD []’s current 23 times and 24 times forward price-earnings (PE) valuations are at the high end of both their historical averages. On average, the brewers are trading at seven times and eight times PE premium over the KLCI.

Given the brewers’ stretched valuations, coupled with an unexciting total industry volume (TIV) growth outlook, we downgrade our recommendation for the brewery sector to “neutral” from “overweight”. We have “neutral” ratings for Carlsberg and Guinness.

For exposure in breweries in the region, we suggest investors switch to Thai Beverage, a brewery in Thailand that is under our regional coverage. It is currently trading at a forward PE of 15 times and offers a three-year earnings compound annual growth rate of 22.5% per annum, versus the Malaysian breweries’ 4% to 5%.

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We highlight that both Carlsberg and Guinness’ dividend yields have compressed to current levels of 4.3% and 4.7% due to the continued price uptrend since 2006. We note that current average yields for the breweries still offer a premium above the KLCI’s average FY13 and FY14 yields of 3.3% and 3.5% and the 10-year Malaysian government securities rate of 3.7%.

Furthermore, both breweries’ dividend yields are still higher than the 3.4% to 3.8% range offered by most consumer stocks under our coverage.

The excise duty on beer and malt liquor has not been raised since September 2005, when it was raised by a steep 23.3% to RM7.40 per litre. A hike in the excise duty was also seen in 2003 and 2004.

The upcoming World Cup 2014, which will be held in Brazil, implies that the matches will be televised live in Malaysia between midnight and 6am due to the time difference. As such, the event is not likely to provide much uptick in the volume of beer consumed by fans, indicating a rather dull outlook for both breweries in 2014. — CIMB Research, June 27

This article first appeared in The Edge Financial Daily, on June 28, 2013.