Results Review, 6 February 2015

Thurs

Guinness Anchor (GUIN MK)

Buy (from Neutral)

Consumer Non-cyclical - Food & Beverage Products

Market Cap: USD1,031m

Target Price:
Price:

MYR14.10
MYR12.20
Macro
Risks

Strong 2QFY15 Earnings Surpass Expectations

Growth
Value

Guinness (GUIN MK)

Relative to FTSE Bursa Malaysia KLCI Index (RHS)

15.0

106

14.5

103

14.0

101

13.5

98

13.0

95

12.5

92

12.0

90

11.5

87

11.0
800
700
600
500
400
300
200
100

84

0
0
.2
0
0
Guinness 1HFY15 (Jun) results were above our and consensus .
0
expectations, largely due to strong sales driven by volume growth, 0
favourable pricing and brand mix, and a reduction in the amount of 0
contraband beers. Given the retracement of the share price from its
recent peak of MYR13.32 and the strong quarter, we upgrade our call to
BUY (from Neutral) with a revised TP of MYR14.10 (15.6% upside).

Dec-14

Jun-14

Aug-14

Oct-14

109

Apr-14

15.5

Feb-14

Vol th

Price Close

Source: Bloomberg

Avg Turnover (MYR/USD)

1.20m/0.35m

Cons. Upside (%)

8.2

Upside (%)

15.6

52-wk Price low/high (MYR)

12.1 - 15.2

Free float (%)

46

Share outstanding (m)

302

Shareholders (%)
GAPL Ltd

51.0

Aberdeen Asset Management

6.1

Share Performance (%)

YTD

1m

3m

6m

12m

Absolute

(0.8)

(0.8)

(4.1)

(9.1)

(13.2)

Relative

(3.2)

(4.6)

(2.1)

(5.2)

(14.2)

mpliant

.
1
0
.
1

Above expectations. Guinness Anchors (Guinness) 1HFY15 net profit

of MYR130.7m (+13% YoY) was above our and consensus
expectations, making up 67.4% and 64.1% of FY15 earnings forecasts
respectively. In 1HFY15, sales were up 10.8% YoY, on the back of: i)
6% YoY volume growth; ii) favourable pricing and sales mix; and iii) a
reduction in the amount of contraband beers from the intensified
enforcement efforts. Sequentially, 2QFY15 earnings rose 39.4% QoQ,
driven by: i) 32.5% increase in sales from seasonal demand; and ii) EBIT
margin expansion to 19.5% (1QFY15: 18.7%) from ongoing strategic
cost management. An interim DPS of 20 sen was declared for the
quarter under review (2QFY14: 20 sen).
Forecasts and risks. In view of the better-than-expected 1HFY15
results, we nudge up our FY15-FY17 earnings forecasts by 12-18.6%
respectively after updating our sales and margins assumptions. Key risks
to our recommendation are: i) weaker-than-expected sales volume; ii) an
excise duty hike; and iii) intensified competition from contraband beer.
Investment case. We replace our DCF valuation methodology with that
of a dividend discount model (DDM) (CoE: 8%, TG: 2%) given Guinness
consistent dividend payouts in tandem with earnings growth as well as
the brewery sector being a fairly mature industry. Our revised DDMderived TP of MYR14.10 implies FY15/FY16 P/Es of 18.6x/18.3x
respectively. As the share price has retraced by 8.4% from a recent peak
of MYR13.32, we upgrade Guinness to a BUY recommendation from
Neutral with a higher TP of MYR14.10 (from MYR13.10) as valuations
are undemanding at FY15/FY16 P/Es of 15.8x/15.2x, which is below
Guinness average five-year historical trading P/E of 18.7x. Dividend
yields for FY15/FY16 remain decent as well at 5.7% for both financial
years.

