JULY 4 — Carlsberg Malaysia just included two lines in its prospects statement: that the market conditions in 2014 are expected to remain challenging. And that it will use its best endeavours to meet the challenges and deliver satisfactory performance.

Carlsberg Malaysia brews beer, and imports and distributes beer in Malaysia, but also has operations in Singapore.

The company just announced earnings for Q1FY14:

Revenue: -5per cent to RM445.9 million Profit: +1per cent to RM51.7 million Cash flow from operations: RM41.9 million vs RM30 million Dividend: 0 sen per share vs 0 sen per share

Carlsberg Malaysia said its Malaysian operations were the main contributor to profit as a result of effective consumer marketing activities and cutting costs.

The Malaysian operations recorded a growth in profit from operations of 11per cent to RM58.2 million, despite flat revenue.

Weak consumer sentiment impacted overall market consumption throughout the quarter, but this was mitigated by Carlsberg Malaysia’s efficiency programmes and improved price and product mix.

Carlsberg Malaysia said its operations in Singapore were impacted by the stock rationalization programme, which ended in the first quarter.

Consumers in Singapore also drank less beer due to the steep 25per cent rise in liquor excise duty in February 2014.

As a result, its revenue in Singapore declined by 22.8per cent for Q1FY14.

1. Why has Carlsberg Singapore not been performing during the peak season?

Based on Q1 reports over the years, we have found that not since Carlsberg Malaysia took over its Singapore counterpart in 2009 has its Singapore operations reported such low revenue for the traditionally strong Q1, which includes Chinese New Year sales. 

Carlsberg Singapore reported revenue of RM79.2 million for Q1FY14, compared to its highest ever revenue of RM102.6 million a year ago. 

In fact, Carlsberg Singapore’s profit margin for the festive Q1 has been decreasing steadily since 2010 – from 22per cent in Q1FY10 to its lowest of 12per cent in the latest Q1FY14.

This could be partially attributed to the stock rationalisation programme last year, which has since ended.

But still, the figures show a trend of decline over the years, before the stock rationalisation exercise started. 

Carlsberg Malaysia’s revenue from Singapore of RM335.8 million made up 22per cent of its total revenue of RM1.56 billion in FY13. 

All data are derived from Q1 results of Carlsberg over the years, filed to Bursa Malaysia.

2. How much did it pay for Maybev?

Carlsberg Singapore recently acquired a 51per cent stake in Maybev, the distributor of Asahi beers in Singapore.

But it did not disclose how much it paid for the distributor.

This raises a number of questions, such as how much Carlsberg Singapore paid, what the net asset value for the stake was, how it was funded, who the vendor was and why they sold the stake to Carlsberg.

3. Is the acquisition of Maybev a way to improve Singapore market results?

By acquiring the stake in Maybev, Carlsberg Singapore adds not just Asahi beers to its portfolio, but a number of other alcohol brands as well, such as Nikka Whisky, Camus Cognac, Hooper’s Hooch, Lanson Champagne, and Pravda Premium Vodka. 

Carlsberg Singapore’s current portfolio does not include spirits or liquor.

Carlsberg Malaysia was the same, until it acquired Luen Heng Sdn Bhd in 2008, giving it access to spirits and premium beer brands it did not previously have in Malaysia. 

The acquisition of Maybev will add Asahi to Carlsberg Singapore’s portfolio and improve its results and expand its presence, just like Luen Heng has done in Malaysia.

Is the timing of the deal intended to be a boost to its Singapore segment, which is not performing well?

4. How will reduction of fuel subsidies affect its costs?

Carlsberg has improved the efficiency of its operations by introducing programmes such as LEAN (L-ess Waste, E-fficiency, A-gile, N-eat & Tidy) which it said has helped improve the performance of the supply chain.

It also started two new work streams which will ensure higher uptime and predictive maintenance.

It said this has already reduced breakdown and maintenance downtime from 32per cent to 20per cent, with a significant reduction in the number of machine breakdown minutes. 

Despite its focus on improving its internal efficiency, it is facing external problems such as an expected further cut of petrol subsidies in Malaysia.

The Malaysian government started a series of subsidy cuts for petrol in September 2013, which raised the pump price of RON95 petrol and diesel by RM0.20 per litre. 

And according to The Malay Mail quoting a World Bank economist, there will be more subsidy cuts this year. 

With logistics making up a fair share of the costs (sales and distribution expenses have formed 19per cent of its revenue for the past three years), how will the reduction of fuel subsidies affect Carlsberg Malaysia?

5. How much or little will the World Cup lift earnings?

The month-long FIFA World Cup held in Brazil will see more beer being sold in Malaysia and Singapore, but what is the expected financial impact from this event, taking into account the current weaker consumer sentiment in these two markets? 

6. If excise duties are increased in Malaysia, will it scale down on its dividend payout?

Excise duties for alcohol are likely to be hiked by the Malaysian government for its next Budget after no hikes for the past eight years. 

If that happens, will Carlsberg Malaysia still be able to distribute 100per cent of its profits, as it has been doing?

7. What will it be doing to drive sales in Malaysia?

Several analysts are claiming that this year will be a weak year for the Malaysian malt liquor market. 

CIMB wrote in its report: “we are still concerned that alcohol consumption in Malaysia will be weak due to the expected higher living costs and potentially weaker-than-expected tourists [sic] arrivals.”

While Kenanga thinks, “...going forward we believe the stock lacks of catalyst, coupled with a challenging consumer market environment.

Carlsberg Malaysia is already focusing on cost management and efficiency within the organisation.

What is it planning to drive sales in Malaysia this year?

8. How will it compete against Tiger Beer’s Radler?

Tiger Beer, represented in Malaysia through Carlsberg Malaysia’s rival Guinness Anchor Bhd, has released a new product – the Tiger Radler.

The Radler is beer with lemon flavour, placing it to fully compete with Carlsberg’s Somersby cider. Carlsberg recently launched the pear flavour of Somersby cider in Malaysia. 

According to the official Somersby website, there are two flavours that have not been released in Carlsberg Malaysia’s markets yet – Somersby Blackberry and Somersby Apple Lite. When does Carlsberg Malaysia plan to release them?

We have invited the company (pearl.lai@carlsberg.asia) to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this article if we do. — Investor Central

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