CGS-CIMB advises clients to buy Carlsberg shares despite harsh business conditions
Published on 24 Mar 2020. | Source: theedgemarkets.com
KUALA LUMPUR (March 24): CGS-CIMB Research is advising its clients to buy shares of Carlsberg Brewery (M) Bhd by upgrading its call to “add”, despite the harsh business operating environment amid the government’s 14-day movement control order (MCO).
The research house said it likes Carlsberg for its relatively more defensive business nature and attractive dividend yields. It however lowered the target price on the stock to RM28 in light of lower sales volume.
In the note, it explained that although brewery counters such as Carlsberg and Heineken Malaysia Bhd tend to stay safe in volatile markets, they are, however, most likely to be negatively affected by the government’s MCO.
At the time of writing, both counters were among the top gainers on Bursa Malaysia. Carlsberg gained RM1.18 or 5.98% to RM20.90. The counter lost some 46% since reaching its peak high of RM38.94 on Feb 21.
Meanwhile, Heineken rose 54 sen or 2.73% to RM20.30. It has also fallen 35% since reaching its peak high of RM31.04 on Feb 21.
Carlsberg said yesterday that its operations will be temporarily halted during the 14-day MCO from March 18 to 31. Under the MCO, all government and private premises except those involved in essential services must be closed.
CGS-CIMB said this is negative as Carlsberg’s temporary ceasing of operations includes all manufacturing activities and any physical marketing activities.
“Hence, we expect Carlsberg’s earnings to be negatively affected on the back of lower production output and lower sales from fewer marketing activities,” it said.
With this announcement, CGS-CIMB said it is also expecting Heineken to follow suit and temporarily halt operations in this period. It maintained its “add” call on Heineken, with a lower target price of RM26.70.
The implementation of the MCO also means potentially lower on-trade sales for Heineken and Carlsberg at locations such as hotel restaurants, bars and pubs, whose operations have also been temporarily closed.
CGS-CIMB estimates that on-trade sales currently make up 50% to 55% of both Heineken and Carlsberg’s total sales.
CGS-CIMB cut its FY20 to FY22 earnings per share (EPS) forecasts by 4.9%-8.5% for Carlsberg. The research house also cut its FY20 to FY22 EPS for Heineken by 2.6%-3.8%.
“We also expect lower tourist arrivals as a result of Covid-19 and the cancellation of the Visit Malaysia 2020 campaign to adversely affect the consumption of beer in the country,” it said.
It added that as major sporting events, such as Euro 2020, have been cancelled or postponed due to the Covid-19 outbreak, this will also lead to lower multi-marketing level sales in supermarkets and other retailers.
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