Malaysia: Carlsberg, Heineken expected to continue to benefit from reopening play

Hong Leong Investment Bank (HLIB) Research continues to favour breweries and tobacco players, believing that the risk-reward ratio is skewed to the upside, due to the combination of earnings growth and undemanding valuations, The Edge Markets reported on December 22.

The research house rates Carlsberg Brewery Malaysia Bhd (target price: RM30.77) and Heineken Malaysia Bhd (TP: RM31.18) as "buy", as they offer continued exposure to the reopening play.

A key catalyst is China's potential reopening next year, which looks increasingly likely, following gradual easing of its Covid-19 restrictions since November, the research house said.

“To note, tourists from China accounted for 11.9% of tourists pre-pandemic (2019). On the cost front, brewers are relieved by declining barley and aluminium prices,” HLIB noted in a note.

“While there is risk of a beer demand slowdown, due to inflationary pressures, higher interest rates and softer economic growth in 2023, we expect beer to continue retaining its inelastic properties. After all, it remains one of the cheapest alcoholic drinks on the market,” it said.

Aside from continued recovery in tourist arrivals, breweries are expected to continue to see year-on-year profit growth, due to the absence of the prosperity tax and full-year reflection of average selling prices.

The implementation of the Control of Tobacco Product and Smoking Bill 2022 — also known as the generational endgame (GEG) — is expected to be deferred, considering that the Bill will have to be reintroduced from the first reading in the Dewan Rakyat.

There is also a chance that the Bill's language will be drastically altered.

On whether the GEG will continue to be implemented, new Health Minister Dr Zaliha Mustafa stressed that decision-making cannot be drastic, and must be incremental.

“With this, we reiterate our view that the legislative path of the Tobacco Bill will be challenging. In fact, as investors are well informed of the impact of the GEG on tobacco players, we believe long-term growth is no longer the primary investment goal of investors.

"Instead, investors will place greater emphasis on near-term catalyst drivers (earnings and valuations), which could be sparked by variables like declining illicit market share and the absence of the prosperity tax in 2023,” HLIB added.

HLIB has a "buy" call on British American Tobacco (Malaysia) Bhd (BAT), with a TP of RM12.08, as it sees upside potential to the group's earnings if the illicit market share continues to fall, coupled with its generous dividend yield of 8.6%, which should provide downside support.

As at the time of writing on Thursday (Dec 22), Carlsberg’s share price was unchanged at RM22.94, giving it a market capitalisation of RM7.01 billion.

Heineken, which has risen 17.91% year-to-date, was traded at RM25.56 a share. At this price, the company was valued at RM7.72 billion.

BAT, meanwhile, was flat at RM11.36, valuing it at RM3.24 billion.

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