CIMB Research retains overweight on brewers, Heineken top pick

Managing director Hans Essadi said while it remained leery on the external environment, it would continue to strive to achieve solid performance in the next few quarters.

KUALA LUMPUR: CIMB Equities Research is maintaining its Overweight call on the brewer sector due to its defensive nature and inelastic demand for malt liquor market (MLM) products.

It said on Tuesday furthermore, the sector’s attractive dividend yield of 5.2-6.1% is a re-rating catalyst as it offers investors a safe haven in volatile times. 

“Our sector top pick is Heineken. Downside risk to our view is an unprecedented hike in excise duty for MLM products,” it said.

The Star reported that the Ministry of Finance announced a 150% increase in 0excise duty for locally produced hard liquor from RM24 a litre to RM60 a litre effective Dec 15. However, excise duty imposed on imported hard liquor and malt liquor products (beers) remain unchanged.

CIMB Research said its channel checks show that this is expected to drive prices of locally-manufactured hard liquor up by about 75%. 

To recap, the demand for locally-produced hard liquor stemmed from its cheaper prices versus other alcohol products. 

“Hence, we opine that this may cause locally-manufactured hard liquor to lose its appeal to the drinking crowd as it becomes less affordable,” it added.

The research house believe that this may result in drinkers switching from locally-made liquor to beer and stout as cheaper legal alternatives. 

Malaysian brewers (mainly producing beer and stout) are likely to benefit as beers are the next cheapest choice after locally-produced hard liquor. This may also cause contraband alcohol products to persist.

However, this increase also raises concerns of another excise duty hike for beers. If this take place, it would be lose-lose for Malaysia’s beer industry and the government. 

Another unprecedented excise duty hike will dampen brewers’ sales volume, leading to lower excise duty collection for the government. 

“For now, we are not inputting any hikes in the near term, as the previous hike in March 2016 was the first in 11 years,” it said.