Forecasts and Valuations

Jun-13

Jun-14

Jun-15F

Jun-16F

Jun-17F

1,676

1,611

1,798

1,852

1,934

Reported net profit (MYRm)

218

198

230

233

244

Recurring net profit (MYRm)

218

198

230

233

244

Recurring net profit growth (%)

5.2

(9.2)

15.9

1.4

5.0

Recurring EPS (MYR)

0.72

0.66

0.76

0.77

0.81

Total turnover (MYRm)

DPS (MYR)

0.69

0.64

0.69

0.70

0.74

Fong Kah Yan +603 9207 7668

Recurring P/E (x)

16.9

18.6

16.0

15.8

15.1

fong.kah.yan@rhbgroup.com

P/B (x)

10.1

10.3

9.8

9.3

8.8

P/CF (x)

16.1

15.4

13.7

12.8

13.2
6.0

Dividend Yield (%)

5.6

5.3

5.7

5.7

EV/EBITDA (x)

11.3

12.1

10.6

10.3

9.8

Return on average equity (%)

58.6

54.9

62.6

60.0

59.7

Net debt to equity (%)

22.4

24.7

23.0

12.2

9.5

12.5

8.8

8.7

Our vs consensus EPS (adjusted) (%)

Source: Company data, RHB

See important disclosures at the end of this report

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Guinness Anchor (GUIN MK)

6 February 2015

Briefing Highlights
A strong 2QFY15. 2QFY15 net profit of MYR76.1m (+15.2% YoY, +39.4% QoQ)
was stronger than expected, largely due to: i) volume growth from seasonal demand;
ii) ongoing strategic cost management as well as iii) a reduction in the amount of
contraband beer. Indeed, while the second quarter of the financial year has always
been the strongest quarter, we note that vis--vis 2QFY14, 2QFY15 earnings were
up by a robust 15.2%, largely due to its improved cost efficiencies and working
capital management. We understand from management that sales performance of all
its core brands, namely Heineken, Tiger and Guinness were beyond expectations
with Tiger leading the pack. Management also added that Tiger is currently the
leading brand in the market as well.

Impact of the Goods and Services Tax (GST). Upon the implementation of the
GST, the current 5% sales tax will be replaced by a 6% GST. However, we note
that under the GST regime, businesses are entitled to claim an input tax
incurred for its taxable supplies. While the impact of GST on Guinness' earnings
remains unclear, management stated that Guinness is prepared for its
implementation this Apr 2015. It added that the strong double-digit growth earnings
momentum may not sustain after the implementation of the GST, due to a potential
slowdown in consumer spending. Management, however, expects the impact to be
normalised within six months after the GST is implemented after the market gets
used to the new regime.
Strengthening of the USD has minimal impact on Guinness. Since Guinness
core operation is in Malaysia, its sales are denominated in MYR. We also understand
from management that a portion of its raw materials are denominated in the USD.
However, management clarified that the strengthening of the USD will have a
minimal impact on Guinness earnings as the portion is not substantial and it has
entered into a one-year currency hedging contract annually.

Price hike across its core brands in Dec 2014. Management revealed that there
was a single-digit percentage of price hike across its core brands in Dec 2014. We
believe the price hike was in preparation for the upcoming GST as under The Price
Control and Anti-Profiteering Regulations 2014, retailers or traders are not allowed to
increase their net profit margin for any goods or services for 18 months from Jan
2015 till Jun 2016.

Forecasts and risks. We believe FY15 will likely be a record year for Guinness
given its strong 1HFY15 thus far. However, after factoring in the potential slowdown
in consumer spending post-GST, price hike across its core brands in Dec 2014 and
not least, its ongoing strategic cost management, we believe our FY16 earnings
forecast of MYR233m (+1.4% YoY) is reasonable. We believe the potential slowdown
in sales post-GST may also be mitigated by the intensified efforts by the Royal
Malaysian Customs and various enforcement agencies to eradicate contraband
beers. For FY17, we forecast a 5% YoY growth in its earnings, reflecting the recovery
in consumer spending post-GST. The key risks to our recommendation are: i)
weaker-than-expected sales volume; ii) an excise duty hike; and iii) intensified
competition from contraband beer.

