#12 INVESTING IDEAS – Carlsberg Brewery Malaysia (KLSE: CARLSBG)

This week, we have one of our contributor, Ong Joo Parn, sharing more about one of his favourite stock at the moment, Carlsberg Brewery Malaysia. Carlsberg Brewery Malaysia has been one of the most consistent dividend stocks on Bursa Malaysia. Find out why that is the case.

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Disclosure: Joo Parn owns Heineken Malaysia at the point of recording. Stanley owns Carlsberg Malaysia, Heineken Malaysia and Nestle Malaysia at the point of recording.

Stanley:                                 Welcome to investing ideas. My name is Stanley; this week, we checked with one of our regular contributor here at Value Invest Asia, Ong Joo Parn. Joo Parn is an experienced investor, and also a financial blogger himself, his specialty is actually in the Malaysian stock market. So, that’s why today he’s sharing with us one of his favorite stock on Bursa Malaysia; Carlsberg brewery Malaysia, if you have been a member of our Value Invest Asia Club, you would have known that this is also a stock that I have owned for many years. However, I’ll be the devil’s advocate here, and I’ll be challenging Joo Parn on his ideas, and test the strength of his thesis. So, I hope you enjoy our discussion, here we go.

Interlude:                              [Music] from valueinvestasia.com, this is investing ideas; where we talk to investors from all walks of life, learn from them, and find out some of their favorite investment ideas.

Stanley:                                 Today, you’re going to introduce one of your favorite stock within Malaysian Stock market to Bursa Malaysia as well, why don’t you go ahead and introduce this company to our audience.

Joo Parn:                                Alright! So, when you approached me to come up with a new investing ideas episodes; I was like, since it’s like Chinese New Year season, so why don’t we do some companies related to Chinese New Year and during Chinese New Year, we Chinese we love to drink. So, the lucky company that I’ll be introducing is Carlsberg Brewery Malaysia, Berhad.

Stanley:                                 Okay! But why this company, why don’t you share a little bit about the company?

Joo Parn:                                So, Carlsberg Brewery Malaysia, is a brewery, they mainly brew alcoholic beverages, they have a plant in Malaysia, in Shah Alam, and then after brewing these products, they are also in charge of marketing and selling these products. So, Carlsberg as a brand, is famous and well-known brand, Malaysians and Singaporeans we all love our Carlsberg and sometimes we also go for Carlsberg’s competitor which is Heineken, but the all in all, Carlsberg is a brand that sees as much how – we already know this is a real brand that maybe our parents love, our relatives love, and as we grow older, and once we passed the so-called [Unclear 02:47] it’s the dream alcohol, I’ve been expecting to come to actually like enjoy Carlsberg for these…

Stanley:                                 Now, what’s the business model like, and why do you like it so much?

Joo Parn:                                Basically, when you talk about Carlsberg, it’s a brewing business, it’s considered as a part of the FMCG, the Fast Moving Consumer Goods, its particular niche because it’s very focused on alcoholic beverages, and in the whole Asia, you can only find two listed breweries, one which is Carlsberg Brewery Malaysia and the other one is Heineken Malaysia. So, what makes Carlsberg so special is that they really focus on alcohol, and alcohol as a product has its own has its specific loyal fan base, so you can say that it’s quite recession proof to any economic downturns, and on top of buying other consumer stocks like F&N, or Dutch Lady. So, Carlsberg is like a special – it has a special place when it comes to comparing against other companies.

Stanley:                                 But how do you see this company in terms of its growth, you know a lot of people when we talk about Carlsberg; it’s a company that has been around for many years, and do you really feel that there’s still growth in such a company?

Joo Parn:                                Well! I’ll say yes, because when we look at the company’s financials; Carlsberg as a company has been growing even though they are predominantly very focused in Malaysia and Singapore, just because of the simple fact that human population is always on the rise, and every year, you have a new batch of youngsters turning 18 or 21. Now, the legal age is now 21, so everyone once the past the age 21, they want to get a get a taste of what beer tastes like, and when it comes to alcoholic beverages, it’s a social drink; mainly after work, when people with colleagues or their close pals, when they hang out. Usually, beer is one of the social drinks that they will all gather around, and have a drink, and chit-chat and catch up. So, not only that, it provides itself of how it really brings people together. So, yeah I just think Carlsberg is still growing, continues growing.

