Malaysia: Brewers' prospects continue to grow

The prospects of beer brewers are expected to grow brighter as foreign tourists return to Malaysia and the upcoming Fifa World Cup football championship is expected to spur demand, The Star reported on September 19.

Brewers have experienced an upward trajectory in earnings as witnessed in the first half of 2022, where Carlsberg Brewery Malaysia Bhd and Heineken Malaysia Bhd put in impressive performances that exceeded analyst expectations.

According to Hong Leong Investment Bank (HLIB) research, Carlsberg's 1H results were 61% and 65% of its and market's full-year forecasts respectively.

Heineken Malaysia's 1H performance also exceeded expectations at 58% and 63% of the research firm's and consensus full-year estimate respectively.

For the coming quarters, there have been concerns over high input costs owing to raw material supply disruptions as highlighted by domestic brewers during their respective 2Q22 briefings.

However, HLIB noted the companies have taken action to cushion the downside.

"To mitigate the impact of rising input cost, various measures were implemented by the brewers, with Carlsberg using 'premiumisation' and cost innovation, while HEIM implementing revenue management (improving sales mix) together with labour cost management.

"Such measures, coupled with the price hike and better operating leverage, should cushion the higher input cost, preserving margins in 2H22," it said in a sector update.

The research firm added that a price hike in August in response to the rising prices of barley and aluminium should not significantly slow demand for beer owing to its inelasticity.

As for the risk of an excise duty hike for alcoholic drinks in the upcoming Budget 2023, HLIB believes any negative impact will be short-lived.

"Taking the 2016 excise duty hike as a reference, the upward price adjustment in beer prices in response to the higher excise duties caused brewers to record relatively lacklustre earnings.

"Nevertheless, beer sales gradually recovered after consumers adapted to the new pricing after two quarters," it said.

HLIB said as brewers have recently raised prices, they might absorb a certain portion of the excise duty in the near term and pass it to consumer when sentiment recovers.

HLIB maintained its "overweight" recommendation on the sector and "buy" ratings on Carlsberg and Heineken.

However, it lowered the companies' price-earnings multipliers as it recalibrated the five-year mean, leading to downward target price revisions for Carlsberg to RM29.62 (from RM30.85) and Heineken to RM28.36 (from RM28.88).

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