CAB ... Aug10

S & P Results Review & Earnings Outlook

• For 2Q10, Carlsberg (M) reported a 56.8% YoY increase in revenue to MYR334.2 mln and a 139.3% YoY increase in net profit to MYR30.8 mln. The improved financial results were within our expectations and market consensus.

• The much improved 2Q10 results were driven by: (i) operational synergies and contribution from acquired subsidiary, Carlsberg Singapore (revenue of MYR75.7 mln and MYR9.6 mln in operating profit), (ii) higher sales associated with the 2010 FIFA World Cup season, (iii) increased supermarket and hypermarket sales, and (iv) higher profit contribution from associate company Lion Brewery (Ceylon). The group has also continued its outperformance in the imported premium beer segment through its subsidiary Luen Heng F&B, which distributes Hoegaarden, Stella Artois and Budweiser.

• Looking forward, we expect domestic demand for beer & stout to remain firm and Carlsberg (M)’s growth will continue to be driven by contribution and operational synergies from Carlsberg Singapore. On the cost side, although malt barley costs have risen in recent months, Carlsberg (M) has partially hedged its raw materials costs through forward buying for the next year. Another concern lies with the uncertainty of an excise duty increase on malt liquor in the upcoming 2011 Budget after a four-year respite.

• In view of the expected results, we maintain our FY10 and FY11 net profit projections.

Recommendation & Investment Risks

• We maintain our Buy recommendation on Carlsberg (M) with a higher 12-month target price of MYR6.00 (previously MYR5.50) after raising our forward dividend projections. Since its acquisition of Carlsberg Singapore, Carlsberg (M) has delivered the operational synergies and
improved profitability associated with the purchase. Besides growth from Carlsberg Singapore, we believe Carlsberg (M) will also benefit from improved domestic beer & stout demand, particularly for the premium segment, on which the group is increasing its attention.

• We continue to derive our 12-month target price using dividend discount model valuation, with an unchanged discount rate ranging from 8.1% to 8.9% (unchanged) and terminal growth of 3% (unchanged). Our higher 12-month target price is due to our raised projected dividend payout ratio. Management has guided for a dividend payout of 50% to 70% of distributable profits.

• Carlsberg (M) has declared an interim dividend of 5 sen less 25% tax and special dividend of 2.5 sen less 25% tax (FY09: interim dividend of 5 sen less 25% tax and nil special dividend).

• Risks to our recommendation and target price include: (i) weaker-than expected demand for beer and stout, (ii) unexpected increase in hop, malted barley and packaging costs, (iii) integration issues and lowerthan-
expected contribution and synergy savings from Carlsberg Singapore, and (iv) an unexpected increase in excise duty on malt liquor during the 2011 Budget.