Carlsberg: Russian Exposure Will Hold Back Growth in 2010

| About: Carlsberg Brewery (CGBWF)

Stock price: DK392 ($77.66)

Conclusion: Growth in 2010 will be held back by excise increases in Russia. Carlsberg (OTC:CGBWF) looks fully priced based on our valuation range of DK390-DK420.

9m results: Sales up 1% reported (flat like for like), EBIT up 26% (+27% organic), net profit up 28%. Guidance full year 2009: Sales DK 59-60bn, EBIT DK9bn, net profit DK3.5bn.

Low visibility affecting half of its profits.
Russia is planning to triple excise duty on beer from 6% of the average retail price to 19% by 2012. Excise on beer will be raised by 200% in 2010, followed by 10% in 2011 and 20% in 2012. Both Heineken (HINKY.PK) and ABI stated that they will try to pass on the increase to the consumer.

As to Carlsberg, a dominant player in Russia with a 41% share, passing through the increase would be easier to achieve in the premium end than in the lower mainstream segment. It remains to be seen what will be the price elasticity for the Russian market. We assume that Russian market will fall by 10% in 2010 and that Carlsberg sales in Russia will decline by 6%, while margin could be down 100bp.

However, we expect Northern and Western Europe to offset lower Russian profits next year. Management stated that the region is benefiting from accelerated efficiency improvements (margin up 380bp in Q3 vs 180bp 9months). NW Europe margin could reach 14-16% medium term, against 12.3% estimated this year.

Carlsberg trades at 14xP/E based on 2010 estimates, implying a slight discount to its peers. We think that such a discount is justified given Carlsberg’s exposure to Russia. Based on our DCF valuation (10% Wacc and 1.5% terminal growth) we reach a stock price of DK420 ($83) .

Disclosure: No position

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