Investeringskommentar, Philip Gorham, Equity Analyst, 17/8/2016
Despite some encouraging signs over the past two quarters, Carlsberg missed our expectations in the second quarter of 2016, with slightly soft volume in Eastern Europe and foreign currency headwinds the culprits for the miss. We will slightly lower our near-term assumptions for these factors as well as a one-time tax expense in Finland, but the impact to our valuation is offset by the time value of money since our last update, and we are reiterating our DKK 610 and $19 fair value estimates for the B shares and ADRs, respectively. Despite today's pullback, we continue to think Carlsberg is slightly overvalued. These results lend support to our thesis that a lack of an economic moat means that the firm may need to rely on its cost-saving plan to gain the financial flexibility to compete on price.
First-half organic revenue growth of 4% was respectable, in line with larger competitor Anheuser-Busch InBev and slightly ahead of SABMiller and Diageo. However, Carlsberg was cycling a very soft performance a year ago, and the organic volume decline of 1% was slightly worse than we had expected. When benchmarking performance against management's strategic objectives--value management, cost and supply chain efficiencies, and rightsizing the business--progress towards improved financial performance was evident in the first half. Fairly strong first-half price/mix implies price elasticity of around negative 0.2, below historical levels, and this helped drive 70 basis points of gross margin improvement year over year. Nevertheless, we believe the firm's brand management would benefit from greater balance between volume and price/mix in Carlsberg's growth algorithm going forward.
Bulls Say
- Carlsberg'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 expand 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 superior margins and higher returns on invested capital.
- Carlsberg lacks a dominant global brand like Heineken or Budweiser, which hinders its scale efficiencies.
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