See important disclosures at the end of this report

Guinness Anchor (GUIN MK)

6 February 2015

Figure 1: Guinness Anchors quarterly results review

FYE June (MYRm)

2QFY14

1QFY15

2QFY15

QoQ (%)

YoY (%)

1HFY14

1HFY15

YoY (%)

Comments

Revenue

499.4

393.2

520.8

32.5

4.3

825.2

913.9

10.8

1HFY15 strong sales due to

volume
growth,
favourable
pricing and brand mix, and a
reduction
in
amount
of
contraband beers

EBIT

89.3

73.7

101.5

37.7

13.6

156.1

175.2

12.2

EBIT Margin (%)

17.9

18.7

19.5

18.9

19.2

Interest expense

(1.9)

(1.4)

0.0

(100.7)

(100.5)

(3.3)

(2.3)

(30.5)

Interest income

0.8

0.5

0.0

(100.0)

(100.0)

1.6

1.4

(7.0)

Associates

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

EI/Others

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Pretax profit

88.1

72.8

101.5

39.4

15.1

154.3

174.3

12.9

Pretax Margin (%)

17.7

18.5

19.5

18.7

19.1

(38.6)

(43.6)

25.0

25.0

Tax

39.4

15.1

Quarterly EBIT margin continued

to expand from ongoing strategic
cost management

(22.1)

(18.2)

(25.4)

Effective tax rate (%)

25.0

25.0

25.0

12.9

Minority Interest

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net Profit

66.1

54.6

76.1

39.4

15.2

115.7

130.7

13.0

Core Profit

66.1

54.6

76.1

39.4

15.2

115.7

130.7

13.0

Net Margin (%)

13.2

13.9

14.6

14.0

14.3

Effective tax rate in line with

expectations

Source: Company data, RHB

See important disclosures at the end of this report

Guinness Anchor (GUIN MK)

6 February 2015

Figure 2: Guinness results for the past eight quarters

FYE June (MYRm)

Revenue

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

442.5

412.1

325.8

499.4

372.6

412.9

393.2

520.8

-6.9

-20.9

53.3

-25.4

10.8

-4.8

32.5

-15.8

0.2

20.7

4.3

(323.3)

(347.7)

(319.5)

(419.3)

Growth QoQ (%)

Growth YoY
COGS

(359.2)

(367.9)

(259.0)

(410.1)

EBIT

83.3

44.2

66.8

89.3

49.3

65.2

73.7

101.5

EBIT Margin (%)

18.8

10.7

20.5

17.9

13.2

15.8

18.7

19.5

Interest expense

(2.1)

(1.4)

(1.4)

(1.9)

(2.3)

(1.8)

(1.4)

0.0

Interest income

0.4

0.4

0.8

0.8

0.4

0.6

0.5

0.0

Associates

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

EI/Others

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Pretax profit

81.5

43.2

66.2

88.1

47.4

64.1

72.8

101.5

Pretax Margin (%)

18.4

10.5

20.3

17.7

12.7

15.5

18.5

19.5

Tax

(20.4)

(9.8)

(16.5)

(22.1)

(11.9)

(17.1)

(18.2)

(25.4)

Effective tax rate (%)

25.0

22.6

25.0

25.0

25.0

26.7

25.0

25.0

Minority Interest

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net Profit

61.2

33.5

49.6

66.1

35.6

46.9

54.6

76.1

Core Profit

61.2

33.5

49.6

66.1

35.6

46.9

54.6

76.1

Net Margin (%)

13.8

8.1

15.2

13.2

9.5

11.4

13.9

14.6

Source: Company data , RHB

Figure 3: Guinness Anchor's quarterly EBIT margins

25%
23%
20.5%

21%
18.8%

18.7%

17.9%

19%
17%

19.5%

15.8%

15%

13.2%

13%
10.7%
11%
9%
7%
5%
3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

Source: Company data, RHB

See important disclosures at the end of this report

Guinness Anchor (GUIN MK)

6 February 2015

Figure 4: Derivation of TP from DDM valuation

FYE June

FY16F

FY17F

FY18F

FY19F

FY20F

FY21F

DPU (MYR)

0.70

0.74

0.78

0.82

0.87

0.91

Discount factor

1.08

1.17

1.26

1.36

1.47

1.58

PV of dividend (MYR)

0.65

0.63

0.62

0.61

0.59

0.57

Discount rate (%)

8.0%

Terminal Value (MYR)

16.45

PV of terminal value (MYR)

10.39

Target price (MYR)

14.10

Rf

4.0%

CoE

8.0%

Beta

0.76

TG (%)

2.0%

Risk premium (Rm-Rf)

5.2%

Rm

9.2%

Source: RHB

Figure 5: 12-month forward P/E

Figure 6: 12-month forward dividend yield

x
35

8.0%

Title:
Source:

