Carlsberg Malaysia Reignited? Not So

Back in May 2010, I have mentioned that the only piece of good news for Carlsberg Malaysia is the acquisition of Carlsberg Singapore to turn things around before it is too late. At least things did become better for the company. Here is the consolidated earnings for nine months ended 30 September for the following years:

2009: RM745,000 (Malaysia 99% + Others)

2010: RM1,042,000 (Malaysia 80%, Singapore 19% + Others)

Profit before tax has risen 93% and revenue up by 43% by half year. Other notables are reduction in cash in hand from RM118 mil to RM28 mil while incurring an additional RM 55 mil borrowings. With such optimism and continuous stream of good news, no wonder the share price has soared to a year high of RM 6.52 while trading at RM6.40.

Some people have said that I missed the boat back in my May 2010 writeup but I have my own views and you have yours as well. I am a value investor, playing the long term waiting game, I rarely do trading buys unless I am very confident. Because I am the value invester, here are my takes on the long run.

1. If I plug in 50% revenue increase into DCF model, the fair value of Carlsberg Malaysia went up from RM3.70-RM4.50 to RM5.30-RM6.50 (15% to 13% discount). Normal price soar from better revenue generation.

2. The big upside for Carlsberg is from Singapore not Malaysia, Malaysia will only be able to achieve a single digit growth. They need to gain more market share in Singapore which they only have 20% and their marketing team will have to work hard on this.

3. Fantastic growth and revenues in 2010 can be attributed to the World Cup event and thus is by no means sustainable.

4. The last excise duty placed on brewery was in 2005-RM7.40 per liter. There is risk from unexpected increase in excise duty in the future. In fact Malaysia's excise duty is the 2nd highest in the world before Norway (but they have almost x10 our income level), thanks to our spendthrift government bleeding us dry.

5. Dividend payout will no longer be 100%, they have announced a 5-year dividend policy of only 50% payout for year 2009 to year 2013 a roughly 2.5% to 4% yield. We will no longer see the 4% to 6% range in the last 10 years, Carlsberg just left the high dividend yield camp.

6. No shares have been repurchased (buy back schemes) since September 1999. Will they restart it? Highly unlikely until they clear debts, restore reserves and improve decreasing gross profit margins.

For a trading buy, yes it would make sense for Carlsberg back in May but as a long term investment it is a no no. In fact if you want to make a profitable trading buy during recession almost any blue chips can earn you good money, why should I go with Carlsberg nia, as if there is nothing else to buy. As a value investor, I have major problems with the company's decreasing gross profit margins and potential excise duty hikes. A small shift in these digits will cause the fair value to tumble like dominoes.