Stanley:                                 Okay, and compared to – of course when we talk about Carlsberg, we always talk about its main competitor, which is a Heineken Malaysia previously known as Guinness Anchor. What’s the difference between the two?

Joo Parn:                                Actually, both of them are very similar, I would say the key differences would primarily be the brand, each of them had their strong brands, but one key difference Carlsberg really sets apart itself compared to Heineken is that Carlsberg Malaysia, the plant in Malaysia manufactures alcoholic beverages for Malaysia, and also Singapore, whereas Heineken, they have two points; one is also in Kiel, and the other one it’s under the Asia Pacific breweries, which is in Singapore. So, the plant over in Malaysia only focuses on producing alcoholic beverages for the Malaysian consumption. Whereas, APB in Singapore will be more focused on Singapore consumption, and also a bit of export.

Stanley:                                 Right! Okay, Carlsberg Malaysia is actually more international compared to Heineken Malaysia.

Joo Parn:                                Yeah, just to mention, they also have a small stake in Sri Lanka beer factory which is called Lion Breweries, so in that case, I would say, secret cut that they can potentially turn the tide around when it comes to comparing with Heineken Malaysia.

Stanley:                                 Alright! Okay,  wouldn’t you say that it’s kind of like a double-edged sword if I may, because Singapore is more or less a much more mature market compared to Malaysia, and you’ve seen that in maybe other developed markets of the trend of people who once reach a point, or become more affluent, they switch from like mainstream beer brands like Carlsberg, and go into more niche microbreweries type of brand, we’re seeing that happening in Singapore, wouldn’t that actually be a downside risk for Carlsberg Malaysia as a whole, because they are exposed to the Singapore market, which is quite substantial within their business? Right!

Joo Parn:                                Yes! It is. Okay! Noted that when it comes to microbreweries company Craft Beer; it is the so called up and coming trend, and just in Singapore, where I like hang out with my pals in a few places, craft beer actually it’s a big thing in Singapore, but surprisingly for Carlsberg, they also have their own range of Craft beer. So, they have this special brand called the Brooklyn breweries, which they categorize on the craft beer category. So, they actually contracted, or – this Brooklyn brewery is actually an American microbrewery, which actually team up with them to actually produce craft beer at their existing site at a Malaysia. So, not only they produce like the so-called normal beers like Carlsberg, but they also have specialty craft beers under their portfolios as well, which is quite amazing?

Stanley:                                 Do you see that also one of the main growth that they’re going to use as in increasing their brand portfolio in the future?

Joo Parn:                                Oh! Yeah! When we look at their 2018 Annual report, they have been highlighting a three digit growth for the Brooklyn microbrewery that they actually just bought over and that growth actually speaks a lot, you can actually satisfy or build their growth and appetite for craft beers in Malaysia. So, of course craft beer in Malaysia is a bit of a specialty because alcohol beverages is actually taxed, or they have a higher tax duty when imported from other countries. So, the benefit of Carlsberg Malaysia having this Brooklyn Liquor under their portfolio, actually provides Malaysian a cheaper option to enjoy craft beer at a lower price point.

Stanley:                                 Right, I’m looking at some of the financial as well, it seems that they have been able to sustain the profit margin at the very stable rate over the past decade, what’s their secret?

Joo Parn:                                When we talk about beer or alcoholic beverages, just beer itself now, beer actually consists of four vital ingredients mainly; Barley, Water, Hops and Yeast. So, basically the process is where you mix everything together, and then you introduce yeast inside to actually ferment and breakdown the sugars from the Barley and once the sugar fermentation happens, you get alcohol. So, of all these ingredients; Barley is actually a commodity, and barley prices actually fluctuate a lot up and down, but the surprising thing about Carlsberg Malaysia, when you look at their profit margin cost profit margin is that there have been very consistent over the past ten years, it has been above thirty percent. So, it’s speaks volume on how they manage their raw material procurement. of course, they have in place, experts when it comes raw material prices, or where to buy more, how much more to cover, and also all of this information also ties back to what is their sales forecasts, so that they won’t run into a situation where they bought bit lesser than what sales growth is, and in the end it impacts their gross margin. So, I’m saying in totality when you look at how the business is run, in terms of the gross profit margin, where they have consistently sustained 30% plus, it’s a real proof that the management has been running company very, very well.

