The current weakness in the share prices of brewers like Carlsberg and Heineken is likely due to heightened political risk factors domestically and abroad, which led to funds selling the counters, said HLIB Research.
PETALING JAYA: Listed brewery companies remain an attractive post-Covid-19 recovery play, underpinned by expectations of rising inbound tourist numbers and higher demand from the local market post-price revisions.
Despite strong first-quarter results from the sector, the current weakness in the share prices of brewers like Carlsberg Brewery (M) Bhd and Heineken (M) Bhd is likely due to heightened political risk factors domestically and abroad, which led to funds selling the counters, according to Hong Leong Investment Bank (HLIB) Research.
The research house also believes the weaker ringgit will lead to higher operational costs and weaker margins for the brewers.
Although the brewers hedge a significant portion of their annual raw material requirements using fixed-price contracts, the risk associated with exchange rate fluctuations cannot be fully averted, it said in a report yesterday.
“Raw materials like barley and aluminium are settled in US dollars, which means any fluctuation in the ringgit directly affects brewers’ costs.
“While the current weak ringgit may create cost pressures, we believe that any potential margin squeeze will be short-lived,” HLIB Research stated.
It said the cheaper barley and aluminium market prices will alleviate some of the higher cost burden brewers faced. Looking ahead, the renewal of fixed-price contracts at lower commodity prices in the upcoming financial year offers a better margin outlook.
“Should raw material costs continue to ease, there is even potential for margins to expand, as brewers had previously adjusted beer prices in response to cost pressures during the 2021-2022 period,” HLIB Research said.
The research house believes if the state-level elections on Aug 12 result in a status quo and continuation of the present government, it could lead to the easing of regulatory and policy risks that would be favourable for brewers.
From the demand side, HLIB Research warned that while there is a risk of weaker demand due to inflationary pressures and softer economic growth this year, it expects beer demand to continue retaining its inelastic properties helped by its cheap price relative to other alcoholic drinks in the market.
“Our expectation of a resilient beer sales volume in 2023 will be driven by the return of beer demand after consumers acclimate to the previous price hikes and the continued recovery in tourist arrivals.
“Of these factors, we reckon the return of foreign tourists to be particularly potent in supporting financial year 2023 (FY23) beer sales,” it said.
Malaysia is targeting some 16 million visitors this year, a 60% year-on-year growth. The positive outlook has led HLIB Research to keep its forecast for the sector unchanged and maintain its “overweight” call.
From a valuation angle, it believes Carlsberg and Heineken were now trading at a palatable FY24 forward price-earning multiple of 17.4 times and 19.4 times, implying a 36.2% and 18.1% discount against its five-year average of 27.3 times and 23.7 times, respectively.
“Though we have a ‘buy’ rating on both, we now see more upside potential in Carlsberg following its share price fall.
“The market appears to undervalue Carlsberg’s Singapore operations, which bring several advantages such as sales diversification and natural hedge against exchange rate fluctuations, among others,” it said. HLIB Research has a target price of RM30.77 a share for Carlsberg and RM30.74 for Heineken.
