osk report my guinness anchor results review 20150106

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Results Review, 6 February 2015

Thurs

Guinness Anchor (GUIN MK) Buy (from Neutral) Consumer Non-cyclical - Food & Beverage Products Target Price: MYR14.10

Market Cap: USD1,031m Price: MYR12.20

Strong 2QFY15 Earnings Surpass Expectations

Macro 2.00

Risks 1.00

Growth 1.00

Value 2.00

84

87

90

92

95

98

101

103

106

109

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

15.0

15.5

Guinness (GUIN MK)Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS)

100

200

300

400

500

600

700

800

Feb

-14

Apr-

14

Jun-1

4

Aug-1

4

Oct-

14

De

c-1

4

Vol th

Source: Bloomberg

Avg Turnover (MYR/USD) 1.20m/0.35m

Cons. Upside (%) 8.2

Upside (%) 15.6

52-wk Price low/high (MYR) 12.1 - 15.2

Free float (%) 46

Share outstanding (m) 302

Shareholders (%)

GAPL Ltd 51.0

Aberdeen Asset Management 6.1

Share Performance (%)

YTD 1m 3m 6m 12m

Absolute (0.8) (0.8) (4.1) (9.1) (13.2)

Relative (3.2) (4.6) (2.1) (5.2) (14.2)

mpliant

Fong Kah Yan +603 9207 7668

[email protected]

Forecasts and Valuations Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Total turnover (MYRm) 1,676 1,611 1,798 1,852 1,934

Reported net profit (MYRm) 218 198 230 233 244

Recurring net profit (MYRm) 218 198 230 233 244

Recurring net profit growth (%) 5.2 (9.2) 15.9 1.4 5.0

Recurring EPS (MYR) 0.72 0.66 0.76 0.77 0.81

DPS (MYR) 0.69 0.64 0.69 0.70 0.74

Recurring P/E (x) 16.9 18.6 16.0 15.8 15.1

P/B (x) 10.1 10.3 9.8 9.3 8.8

P/CF (x) 16.1 15.4 13.7 12.8 13.2

Dividend Yield (%) 5.6 5.3 5.7 5.7 6.0

EV/EBITDA (x) 11.3 12.1 10.6 10.3 9.8

Return on average equity (%) 58.6 54.9 62.6 60.0 59.7

Net debt to equity (%) 22.4 24.7 23.0 12.2 9.5

Our vs consensus EPS (adjusted) (%) 12.5 8.8 8.7

Source: Company data, RHB

Guinness 1HFY15 (Jun) results were above our and consensus expectations, largely due to strong sales driven by volume growth, favourable pricing and brand mix, and a reduction in the amount of contraband beers. Given the retracement of the share price from its recent peak of MYR13.32 and the strong quarter, we upgrade our call to BUY (from Neutral) with a revised TP of MYR14.10 (15.6% upside).

Above expectations. Guinness Anchors (Guinness) 1HFY15 net profit

of MYR130.7m (+13% YoY) was above our and consensus expectations, making up 67.4% and 64.1% of FY15 earnings forecasts respectively. In 1HFY15, sales were up 10.8% YoY, on the back of: i) 6% YoY volume growth; ii) favourable pricing and sales mix; and iii) a reduction in the amount of contraband beers from the intensified enforcement efforts. Sequentially, 2QFY15 earnings rose 39.4% QoQ, driven by: i) 32.5% increase in sales from seasonal demand; and ii) EBIT margin expansion to 19.5% (1QFY15: 18.7%) from ongoing strategic cost management. An interim DPS of 20 sen was declared for the quarter under review (2QFY14: 20 sen).

Forecasts and risks. In view of the better-than-expected 1HFY15 results, we nudge up our FY15-FY17 earnings forecasts by 12-18.6% respectively after updating our sales and margins assumptions. Key risks to our recommendation are: i) weaker-than-expected sales volume; ii) an excise duty hike; and iii) intensified competition from contraband beer.