Stanley:                                 Looking at their balance sheet, what’s your assessment on them?

Joo Parn:                                When we look at the balance sheet, the company has been really, really stable. Of course, when we look at the latest balance sheet they have excess of our 682 million; total liabilities is 501 million, and the rest of the total equity is 180 million. So, at one glance of it you’ll see that how come a company like Carlsberg is having so much higher liabilities compared to the equity, so when you look at the breakdown of the liabilities, only a small part of it is its borrowings from the bank, the rest of it actually is payables, and when you will also try to do a bit of calculation, you will actually find that it’s cash conversion cycle is very beneficent, basically it is able to delay payments to its clients, while also asking for longer paying periods form from its suppliers. So, basically they are getting free money to run the business, and hence, when you look at the ROE, you get above 100% ROE, so that is how a good business actually can run its business without the money from a shareholder, but rather from other people’s money in this case [Inaudible 13:49].

Stanley:                                 Definitely, a very, very fascinating business model. They have also been one of the key dividend payer on Bursa Malaysia as well. Do you see that going to continue, or is there any risk to their dividends, is it sustainable?

Joo Parn:                                Well! when it comes to dividends, we have to also tie back their dividends paying out from the company is a cash dividend, so before we look at how sustainable the dividend payout is going to be, we also have to take a look at their so-called free cash flow of the company. So, in a company like Carlsberg, when they report profit, it also has to tie back to the cash that they are receiving from the business. So, of course, the cash flow has been also very fantastic, it has been growing trending up positively without showing any potential signs of coming down, and when we compare that with the dividends that they are paying out, almost 100% of their earnings they are paying it out as dividends to the shareholders. So, it’s like there will be consistent payout every time Carlsberg report higher profits. So, it’s really amazing like how this kind of company is actually available in Bursa Malaysia.

Stanley:                                 I will say that this kind of company is almost just a handful on Bursa Malaysia. Right?

Joo Parn:                                Yes.

Stanley:                                 And would you say it’s mainly because their shareholder structure, that they have a main shareholder the [Unclear 15:34] that’s why they need to constantly be paying out the dividend to back to their parent company?

Joo Parn:                                Yeah! This kind of trend is particularly noticeable when you compare companies like Carlsberg, Heineken and also Nestle Malaysia. So, what is special about these three companies is that they actually have a mother company, Mother HQ outside of Malaysia. So, for Nestle, it’s listed in the Swiss Stock Exchange, and then Nestle S.A., Carlsberg; the mother company is listed in the Danish Stock Exchange, and Heineken is in the Europe Stock Exchange. So, why these companies actually could – So, all these mother HQ companies are controlling these other listed companies around the world as majorities shareholders, and they act like an investment company. So, basically their job is to invest in profitable breweries around on the world, and once companies Carlsberg Malaysia under the investment of Carlsberg A/S, once they have registered a profit there, enough cash for collective purposes automatically a major some of it, if not all will be repatriated back to the mother company, so and these companies are also listed on their respective Stock Exchange, and they also have to show that they are growing, and they also collecting more cash from investments around the world.

Stanley:                                 In a sense, wouldn’t you say that it almost doesn’t really matter if I invest in say Carlsberg, or Heineken, or even some of the other MNC that has such shareholder structure, given that most of them will all still be very high dividend, and quite consistent in a sense. Right?  Maybe I’ll give you a more specific example, at this juncture, at this stage, why would you choose Carlsberg over say a company like Nestle Malaysia or Dutch Lady Malaysia? Given that, you know, Malaysia no matter what is still a Muslim majority country, and so alcoholic brewery will never be able to serve their entire population. Right? But a company like Nestle Malaysia is actually here to serve the entire population, and wouldn’t you say that the growth potential would be much better?