30

7.0%

SD = 6.5%
Please fill in the+1
values
above to have them entered in y

+1 SD = 23.5x

25

6.0%

AVG = 5.3%
20

AVG = 18.7x

5.0%

15

-1 SD = 13.8x

4.0%

-1 SD = 4.1%

10

5
Jan-10

3.0%

Jan-11

Jan-12

Jan-13

Source: Company data, RHB

See important disclosures at the end of this report

Jan-14

Jan-15

2.0%
Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Source: Company data, RHB

Guinness Anchor (GUIN MK)

6 February 2015

Financial Exhibits
Profit & Loss (MYRm)

Jun-13

Jun-14

Jun-15F

Jun-16F

Total turnover

1,676

1,611

1,798

1,852

Jun-17F
1,934

Cost of sales

(1,111)

(1,032)

(1,194)

(1,236)

(1,278)

Gross profit

565

578

603

616

Gen & admin expenses

(70)

(70)

(79)

(85)

(90)

(212)

(232)

(225)

(231)

(251)

Selling expenses
Other operating costs

10

(6)

656

11

11

11

Operating profit

293

271

311

311

326

Operating EBITDA

334

312

357

362

381

Depreciation of fixed assets

(41)

(41)

(46)

(51)

(55)

Operating EBIT

293

271

311

311

326

Interest income

Interest expense

(7)

(7)

(7)

(7)

(7)

Pre-tax profit

289

266

306

306

Taxation

(71)

(68)

(77)

(74)

322
(77)

Profit after tax & minorities

218

198

230

233

244

Reported net profit

218

198

230

233

244

Recurring net profit

218

198

230

233

244

Jun-13

Jun-14

Jun-15F

Jun-16F

Jun-17F

293

271

311

311

326

41

41

46

51

55

(12)

(18)

(7)

14

(20)

Source: Company data, RHB

Cash flow (MYRm)

Operating profit
Depreciation & amortisation
Change in working capital
Other operating cash flow
Operating cash flow
Interest received
Interest paid

(10)

321

(1)

286

350

366

(7)

(7)

(7)

(7)

(8)

361

Tax paid

(89)

(50)

(77)

(74)

(77)

Cash flow from operations

229

239

268

288

279

Capex

(46)

(25)

(48)

(48)

(48)

(13)

(45)

(38)

(43)

(48)

(48)

(227)

(207)

(209)

(212)

(222)

Other investing cash flow

Cash flow from investing activities
Dividends paid
Increase in debt

(25)

(15)

(15)

(277)

(207)

(234)

(227)

(237)

Cash at beginning of period

161

68

62

53

66

Total cash generated

(93)

(6)

(8)

13

(6)

68

62

54

66

60

Cash flow from financing activities

Implied cash at end of period

(50)

Source: Company data, RHB

See important disclosures at the end of this report

Guinness Anchor (GUIN MK)

6 February 2015

Financial Exhibits
Balance Sheet (MYRm)

Jun-13

Jun-14

Jun-15F

Jun-16F

Jun-17F

Total cash and equivalents

68

62

53

66

60

Inventories

47

39

93

98

98

323

333

298

292

318

Accounts receivable
Other current assets

19

Total current assets

458

442

452

464

484

Tangible fixed assets

226

220

213

203

192

Intangible assets

36

39

55

62

66

Total other assets

20

Total non-current assets

281

260

269

266

259

Total assets

739

702

721

730

743

Short-term debt

100

80

65

55

Accounts payable

179

153

164

176

182

Other current liabilities

Total current liabilities

183

253

244

241

237

Total long-term debt

150

50

60

50

45

40

43

40

40

40

Total non-current liabilities

190

93

100

90

85

Total liabilities

373

346

344

331

322

Share capital

151

151

151

151

151

Retained earnings reserve

214

206

226

247

269

Shareholders' equity

366

357

377

398

420

Total equity

366

357

377

398

420

Total liabilities & equity

739

702

721

730

743

Other liabilities

Source: Company data, RHB

Key Ratios (MYR)

Jun-13

Jun-14

Jun-15F

Jun-16F

Jun-17F

Revenue growth (%)

3.2

(3.9)

11.6

3.0

4.4

Operating profit growth (%)

5.8

(7.8)

14.9

(0.0)