Investment case. We replace our DCF valuation methodology with that of a dividend discount model (DDM) (CoE: 8%, TG: 2%) given Guinness consistent dividend payouts in tandem with earnings growth as well as the brewery sector being a fairly mature industry. Our revised DDM-derived TP of MYR14.10 implies FY15/FY16 P/Es of 18.6x/18.3x respectively. As the share price has retraced by 8.4% from a recent peak of MYR13.32, we upgrade Guinness to a BUY recommendation from Neutral with a higher TP of MYR14.10 (from MYR13.10) as valuations are undemanding at FY15/FY16 P/Es of 15.8x/15.2x, which is below Guinness average five-year historical trading P/E of 18.7x. Dividend yields for FY15/FY16 remain decent as well at 5.7% for both financial years.

Guinness Anchor (GUIN MK) 6 February 2015

See important disclosures at the end of this report 2

Briefing Highlights A strong 2QFY15. 2QFY15 net profit of MYR76.1m (+15.2% YoY, +39.4% QoQ) was stronger than expected, largely due to: i) volume growth from seasonal demand; ii) ongoing strategic cost management as well as iii) a reduction in the amount of contraband beer. Indeed, while the second quarter of the financial year has always been the strongest quarter, we note that vis--vis 2QFY14, 2QFY15 earnings were up by a robust 15.2%, largely due to its improved cost efficiencies and working capital management. We understand from management that sales performance of all its core brands, namely Heineken, Tiger and Guinness were beyond expectations with Tiger leading the pack. Management also added that Tiger is currently the leading brand in the market as well.

Impact of the Goods and Services Tax (GST). Upon the implementation of the GST, the current 5% sales tax will be replaced by a 6% GST. However, we note that under the GST regime, businesses are entitled to claim an input tax incurred for its taxable supplies. While the impact of GST on Guinness' earnings remains unclear, management stated that Guinness is prepared for its implementation this Apr 2015. It added that the strong double-digit growth earnings momentum may not sustain after the implementation of the GST, due to a potential slowdown in consumer spending. Management, however, expects the impact to be normalised within six months after the GST is implemented after the market gets used to the new regime.

Strengthening of the USD has minimal impact on Guinness. Since Guinness core operation is in Malaysia, its sales are denominated in MYR. We also understand from management that a portion of its raw materials are denominated in the USD. However, management clarified that the strengthening of the USD will have a minimal impact on Guinness earnings as the portion is not substantial and it has entered into a one-year currency hedging contract annually.

Price hike across its core brands in Dec 2014. Management revealed that there was a single-digit percentage of price hike across its core brands in Dec 2014. We believe the price hike was in preparation for the upcoming GST as under The Price Control and Anti-Profiteering Regulations 2014, retailers or traders are not allowed to increase their net profit margin for any goods or services for 18 months from Jan 2015 till Jun 2016.

Forecasts and risks. We believe FY15 will likely be a record year for Guinness given its strong 1HFY15 thus far. However, after factoring in the potential slowdown in consumer spending post-GST, price hike across its core brands in Dec 2014 and not least, its ongoing strategic cost management, we believe our FY16 earnings forecast of MYR233m (+1.4% YoY) is reasonable. We believe the potential slowdown in sales post-GST may also be mitigated by the intensified efforts by the Royal Malaysian Customs and various enforcement agencies to eradicate contraband beers. For FY17, we forecast a 5% YoY growth in its earnings, reflecting the recovery in consumer spending post-GST. The key risks to our recommendation are: i) weaker-than-expected sales volume; ii) an excise duty hike; and iii) intensified competition from contraband beer.



Figure 1: Guinness Anchors quarterly results review

FYE June (MYRm) 2QFY14 1QFY15 2QFY15 QoQ (%) YoY (%) 1HFY14 1HFY15 YoY (%) Comments

Revenue 499.4 393.2 520.8 32.5 4.3 825.2 913.9 10.8 1HFY15 strong sales due to volume growth, favourable pricing and brand mix, and a reduction in amount of contraband beers

EBIT 89.3 73.7 101.5 37.7 13.6 156.1 175.2 12.2

EBIT Margin (%) 17.9 18.7 19.5 18.9 19.2 Quarterly EBIT margin continued to expand from ongoing strategic cost management