Joo Parn:                                Yes, I will agree with you to say that in a way, in that kind of perspective, definitely Nestle would be poised to encounter more growth compared to company like Carlsberg, where their reach can only serve the non-Muslims around Malaysia, but when we compare the valuation of Carlsberg Brewery against Nestle Berhad. Well! Nestle Berhad, also with a very fantastic business model, and brand image of its product, we also see that is kind of impossible for sales to suddenly lose steam, or something bad to happen to the company, but as we all are quite aware that  the valuation of Nestle Berhad is quite a premium right now, it’s at around 50 plus, if I’m not mistaken, and when we compare it against the issue, Nestle  S/A listed in the Swiss Stock Exchange, it’s just around 25 plus. So, Nestle Berhad itself is at two times more the premium of Nestle S/A, so when it comes to this kind of justifications, and comparison, no doubt, Nestle would be still growing, but you want to buy nestle at a better price to earnings ratio, and a better valuation.

Stanley:                                 Wow! Okay, it’s almost trading like 10 companies. Okay, just like you mentioned a little bit on the investment that Carlsberg Malaysia has, which is on Lion Breweries, main Breweries Sri Lanka, what’s that about, you want to share a little bit about that?

Joo Parn:                                Okay! So, Lion Brewery is one of the oldest brewery in Sri Lanka, and currently majority, it manufactures beer for the Sri Lankan market, servicing its Sri Lankan population. So, we all know Sri Lanka as a small island just beside India, but surprising fact about Sri Lanka is that, although it is an island nation, it has a population of 21 million as of latest, and so we see that this small stake in the Lion Brewery, by Carlsberg Malaysia could actually be the next pro factor to actually contribute more in the future towards Carlsberg Malaysia’s earnings.

Stanley:                                 Right! It is because the addressable market in Lion brewery is actually much bigger than the addressable market that Carlsberg Malaysia actually has right?

Joo Parn:                                Yeah!  It is.

Stanley:                                 Cool! Okay, it seems that this company is almost perfect, why don’t you share a little bit in your opinion, what could go wrong on with this company, what is the risk here?

Joo Parn:                                I think the special thing about having a… Brewing Company in Malaysia is that the regulation itself is considered a mold, and a protection. So, there in Malaysia as a playground area, Carlsberg only needs to you know compete with Heineken Malaysia for the Malaysian market share of beer drinking communities, and on top of that they also have a stake in the Sri Lanka Brewery. but what makes these two companies especially Heineken Carlsberg so special is that, the tax duty that the Malaysian government actually tax upon export alcohol really deters other big breweries around the Asian region from entering Malaysia, because it just doesn’t make any sense for them to import the beer get taxed at a higher duty, and in the end, when the products enter to Malaysia from a price point of view, it’s going to be much more expensive than Carlsberg or Heineken Malaysia. So, these big companies big companies like Thaibev, Thai Beverage listed Thai alcohol Brewery, San Miguel Philippine brewery, and also Tsingtao, a Chinese based brewery. So, over in Singapore, I used you see Thaibev, San Miguel and Tsingtao products, fairly at certain areas, but in Malaysia you only intend to see Carlsberg or Heineken products, in the supermarket or in those shop areas.

Stanley:                                 Maybe as a disclosure, do you own this company?

Joo Parn:                                To be very honest, the thing is, I don’t own this company, and I’ll tell you why I do not own this company.

Stanley:                                 Yes, why?

Joo Parn:                                You know when it comes to investing, we always like to have margin of safety, we always like to say is the price correct now, then probably I’ll buy, but the thing about Carlsberg Berhad, if you look at their historical performance in terms of stock price in 2019 is that it started off the year in 2019 and share price was around 20 Ringgit. So, that time I already kept Carlsberg in my watch list I was like okay, 20 Ringgit, if it jumps down to – let’s say 10% is 18 ringgit, I will buy, but this share price just kept going up and going up, and when he got to 24, I was like if it drops to 22 I’ll buy. So, this so-called Dilly dallying, and keep wanting to time the market kind of approach actually made me lose an opportunity of a 50% capital gain, if I had bought Carlsberg at 20 Ringgit, just one year ago from now, and as of today, it’s at 30 Ringgit the share price has been up 50%, and if you had invested in Carlsberg, just one year ago, you’ll be a very, very happy man today.

