Investeringskommentar, Philip Gorham, Analyst, 10/02/2016
Carlsberg narrowly beat our above-consensus forecasts for the fourth quarter, but that should not mask thechallenges facing the no-moat brewer from the continued
contraction in Eastern Europe. The Russian market is still deteriorating, and Carlsberg's lack of an economic moat means that it may need to rely on its cost-saving plan to gain the financial flexibility to compete on price. As the quarterly results were fairly close to our estimates, any change to our DKK 570 fair value estimate is likely to be related to the time value of money, rather than a materialchange in our cash flow forecasts.
Fourth-quarter organic net revenue increased 5%, a touch above our forecast for the second consecutive quarter, despite the 8% volume decline in Eastern Europe. Consolidated price/mix was 6%, one of the highest among the consumer staples names that have so far reported fourth-quarter earnings; however, we think this is more reflective of the double-digit rate of food inflation in Russia than of real pricing power. In a sign of the extent to which Eastern Europe has contracted, the segment accounted for just 15% of group EBIT in 2015, down from its peak of 39% in 2012. Asia, once a low-single-digit piece of Carlsberg's portfolio, has now overtaken Eastern Europe as the firm's second-largest segment by EBIT. In addition to the decline in Eastern Europe volumes, this in part stems from the growth of the Asia business, which generated 8% volume growth and 5% organic revenue growth in 2015. With its premium brand Tuborg, we think Carlsberg is well placed to ride the long-term premiumisation trend in Asia. In the near term, we expect segment growth to accelerate slightly next year.
The Funding the Journey strategy appears to be on track, and should lead to operating efficiencies beginning in 2016. Management will provide an updated strategy in March.
Bulls Say
- The company's portfolio includes well-known regional brands such as Carlsberg, Baltika, Tuborg, and Holsten.
- Leading positions in western China, Scandinavia, France, and northern Germany give Carlsberg some scale.
- The beer markets of Asia should continue to grow during the next five years while Eastern Europe could rebound.
Bears Say
- The Russian government's stance on taxes and regulation on beer is unpredictable, and further tax hikes could disrupt volume beyond 2016.
- Several other publicly traded brewers sport healthier margins and returns on invested capital.
- Carlsberg lacks a dominant global brand like
Heineken or Guinness.
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