Interest expense (1.9) (1.4) 0.0 (100.7) (100.5) (3.3) (2.3) (30.5)

Interest income 0.8 0.5 0.0 (100.0) (100.0) 1.6 1.4 (7.0)

Associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EI/Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Pretax profit 88.1 72.8 101.5 39.4 15.1 154.3 174.3 12.9

Pretax Margin (%) 17.7 18.5 19.5 18.7 19.1

Tax (22.1) (18.2) (25.4) 39.4 15.1 (38.6) (43.6) 12.9

Effective tax rate (%) 25.0 25.0 25.0 25.0 25.0 Effective tax rate in line with expectations

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 66.1 54.6 76.1 39.4 15.2 115.7 130.7 13.0

Core Profit 66.1 54.6 76.1 39.4 15.2 115.7 130.7 13.0

Net Margin (%) 13.2 13.9 14.6 14.0 14.3




Figure 2: Guinness results for the past eight quarters

FYE June (MYRm) 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15

Revenue 442.5 412.1 325.8 499.4 372.6 412.9 393.2 520.8

Growth QoQ (%) -6.9 -20.9 53.3 -25.4 10.8 -4.8 32.5

Growth YoY -15.8 0.2 20.7 4.3

COGS (359.2) (367.9) (259.0) (410.1) (323.3) (347.7) (319.5) (419.3)

EBIT 83.3 44.2 66.8 89.3 49.3 65.2 73.7 101.5

EBIT Margin (%) 18.8 10.7 20.5 17.9 13.2 15.8 18.7 19.5

Interest expense (2.1) (1.4) (1.4) (1.9) (2.3) (1.8) (1.4) 0.0

Interest income 0.4 0.4 0.8 0.8 0.4 0.6 0.5 0.0

Associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

EI/Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Pretax profit 81.5 43.2 66.2 88.1 47.4 64.1 72.8 101.5

Pretax Margin (%) 18.4 10.5 20.3 17.7 12.7 15.5 18.5 19.5

Tax (20.4) (9.8) (16.5) (22.1) (11.9) (17.1) (18.2) (25.4)

Effective tax rate (%) 25.0 22.6 25.0 25.0 25.0 26.7 25.0 25.0

Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net Profit 61.2 33.5 49.6 66.1 35.6 46.9 54.6 76.1

Core Profit 61.2 33.5 49.6 66.1 35.6 46.9 54.6 76.1

Net Margin (%) 13.8 8.1 15.2 13.2 9.5 11.4 13.9 14.6

Source: Company data , RHB

Figure 3: Guinness Anchor's quarterly EBIT margins

Title:

Source:

Please fill in the values above to have them entered in your report18.8%

10.7%

20.5%

17.9%

13.2%

15.8%

18.7%19.5%

5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15




Figure 4: Derivation of TP from DDM valuation FYE June FY16F FY17F FY18F FY19F FY20F FY21F

DPU (MYR) 0.70 0.74 0.78 0.82 0.87 0.91

Discount factor 1.08 1.17 1.26 1.36 1.47 1.58

PV of dividend (MYR) 0.65 0.63 0.62 0.61 0.59 0.57

Discount rate (%) 8.0%

Terminal Value (MYR) 16.45

PV of terminal value (MYR) 10.39

Target price (MYR) 14.10

Rf 4.0% CoE 8.0%

Beta 0.76 TG (%) 2.0%

Risk premium (Rm-Rf) 5.2%

Rm 9.2%

Source: RHB

Figure 5: 12-month forward P/E Figure 6: 12-month forward dividend yield

Title:

Source:

Please fill in the values above to have them entered in your report

5

10

15

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25

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35

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

x

AVG = 18.7x

-1 SD = 13.8x

+1 SD = 23.5x

Title:

Source:

Please fill in the values above to have them entered in your report

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

+1 SD = 6.5%

AVG = 5.3%

-1 SD = 4.1%

Source: Company data, RHB Source: Company data, RHB



Financial Exhibits

Profit & Loss (MYRm) Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Total turnover 1,676 1,611 1,798 1,852 1,934

Cost of sales (1,111) (1,032) (1,194) (1,236) (1,278)

