Established in 1969, Carlsberg Brewery Malaysia Berhad (“Carlsberg Malaysia”) (KLSE:CARLSBG) is part of Carlsberg Breweries A/S (Carlsberg Group), one of the world’s leading brewers with strong market positions across Asia and Europe. In this article, we will take a closer look at Carlsberg Malaysia’s business, management and financial aspects of the company, to assess whether it is a worthwhile investment.
Carlsberg Malaysia is one of two local brewers listed on Bursa Malaysia, the other being Heineken Malaysia Berhad (KLSE:HEIM). We have in a separate article performed a comparison numbers-wise on both listed companies which you can access here.
Carlsberg Malaysia is a dynamic brewer with operations in Malaysia and Singapore, with a 25% stake in Lion Brewery (Ceylon) Plc, a brewery in Sri Lanka. The group also has a regional presence via exports and intercompany sales to regional markets such as Taiwan, Hong Kong, Cambodia, Laos, Thailand, Sri Lanka, Timor Leste, Papua New Guinea, Maldives and Guam.
Carlsberg Malaysia’s international portfolio of brands features Carlsberg Danish Pilsner, Carlsberg Smooth Draught and Carlsberg Special Brew. This Carlsberg trio is complemented by a comprehensive range of international premium brews including France’s premium wheat beer Kronenbourg 1664 Blanc, Japan’s No. 1 premium beer Asahi Super Dry, European cider Somersby, Connor’s Stout Porter that’s “Just Made Right”, US award-winning craft beer Brooklyn Brewery as well as Corona Extra, the imported premium Mexican beer brand. Additionally, Carlsberg Malaysia’s value power brands include the international award-winning Royal Stout, refreshing SKOL, Jolly Shandy and Nutrimalt.
Geographically, Malaysia and Singapore represent the group’s largest customer locations, representing 97.0% and 97.5% of total revenue for 2018 and 2019 respectively.
(Source: 2019 annual report)
(Source: 2019 annual report)
Carlsberg Malaysia’s single largest shareholder is Carlsberg Breweries A/S., with an equity stake of 51.0%. This makes Carlsberg Malaysia part of one of the leading brewery groups in the world today. Interestingly, the majority of Carlsberg Malaysia’s top 10 shareholders comprise institutional funds. This speaks volumes of the stability of the group and its generosity as a dividend payer.
(Source: 2019 annual report)
Measure 1: Growth in revenue and profits
Carlsberg Malaysia has recorded a compounded annual growth rate (“CAGR”) in revenue and net profits of approximately 8.0% and 7.8% from 2015 to 2019. However, the group recorded weak results in the H1 2020 as it was impacted by production suspension and limitations to sales and distribution amid Covid-19.
The group’s production was suspended for 7 weeks since the Movement Control Order (MCO) commenced on 18 March in Malaysia. The pandemic has also significantly affected sales and distribution during the Conditional and Recovery MCO in Malaysia and the Circuit Breaker (CB) in Singapore. Besides, the group also recognized a one-off RM6.4 million settlement with the Royal Malaysian Customs (RMC) during H1 2020 with regards to the bill of demand on excise duties issued by the Selangor State Director in 2014.
Measure 2: Profitability
Carlsberg Malaysia’s gross profit margins have declined slightly from 36.6% in 2015 to 31.8% in 2019. On the other hand, its net profit margins have remained fairly stable within the range of 12.2% – 14.0% from 2015 to 2019.
Meanwhile, the group’s return on equity ratios is fantastic ranging from 62.1% – 185.7% over the past 5 years. This shows that management is efficient in allocating shareholders’ capital.
Measure 3: Liquidity
Carlsberg Malaysia does not have any liquidity issues as the company has recorded positive current and cash ratios from 2015 to 2019. Nevertheless, from a net cash position, the group now has a net gearing ratio of 0.2x as its loan and borrowing of RM134.5 million exceeds its cash and cash equivalents of RM81.9 million as at 30 June 2020.
Round 4: Dividends payout
Carlsberg Malaysia is a consistent dividend payer. Its yearly dividend payout is more than its annual net profits, which is unsustainable in the long-term. Investors should also note that its management has decided to suspend the quarterly dividend payments for the financial year ending 31 December 2020 to ensure prudent focus on preserving cash and liquidity.
With a closing share price of RM22.98 as at 24 August 2020, Carlsberg Malaysia is trading at a price of earnings (PE) ratio of 31.68, with a market capitalisation of RM7.03 billion, and an indicative yield of 3.91%.
Carlsberg Malaysia’s management is taking a cautious view of the outlook for the second half of 2020 due to the persisting effects of Covid-19 and the measures necessary to control the pandemic. Management has cautioned that the regulations and measures imposed by the governments in Malaysia and Singapore to contain the pandemic will cause on-trade sales and consumer sentiment to remain depressed.
Therefore, the group anticipates a slow recovery in on-trade sales due to the reduced capacities, social distancing, health and safety guidelines that are in place, as well as general contributing factors such as deteriorating macroeconomic conditions and financial and operating challenges that F&B operators are facing to stay viable.
While we expect management to be able to cope with the challenges to its bottom line and cash flow, the group does not look like an attractive investment for the time being. Its valuation is on the high side, and the current dividend yield is no higher than fixed deposit rates. We would recommend income investors to look for a better entry point.