1HFY21 CNP came in below expectations due to more restrictive lockdown in the 2nd half of 2Q21. Moving forward, we slash our FY21E/FY22E earnings by 23%/6% respectively with TP reduced to RM23.10 and downgrade our call to MARKET PERFORM.

Below expectations. 1HFY21 core net profit (CNP) of RM102m (+22% YoY) came in below, accounting for 38%/44% of our/consensus estimates. Subsequently, DPS of 10.0 sen was declared implying a payout of 30% (below expectations).

YoY, 1HFY21 top-line was flat (RM881m) as the prevailing lockdown and subsequent FMCO dampened the good performance seen in 1QFY21. While Malaysian operation saw a 7% decline in revenue (RM610m), Singapore operation’s revenue rebounded 26% to RM281m on shorter duration of restrictions plus positive momentum in off-trade channels and e-commerce. Malaysia’s weaker performance was mitigated by Chinese New Year (1QFY21) and off-trade promotions for Harvest Festival (April 2021) and Euro 2020 (June 2021). On a positive note, cost discipline (from lower A&P) helped boost overall EBIT margin to 15% (+270bps) from the previous corresponding period. Cost discipline improved domestic operating margin (340bps to 16%) whilst Singapore operation’s margin improved 170bps to 10%.

QoQ, 2QFY21 turnover fell 34% to RM349m coming from a high base in 1QFY21 (boosted by the CNY sales). Re-imposed lockdown in both Malaysia and Singapore dragged performance with its brewery operations suspended in June (for 11 weeks) with the advent of the FMCO. In terms of revenue, Malaysia’s 29% drop in sales to RM254m outperformed Singapore’s falling 40% to RM106m. Overall EBIT margin fell 240 bps to 13% mitigated by lower A&P spend.

A weak quarter ahead. We maintain our view of earnings recovery which will depend on the efficacy of on-going vaccinations with the targeted 80% adult population fully vaccinated by 4QCY21. That said, near-term weakness in performance is evident given that restriction on its brewery operations were only lifted in mid-August, dampening third quarter performance. Inconsistent policies with regards to brewery operations might be detrimental in the long run, jeopardizing the Group’s competitiveness and sales within wider Carlsberg markets. While raw materials costs are well hedged for FY21, EBIT margins might still see downside risks if costs pressure still persists into FY22. On a positive note, despite an 11% YoY decline in core products, premium brands saw 16% growth boosted by the launch of new products. We also take heart of its cost-discipline enabling robust margins in the near-term.

Post results, we slashed our FY21E/FY22E earnings by 23%/6% and DPS to 50.0 sen/90.0 sen (from 65.0 sen/96.0 sen), respectively.

Downgrade. TP is lowered to RM23.10 (from RM24.10) with an unchanged FY22E PER of 25.0x (implying 0.25SD - previously 0.5 - below its 5-year mean). While we are positive on the progress of the national vaccination rollout, we see the specter of sin tax ahead coupled with an unfavorable Ringgit undermining raw materials costs. Hence, we downgrade CARLSBG to MARKET PERFORM.

Risks to our call include: (i) new variants of the virus, and (ii) volatile policies.

Source: Kenanga Research - 23 Aug 2021