Gross profit 565 578 603 616 656

Gen & admin expenses (70) (70) (79) (85) (90)

Selling expenses (212) (232) (225) (231) (251)

Other operating costs 10 (6) 11 11 11

Operating profit 293 271 311 311 326

Operating EBITDA 334 312 357 362 381

Depreciation of fixed assets (41) (41) (46) (51) (55)

Operating EBIT 293 271 311 311 326

Interest income 3 3 3 3 3

Interest expense (7) (7) (7) (7) (7)

Pre-tax profit 289 266 306 306 322

Taxation (71) (68) (77) (74) (77)

Profit after tax & minorities 218 198 230 233 244

Reported net profit 218 198 230 233 244

Recurring net profit 218 198 230 233 244


Cash flow (MYRm) Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Operating profit 293 271 311 311 326

Depreciation & amortisation 41 41 46 51 55

Change in working capital (12) (18) (7) 14 (20)

Other operating cash flow (1) (8) - (10)

Operating cash flow 321 286 350 366 361

Interest received 3 3 3 3 3

Interest paid (7) - (7) (7) (7)

Tax paid (89) (50) (77) (74) (77)

Cash flow from operations 229 239 268 288 279

Capex (46) (25) (48) (48) (48)

Other investing cash flow 1 (13) 5 - -

Cash flow from investing activities (45) (38) (43) (48) (48)

Dividends paid (227) (207) (209) (212) (222)

Increase in debt (50) - (25) (15) (15)

Cash flow from financing activities (277) (207) (234) (227) (237)

Cash at beginning of period 161 68 62 53 66

Total cash generated (93) (6) (8) 13 (6)

Implied cash at end of period 68 62 54 66 60




Financial Exhibits

Balance Sheet (MYRm) Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Total cash and equivalents 68 62 53 66 60

Inventories 47 39 93 98 98

Accounts receivable 323 333 298 292 318

Other current assets 19 7 7 7 7

Total current assets 458 442 452 464 484

Tangible fixed assets 226 220 213 203 192

Intangible assets 36 39 55 62 66

Total other assets 20 1 1 1 1

Total non-current assets 281 260 269 266 259

Total assets 739 702 721 730 743

Short-term debt - 100 80 65 55

Accounts payable 179 153 164 176 182

Other current liabilities 4 - - - -

Total current liabilities 183 253 244 241 237

Total long-term debt 150 50 60 50 45

Other liabilities 40 43 40 40 40

Total non-current liabilities 190 93 100 90 85

Total liabilities 373 346 344 331 322

Share capital 151 151 151 151 151

Retained earnings reserve 214 206 226 247 269

Shareholders' equity 366 357 377 398 420

Total equity 366 357 377 398 420

Total liabilities & equity 739 702 721 730 743


Key Ratios (MYR) Jun-13 Jun-14 Jun-15F Jun-16F Jun-17F

Revenue growth (%) 3.2 (3.9) 11.6 3.0 4.4

Operating profit growth (%) 5.8 (7.8) 14.9 (0.0) 4.9

Net profit growth (%) 5.2 (9.2) 15.9 1.4 5.0

EPS growth (%) 5.2 (9.2) 15.9 1.4 5.0

Bv per share growth (%) (3.7) (2.4) 5.8 5.5 5.5

Operating margin (%) 17.5 16.8 17.3 16.8 16.9

Net profit margin (%) 13.0 12.3 12.8 12.6 12.6

Return on average assets (%) 28.7 27.5 32.3 32.1 33.2

Return on average equity (%) 58.6 54.9 62.6 60.0 59.7

Net debt to equity (%) 22.4 24.7 23.0 12.2 9.5

DPS 0.69 0.64 0.69 0.70 0.74

Recurrent cash flow per share 0.76 0.79 0.89 0.95 0.92




SWOT Analysis

The business provides stable recurring cash flow

Leader in Malaysian breweries industry with a brand of portfolio encompassing all price points

Strong corporate governance

Aggressive marketing efforts and the introduction of new brands by key rivals may take some market share away

Intensified competition from the contraband beers

Growth in the premium segment helps boost ASPs and improve profit margins

A reform in the alcohol taxes may see beer becoming relatively cheaper than other alcoholic beverages