Stanley:                                 Yes, I can feel your pain, although I am trying to challenge your idea here, I actually am a shareholder of Carlsberg Malaysia, and also Heineken for quite a few years now. So, you are right the share price actually rises close to 50% in 2019, so now if I ask you right now; again, would you buy the stock right now?

Joo Parn:                                Yes, I would say definitely, although if you compare the price to earnings now versus one year back, actually PE ratio; historically, for the past two to three years, Carlsberg has been trading at the PE of around 25 each, and as of today, price of 30 Ringgit per share, it’s roughly around 30 times, so you are paying like five times more PE. of course, people would argue that five times more is a lot, but that’s when we just look at PE as itself only, but the thing about investing, and after personally practicing investing myself is that when a good company like Carlsberg, and with such a fantastic business model, and you know that the company is going to continue to be growing over the future five to ten years. It’s very inevitable that the price or eventually tag along with the company earnings, so if you are going to be a long-term value investor right, price of 30 times PE, for a company with such solid business model doesn’t really bother you. but coming from the other side is that if you are a trader, or looking to profit at price fluctuations, then you’ll be very scared, because for a company trading at a PE of 30 times, and being such a company and trading at $30 which made the price quite high, you would not really be able to capitalize on the potential capital gains, if you were to hold it for one month, or just two months. This is a company that you have to buy and hold onto it to for like at least five to ten years to really see the magic that it works with your portfolio.

Stanley:                                 Yeah! You’re absolutely right. It is basically what Buffett says right, it’s much better to pay a fair price for a great company than a great price for mediocre company.

Joo Parn:                                Yes, definitely sums up the risk.

Stanley:                                 We all have to experience this, and learn this the hard way sometimes.

Joo Parn:                                Yeah! Yeah! And I’m thankful that I really learned this the hard way, and hopefully no more other good opportunities like this slipping out of my hands.

Stanley:                                 But also, when you talk about the valuation for Carlsberg Brewery Malaysia, where we checked on Heineken Malaysia, it is actually trading at a lower valuation than Carlsberg. So, right now it’s trading roughly about 25 times its PE. Although you say that yeah you feel that Carlsberg has a higher growth potential, and it is more diversified than most of his business, when it comes to this to company right now, when you put valuation into consideration as well, would Carlsberg still be the one that you choose over Heineken?

Joo Parn:                                Well! Surprisingly. When you asked the question, I’m actually a Heineken shareholder.

Stanley:                                 So, you didn’t mean so much.

Joo Parn:                                I never missed that much, but I think Carlsberg actually taught me the lesson, I kind of realized the mistake I was actually committing somewhere around middle of last year. So, at that time Carlsberg is already trading at a higher premium compared to Heineken, so based on the slightly cheaper valuation of Heineken, I took a bit of position on Heineken, and well, I actually take along the capital gains of Heineken, second half of the year, and not to mention the dividend yield that is going to also add my so called dividend pay off. So, yeah, Carlsberg actually taught me the lesson not to time the market, and I realized that mistake I bought Heineken at a cheaper valuation, but if you talk about the growth potentials, I think both companies stand to profit from the population growth of Malaysians, and it would be very difficult to say that Carlsberg will eventually dethrone or to take complete market share of Heineken Malaysia [Unclear 29:59], for the past 40 to 50 years, Carlsberg and Heineken have been listed and have been running their businesses in Malaysia, and they have been – although they are still competitors, but they can actually still share the whole market, share the whole piece of pie together with each other. So, both would eventually grow as the human population rises.

Stanley:                                 Yep! Okay. Fascinating, I totally agree with you on your idea, although you are just giving us a thesis of one company, you’re actually giving us two ideas right here. So, thank you very much for your curiosity, so thank you so much, and for you guys who want to know more about Joo Parn, and what he likes to write about. of course, visit us @ valueinvestasia.com, you can find many of his articles there, and also you can check out his blog @ mykayaplus.com, where he shares more detailed analysis about mostly stocks in Malaysia, and it’s a fascinating read on his blog, do check it out. Thank you very much Joo Parn for joining us, I’ll see you very soon.

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