GAB (3255) : Guinness Anchor - Low base effect boosts top line

Target RM12.20 (Stock Rating: REDUCE)

GAB’s 1QFY15 results came in line with our and consensus’ full-year forecasts (27% of full-year net profit). Its 1Q earnings usually account for 25-27% of full-year earnings. Although revenue grew 20.7% mainly due to the low base effect in the previous year, net profit rose by only 10% yoy, impacted by higher duty and sales tax paid on A&P expenses and royalties paid. Given the in-line results, we maintain our FY15-17 net profit forecasts. Our DCF-based target price however is increased as we roll our valuation one year forward. Despite the higher target price, we maintain our Reduce call as we expect sales volume to remain weak due to the higher living costs and competition from contraband. As usual, no dividend was declared in this quarter. We prefer Thai Bev which offers much stronger earnings growth.

Revenue rose due to the low base effect last year
GAB’s 1QFY15 revenue rose 20.7% yoy, while net profit increased by a slower rate of 10% yoy. The stronger top line was mainly due to the low base effect in 1QFY14 when the group’s sales volume was impacted by the planned reduction in distributor stocks. In 1QFY14, revenue declined by 16.9% yoy while net profit dropped by 12.7% yoy. The stronger 1QFY15 results were also due to improved pricing, brand mix and the reduction in contraband beer as the government ramped up its efforts to seize the illegal beers. Despite the 20.7% growth in revenue, net profit grew by only 10% yoy, impacted by the higher duty and sales tax paid due to the new valuation method implemented in Nov 2013, as well as the increase in commercial investments. The EBIT margin was hence narrower at 18.7% in 1QFY15 versus 20.5% in 1QFY14. On a qoq basis, while revenue declined by 4.8% due to seasonality, net profit grew 16.3% due to the lower production costs and higher commercial spend in the previous quarter.

Outlook remains challenging
We maintain our view that beer consumption will recover in tandem with consumer spending, but the industry’s long-term prospects are not promising due to the high levels of contraband and consumption reaching saturation point. Although the government has been clamping down on some of the illicit beers, we believe these beers remain a threat to GAB as they have widened their reach in the past three years. Also, GAB was negatively affected by a rise in expenses due to the higher duties paid and will find it difficult to pass on the higher costs to consumers given the weak consumer spending.

Source: CIMB Daybreak - 17 November 2014