Carlsberg: Too Soon to Expect a Rebound

| About: Carlsberg Brewery (CGBWF)

Stock Price: DKK 319,5 (US$62.4)
Conclusion: Too early to play a rebound. 10% discount to brewers (based on 2010 estimates) looks justified in light of the poor visibility which is affecting the Russian beer market.

First half 2009: Sales +9% reported, flat like for like, Ebit +38%, eps -10%
Guidance for 2009: DKK61 (US$11.9)bn sales, EBIT>DKK9 (US$1.75)bn, Net profit>DKK3.5 (US$0.68)bn.

As expected (cf our previous comment), management had to revise down sales guidance by 3% this year from DKK 63bn to DKK 61bn, owing to the sharp deterioration of volume. Except for Asia (only 10% of volume), Carlsberg’s (OTC:CGBWF) key markets, Northern Europe (47% of total volume) and Eastern Europe (43%) should continue to decline in H2, albeit at a slower rate than in H1. We are looking for a -4% volume decline in 2009 versus -5% in H1, coupled with negative mix. Organic growth should remain flattish thanks to pricing.

The good news came from the bottom line, much better than anticipated in H1. We expect operating earnings to continue to benefit from the conjunction of positive pricing (+5%), lower media spending (media costs fell by 15%), accelerated efficiency programs and synergies from the integration of Scottish&Newcastle. We look for 210bp gain in EBIT margin from 13.3% to 15.4% of sales. EBIT could exceed management initial guidance of DKK9bn, which implies only +2.6% increase in operating profit in H2. Net profit could achieve DKK3.66m, up 4.5% versus initial guidance. However, these numbers are in line with consensus and should not surprise investors.

The major risk for Carlsberg is a significant increase in the excise tax. The tighter alcohol regulation should lead to beer excise increase which will be effective as of January 2010. According to press reports, the increase could be between 25% to 200%, implying retail price increases from 1% to +10%. The scale of the increase should be known early October.

Given the uncertainty, we expect the stock price to remain under pressure.
Carlsberg trades at 12.5x P/E based on 2010, implying 10% discount to peers and FCF yield exceeds 12%. Our DCF points to DKK360 (US$70.3) per share.

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