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Saturday, May 8, 2010

Consumer: Carlsberg Brewery Malaysia Berhad


Introduction
Incorporated in 1969 and started brewing the Green Label in 1972, having grown over the last 40 years to be the No.1 beer brand in Malaysia. The Malaysian company is 51% owned by the Carlsberg Group and has made its presence via subsidiaries in other places of Sri Lanka, Taiwan & very recently Singapore (in 2009).

Carlsberg Malaysia not only does sell their beer only, they have seven top international beers: Carlsberg - Malaysia, Tuborg - Denmark, Corona - Mexico, Stella Artois - Belgium, Foster - Australia, Beck - Germany and Budweiser - Official Beer for World Cup 2010 in South Africa. They also have SKOL beer, Jolly Shandy brand and non-alcoholic Nutrimalt drink.

How do you sell beer in a country where ~60% of the population is Muslim and forbidden by the government to buy it? Just drink lor and hope 'tak kena tangkap', in July 2009 a Muslim model was caught and supposedly caned but it did not happen and changed to community service. WHY? Punishment is not a solution it is repression. Whatever it is, Malaysia is not the only Muslim-majority country where alcoholic sales is increasing. Turkey and Egypt are too. Our friend Indonesia how ah? I dunno so I ask you.

Fundamental
1. Does the company have an identifiable durable competitive advantage?
In its own way YES, it has a commanding 50% overall beer market share and 20% of the domestic stout market via Royal Danish Stout market. Their main rival is Guinness which has 40% and 80% respectively. Carlsberg has a more competitive advantage in the field of brand awareness and popularity. It has won Reader's Digest Trusted Brand Gold Award for 11 years in a row even though they are No.2 in total market share.

2. Do you understand how the product works?
Buy and drink nia la, you have to feel to know how it works.

3. What is the chance that it will become obsolete (pupus) in the next twenty years?
When everyone starts to dislike beer over coke or the govt suddenly decide it is haram for all Malaysians, IMPOSSIBLE, chances are near zero.

4. Does the company allocate capital exclusively in the realm of its expertise?
Yes, they market Carlsberg rigorously. In mid-2007 they imported new high-end beer Jacobsen for premium restaurant niche market and also the new Tuborg to woo younger generations. In mid-2008 they launched Carlsberg Gold. As you can see they focus on one thing, to make profit from selling more BEERS across different segments!

5. What is the company's financial history and status?
  • Profit Margin is being squeezed and consistently getting lower over the past 10 years.
  • Return of Equity which means how much shareholders get in return of investment has stabilized at ~20%
  • Revenue Growth Rate has their ups and downs thanks to the govt who kept on raising excise tax because govt is poor and in debt, people take time to adjust to new prices, see below:

  • Earnings Per Share & Dividend Per Share has also being in the downward trend over the past 10 years.
  • Div payout in 2009 was specially low due to acquisition of Carlsberg Singapore Pte Ltd at RM360mil and they had to give less dividends to recover cash flow back.
6. Is the company conservatively financed?
Of course, it has ~RM118mil in cash and has no debts.

7. Is the company actively buying back its shares?
Only once in Sept 1999, but still they have bonus issues 4 times in the 1990s but only one share split in 2000s. This is very good for long term investors who invested before the 1990s until now. 

8. Is the company free to raise prices with inflation?
The company has no problems with inflation but the ever raising excise tax. Malaysia is broke but the govt can buy useless submarines at the expense of the RAKYAT's purchasing power and company growth.

9. Are large capital expenditures required to update plant and equipment?
Not really, their current brewery plant utilization is 60% and is hoping to increase it to a more optimum or higher level with the acquisition of Carlsberg Singapore. All SG-bound products will be made locally here :) Malaysia Boleh..

Discounted Cash Flow Analysis
Not going into details but this analysis method was introduced by a friend of mine. Thanks to him, I have abandoned my old way of "relative analysis & safety of margin" method. DCF tries to work out the value of the company today, based on projections of how much money it will generate in the future.

Boh meng pek (don't understand) la..well DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. So what factors do I look at (for the next 5 years)?
  • Forecast sales revenue using historical data and current market conditions.
  • Forecast free cash flow, that is after deducting operating costs, working capital and re-investment.
  • Factor in corporate taxes + debt repayment if any + market risk (beta).
Based on all these factors I have assumed Carlsberg's revenue growth rate is at 7.5% averagely, with 90% operating cost margin, 25% corporate tax, almost free of investment and working capital growth for the next 5 years. Having said all these in my opinion it is fair to buy..

Carlsberg at RM3.70 to RM4.50 for ~15-13% discount rate. Of course with some risk la, the higher price you pay, less returns you get but with more risk.

First you can see quite a very gradual depreciation of share price from 2002 to 2007 and fundamentally you know this because of the downward trend that I have just mentioned earlier. Intelligent shareholders know this and smart money (professional money) is not going to inject more money thus no increase in share price. The recent downturn has made Carlsberg very attractive in price and they might be buying for profit taking in the short term. Will Carlsberg's entry into Singapore entice investor to pour in money for the long term is something unknown for now. If you think you can digest that unknown then buy at the appropriate price level to minimize or compensate your risk.


What Do I Think?
-I do not like the company's financial history performance over the last 10 years. It seems that they are finding it increasingly hard to balance between ever raising excise tax and to pass on the cost to consumers. If Najib's NEM can fly and double our income in 10 years this would not be a problem because the RAKYAT can spend more to party or celebrate but the fact remains that this task is quite insurmountable.

-On the other hand, the company's div yield is between the 4% to 6% range for the last 10 years. They had also just announced that from 2009 to 2013 the payout ratio will be 50% to 70% of net profit thus you will see roughly 2.5% to 4.5% only.

-Good news is Carlsberg realised that they have to grow outside of Malaysia and recent acquisition of Carlsberg Singapore is a good sign the company is trying to turn things around before it is too late.

-In short, I will not buy into Carlsberg seeing there is some uncertain risk and with their financial downward trend. It was a good stock to own if it was in the 1980s or early 1990s. Sorry man, but I still love your beers & models :)

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