Malt Liquor Sector : Happy hour still on OVERWEIGHT

SECTOR FOCUS OF THE DAY

Malt Liquor Sector : Happy hour still on  OVERWEIGHT

We are maintaining our OVERWEIGHT stance on the malt liquor market (MLM) as we move into the second half of 2016 with BUYs on both Heineken Malaysia (HEIM) and Carlsberg Brewery (M) (CAB). Our positive view on the sector is underpinned by:- (1) the sector’s defensive and resilient earnings profile (decent 3-year earnings CAGR of 5-8%) on the back of improving consumer confidence; (2) stable margins supported by uptrading activities, improving product mixes and potential price increase in 2H; (3) attractive dividend yields of ~6%; and (4) reduced regulatory risk moving forward. We expect MLM volumes to continue growing in the low-to-mid single digits in the near-term. That said, we remain cognizant of ongoing threats to this MLM volume growth, namely the proliferation of contrabands/parallel imports and the negative correlation between price and volumes brought about by the revamp of the alcohol excise duty structure. On a more positive note, the announcement of the excise duty reform together with other have essentially reduced the regulatory uncertainties surrounding the sector ahead.

Despite the current cost headwinds and higher A&P spending, we expect the brewers’ EBITDA margins to remain stable, at 23% for HEIM and 18% for CAB. We foresee greater uptrading activities ahead in tandem with improving consumer confidence and enhanced product mixes. Cost increases, including raw materials’, are expected to be offset by savings from efficiency improvements and a potential price increase in 2H16 after the expiry of the Price Control and Anti-Profiteering Act 2014. We reaffirm our OVERWEIGHT stance call on the sector, with BUY recommendations for both HEIM and CAB with unchanged fair values of RM16.00/share and RM13.80/share, respectively. In light of the present market uncertainties, we advocate investors to accumulate defensive stocks like the brewers which are a relatively safe consumer play offering stable returns.

Others :

SapuraKencana Petroleum : B15 earnings enhancement in FY19F              HOLD

Rubber Gloves : Normalisation rubbing in                                                             NEUTRAL

Tobacco Sector : Still smokey                                                                                      NEUTRAL

Healthcare Sector : 2H Outlook: Steady demand in resilient sector            NEUTRAL

QUICK TAKES

Berjaya Auto : Yen volatility a threat to margins BUY

Genting Plantations : Acquires land in Indonesia                HOLD

Construction Sector : RM150bil construction jobs this year            OVERWEIGHT

ECONOMIC HIGHLIGHTS

Thailand : Exports will continue to experience headwinds

NEWS HIGHLIGHTS

Gamuda : MMC-Gamuda faces suit over MRT land acquisition

Consumer Sector : High-5 ‘has no choice by to close down’

AirAsia : Buys into supplier of its inflight tea and coffee

Sunway Construction Group : Bags RM66mil job for UKM children’s specialist hospital