Small presence in the super premium segment

-15%

-12%

-8%

-5%

-1%

3%

6%

10%

13%

17%

20%

0

2

4

6

8

10

12

14

16

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20

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-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

P/E (x) vs EPS growth

P/E (x) (lhs) EPS growth (rhs)

48%

51%

53%

56%

59%

61%

64%

7.5

8.0

8.5

9.0

9.5

10.0

10.5

Jan

-13

Jan

-14

Jan

-15

Jan

-16

Jan

-17

P/BV (x) vs ROAE

P/B (x) (lhs) Return on average equity (rhs)

Source: Company data, RHB Source: Company data, RHB

Company Profile Guinness Anchor is involved in the manufacture, sale and distribution of beer. Its key brands are Tiger, Guinness and Heineken.



Recommendation Chart

5.3

7.3

9.3

11.3

13.3

15.3

17.3

19.3

21.3

23.3

Feb-10 May-11 Aug-12 Nov-13

Price Close

na

14.2

15.3

17.5

17.5

20.5

15.2

13.5

12.8

12.8

13.1

Recommendations & Target Price

Buy Neutral Sell Trading Buy Take Profit Not Rated

Source: RHB, Bloomberg

Date RecommendationTarget Price Price

2014-11-17 Neutral 13.1 13.2

2014-08-25 Neutral 13.1 13.5

2014-08-22 Neutral 12.8 13.5

2014-05-12 Sell 12.8 13.9

2014-02-19 Sell 13.5 15.2

2013-09-13 Sell 15.2 17.4

2013-08-23 Neutral 20.5 18.1

2013-05-15 Neutral 20.5 20.7

2013-05-07 Neutral 17.5 19.7

2013-02-22 Buy 17.5 16.6

Source : RHB, Bloomberg

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RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage DISCLAIMERS

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Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in the securities

covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose securities are covered in the report. This report is therefore classified as a non-independent report.

As of 5 February 2015, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary positions in the subject companies, except for: a) -

As of 5 February 2015, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: a) -

DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N)

Kuala Lumpur Hong Kong Singapore

Malaysia Research Office

RHB Research Institute Sdn Bhd

Level 11, Tower One, RHB Centre Jalan Tun Razak

Kuala Lumpur Malaysia

Tel : +(60) 3 9280 2185 Fax : +(60) 3 9284 8693

RHB OSK Securities Hong Kong Ltd. (formerly known

as OSK Securities

Hong Kong Ltd.) 12

th Floor

World-Wide House 19 Des Voeux Road Central, Hong Kong

Tel : +(852) 2525 1118 Fax : +(852) 2810 0908

DMG & Partners

Securities Pte. Ltd.

10 Collyer Quay #09-08 Ocean Financial Centre

Singapore 049315 Tel : +(65) 6533 1818 Fax : +(65) 6532 6211

Jakarta Shanghai Phnom Penh

RHB OSK Securities Indonesia

Wisma Mulia Building, 20th Floor, Jl. Jenderal Gatot Subroto No. 42,

Jakarta 12710, Indonesia Tel : +(6221) 2783 0888 Fax : +(6221) 2783 0777

RHB OSK (China) Investment Advisory Co. Ltd.

(formerly known as OSK (China) Investment Advisory Co. Ltd.)

Suite 4005, CITIC Square 1168 Nanjing West Road

Shanghai 20041 China

Tel : +(8621) 6288 9611 Fax : +(8621) 6288 9633

RHB OSK Indochina Securities Limited (formerly

known as OSK Indochina Securities Limited) No. 1-3, Street 271

Sangkat Toeuk Thla, Khan Sen Sok Phnom Penh

Cambodia Tel: +(855) 23 969 161 Fax: +(855) 23 969 171

Bangkok

RHB OSK Securities (Thailand) PCL (formerly known

as OSK Securities (Thailand) PCL) 10th Floor, Sathorn Square Office Tower

98, North Sathorn Road,Silom Bangrak, Bangkok 10500

Thailand Tel: +(66) 2 862 9999 Fax : +(66) 2 108 0999

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