4.9

Net profit growth (%)

5.2

(9.2)

15.9

1.4

5.0

EPS growth (%)

5.2

(9.2)

15.9

1.4

5.0

Bv per share growth (%)

(3.7)

(2.4)

5.8

5.5

5.5

Operating margin (%)

17.5

16.8

17.3

16.8

16.9

Net profit margin (%)

13.0

12.3

12.8

12.6

12.6

Return on average assets (%)

28.7

27.5

32.3

32.1

33.2

Return on average equity (%)

58.6

54.9

62.6

60.0

59.7

Net debt to equity (%)

22.4

24.7

23.0

12.2

9.5

DPS

0.69

0.64

0.69

0.70

0.74

Recurrent cash flow per share

0.76

0.79

0.89

0.95

0.92

Source: Company data, RHB

See important disclosures at the end of this report

Guinness Anchor (GUIN MK)

6 February 2015

SWOT Analysis
The business provides stable recurring cash flow

Aggressive
marketing
efforts and the
introduction of
new brands by
key rivals may
take some
market share
away

Leader in Malaysian breweries industry with a brand

of portfolio encompassing all price points
Strong corporate governance

Intensified
competition
from the
contraband
beers

Growth in the
premium segment
helps boost ASPs
and improve profit
margins
A reform in the
alcohol taxes may
see beer
becoming
relatively cheaper
than other
alcoholic
beverages

Small presence in the super premium segment

P/E (x) vs EPS growth

P/BV (x) vs ROAE

-1%

-5%

-8%

-12%

-15%

P/E (x) (lhs)

EPS growth (rhs)

Source: Company data, RHB

9.5

59%

9.0

56%

8.5

53%

8.0

51%

7.5

48%

P/B (x) (lhs)

Jan-17

3%

61%

Jan-16

10

10.0

Jan-15

6%

64%

Jan-14

12

10.5

Jan-13

10%

Jan-17

13%

14

Jan-16

16

Jan-15

17%

Jan-14

20%

18

Jan-13

20

Return on average equity (rhs)

Source: Company data, RHB

Company Profile
Guinness Anchor is involved in the manufacture, sale and distribution of beer. Its key brands are Tiger, Guinness and Heineken.

See important disclosures at the end of this report

Guinness Anchor (GUIN MK)

6 February 2015

Recommendation Chart
Price Close
12.8

12.8

13.5

17.5

15.2

13.1

19.3

20.5

14.2

17.5

Recommendations & Target Price

15.3

21.3

na

23.3

17.3

15.3
13.3
11.3
9.3
7.3
Buy
5.3
Feb-10

Neutral

Sell

May-11

Trading Buy

Aug-12

Take Profit

Not Rated

Nov-13

Source: RHB, Bloomberg

Date

Recommendation
Target Price

Price

2014-11-17

Neutral

13.1

13.2

2014-08-25

Neutral

13.1

13.5

2014-08-22

Neutral

12.8

13.5

2014-05-12

Sell

12.8

13.9

2014-02-19

Sell

13.5

15.2

2013-09-13

Sell

15.2

17.4

2013-08-23

Neutral

20.5

18.1

2013-05-15

Neutral

20.5

20.7

2013-05-07

Neutral

17.5

19.7

2013-02-22

Buy

17.5

16.6

Source : RHB, Bloomberg

See important disclosures at the end of this report

RHB Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage

Disclosure & Disclaimer

All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or
warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer
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10

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DMG & Partners Research Guide to Investment Ratings

Kuala Lumpur

Hong Kong

Singapore

Buy: Share price may exceed 10% over the next 12 months
Trading Buy:Malaysia
Share price
may exceed 15% over theRHB
nextOSK
3 months,
however longer-term outlook remains uncertain
Research Office
Securities Hong Kong Ltd. (formerly known
DMG & Partners
Neutral: Share
mayInstitute
fall within
months
as12
OSK
Securities
Securities Pte. Ltd.
RHB price
Research
Sdn the
Bhdrange of +/- 10% over the next
Take Profit:
Target
price One,
has been
attained. Look to accumulate at lower
Honglevels
Kong Ltd.)
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11, Tower
RHB Centre
10 Collyer Quay
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Sell: Share price may
byRazak
more than 10% over the next 12 months
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