Let’s talk about Carlsberg Brewery Malaysia Bhd

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Truth be told, I haven’t been studying listed companies for some time. One reason is because I have been busy building up my passive cash flow via investing in P2P loans (Crowdfunding) and the second reason is probably because I felt that the prices should come down lower (before I consider dipping in).

Having said that I don’t expect this year’s stock dividend from my stock investments, to be exceptionally good. It could even be lower than last year’s.

Recently, I received a copy of the Shares Investment booklet (issue 532)  from my broker.

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I usually just flip through the booklet as the information within it pertaining to each company is rather limited. Nevertheless it does have a few helpful metrics such as the ROE and ROA (no, not P/E). However, in this issue, it has included a number of companies listed in the Malaysian market.

As usual I was flipping through the booklet when I noticed that a number of Malaysia listed companies have exceptionally high ROE. Now, ROE by itself can be a misleading number as it could be debt fueled (companies take on lots of debt to generate high ROE).

Funny how I have thought about listed companies in the Japan, Hong Kong and US markets but not those just across the Causeway… Well with the weaker Malaysian economy which suffered the stresses of the plunge in global crude oil prices and the depreciation of the Ringgit, it might be a good time to check out the fundamentally good listed companies there.

The high ROE Malaysian companies (which I found in the booklet) are:

  1. Carlsberg Brewery Malaysia Bhd (ROE on 31.12.14 is 67.78%)
  2. British American Tobacco Malaysia Bhd (ROE on 31.12.14 is 172.09%)
  3. Dutch Lady Milk Industries Bhd (ROE on 31.12.14 is 69.95%)
  4. Guinness Anchor Berhad (ROE on 30.6.15 is 56.94%)
  5. Scicom MSC Bhd (ROE on 30.6.15 is 43.02%)
  6. Nestlé (Malaysia) Berhad (ROE on 31.12.14 is 70.82%)

Ok, after looking at their ROE, I have checked up on their balance sheets as well – Not all have pristine balance sheet I must say.

I also noticed that quite of number of these companies are the so called ‘sin stocks. Sin stock sectors include alcohol, tobacco, gambling, sex-related industries, weapons manufacturers and the military. These companies are Carlsberg Brewery Malaysia Bhd, British American Tobacco Malaysia Bhd and Guinness Anchor Berhad. Just for interest sake, Karex Berhad, the world’s largest condom manufacturer is listed in the Malaysia market.

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For today, let’s study Carlsberg Brewery Malaysia Bhd (which I think has fairly decent balance sheet and historical ROE and ROIC).

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While reading the recent 2015 annual report, I can see that the outlook is not as fair for the alcohol industry here:

  • Malaysia’s gross domestic product (GDP) growth slowed to 5.0% in 2015 compared to 6.0% in 2014.
  • In Singapore, GDP growth declined to 2.1% in 2015 from 2.9% in the preceding year. This was the island nation’s weakest annual growth since 2009.
  • On 1 March 2016, the Malaysian Government announced a hefty increase in excise duties for beer, stout and cider. This is a signifcant and adverse development at this early part of the year that is expected to take a further toll on consumer demand.
  • The Singapore beer market has been facing its own challenges. In early 2015, off-trade businesses in Singapore were impacted by the introduction of the Liquor Control (Supply and Consumption) Bill. Among others, the Bill restricts alcohol consumption in public places between 10:30 pm and 7:00 am, while retail shops have to stop selling alcohol after 10:30 pm.

Nevertheless, let’s look further at the financial fundamentals of Carlsberg Brewery Malaysia Bhd.

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In gist:

  • Its P/E is not low (Note: That is in comparison to the PE of iShares MSCI Malaysia which is now at 16);
  • Its EV/EBITDA are not low (As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value. Seems like all these companies pass this test, with ISOTeam having the lowest EV/EBITDA);
  • Its ROA and ROE is good. In fact, its ROE (TTM) at 65.38% is great.
  • Its balance sheet is good. Its total cash is more than the total debt, and if we minus the debt from the cash, we still have approx. Malaysian Ringgit 9.46 mil.
  • Its total debt / equity ratio is low which is good.
  • Its current ratio is acceptable (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).

Now let’s look a bit further back and study the Earnings per share, Free Cash Flow, ROE and ROIC values. See charts below, data is from Morningstar.

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Ok, these charts may not demonstrate the most perfect linear upward trend, but in general these are upward trending over a long period esp. for FCF, ROE and ROIC. So yes, these are good. And the good thing is that current ratio (which compares a firm’s current assets to its current liabilities) has been trending down through the years (see below).

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Let’s do a quick study on the current share price of Malaysian Ringgit 13.88 – via Trailing PEG and Intrinsic Value.

1) Trailing PEG

  • P/E: 19.66 (Most recent filing from POEMS)
  • Dividend Yield (%): 5.19 (from POEMS)
  • 5 years EPS compound growth rate: 3.94 (from POEMS)

 

The trailing PEG will be 19.66/(5.19+3.94) = 2.15. Which is not good (above 1).

2) Intrinsic Value

If we calculate the intrinsic value using a growth rate of 3.15% (20% discount from the 5 yrs EPS compound growth rate of 3.94).

F = P(1+R)N

  • F = the future EPS
  • P = the starting (present) EPS (MYR 0.71)
  • R = compound growth rate, 3.15
  • N = number of years in the future (5)

Estimated future EPS: 0.83

I will be estimating the future PE of Carlsberg Brewery Malaysia Bhd to be 17.88. (See below, data from Morningstar) Average of PEs from 2006 to 2015.

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Future Stock Price

P=EPSxPE

  • P = future stock price
  • EPS = future EPS
  • PE = future PE

Hence future stock price of Carlsberg Brewery Malaysia Bhd is 0.83 x 17.88= MYR 14.8404

Intrinsic Value

P=F/(1+R)N

  • P = present (intrinsic) value
  • F = future stock price (14.8404)
  • R = MARR (15% or 0.15)
  • N = Number of years (5)

Hence intrinsic value of Carlsberg Brewery Malaysia Bhd is MYR 7.38.

Given the current stock price of Carlsberg Brewery Malaysia Bhd at MYR 13.88, there is no margin of safety base on the estimated intrinsic value.

In fact, current share price is higher than intrinsic value by 88%.

Moreover current Price to Book value (most recent filing) is 12.65. (which could be lower)

 

In summary:

Fundamentally,  Carlsberg Brewery Malaysia Bhd is a strong company.

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However, the immediate outlook appears gloomy for the industry it is in. Hence it is worth waiting a while more to see if the company’s performance is still as strong in 2016.

As stated by its Chairman, Dato’ Lim Say Chong, in the recent annual report: “the Group has embarked on a programme called Funding the Journey which sets the framework, elements and deliverables for both our Malaysian and Singapore operations to unlock more growth potential and release funds for investments into our brands and people.”

Moreover, the trailing PEG and the study on intrinsic value suggest that current price is over-valued.

I shall observe this company more closely, and hopefully its narrative / outlook improve and the stock price drop below its intrinsic value.

Shall leave you with this song. I had spent a great long weekend with my family. It was fun watching my son play and just hanging out with my wife. Oh yes, we have watched the “Batman v Superman: Dawn of Justice” movie.

 

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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room flat.
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