Carlsberg: Fairly Priced Given Uncertainties in the Russian Marketplace

| About: Carlsberg Brewery (CGBWF)

Stock price: DK 480 ($79.36)

Conclusion: Except for Russia, results were not that bad in Q1. Carlsberg (OTC:CGBWF) grew faster than peers in most markets. Nevertheless, medium term growth prospect in Russia remains a key question mark. We think the stock looks fairly priced based on our valuation range of DK 480-500 per share (slight upgrade related to RUB).

Q1 results: Sales declined 7% to DK11bn (down 7% organic). EBIT down 7%- Net earnings: DK 81m vs -212m. Full year guidance reconfirmed: EBIT in line with 2009. Net profit growth above 20% (excluding one-off items).

Carlsberg grew faster than peers in most markets.

  • Northern&Western Europe reported 3% organic volume growth, which is good news. Carlsberg improved overall market share, helped by a strong gain in the UK. EBIT tripled thanks to improved gross margin, despite flat price/mix impact.
  • Asia also reported strong organic growth (+16% mainly volume) driven by Indochina and China. EBIT jumped 50% from a low base, thanks to higher gross margin and positive leverage.
  • The increase in central costs results primarily from higher marketing costs which clearly paid off in Q1.

Eastern Europe collapsed as expected, due to Russia.

  • Total beer volumes declined 27% in Q1. Adjusted for the destocking impact in Russia (-15%), volume fell 12%.
  • The Russian market declined by 12% as a result of the 200% excise tax increase early this year. Carlsberg’s share eroded 180bp to 39.1% in Q1. We find it surprising given that Carlsberg has chosen to pass on the tax increase on a gradual basis. Except Heineken (12.1%), most of Baltika’s smaller competitors improved share, notably ABI (17.7%), Efes (9.7%) and SAB Miller (7%).
  • EBIT declined 54%, mostly due to the destocking impact estimated at DK300m.
  • Carlsberg is looking for a low double digit decline in 2010. We assumed a slight increase in reported sales, driven by a higher Ruble. Margin could retreat 200bp to 26.5%.

Russia to remain a question mark.

  • Russia should still account for half of EBIT by the end of 2010.
  • Further regulation is being currently discussed at the Duma. It is still too early to assess the long term impact of rising taxes on Russian consumption and whether Carlsberg might have to revise its growth assumptions.
  • Notwithstanding higher price increases at the low end of the market, consumers are still trading down in Russia, which does not bode well for mix.
  • Baltika might have to raise marketing spending in order to reverse its market share trend.

Carlsberg trades at 15xP/E and 8xEV/EBITDA based on our 2010 estimates (EPS DK32). Although we recognize the good work done in Europe and in Asia, we think the stock looks fairly priced in light of the uncertainties affecting half of its profit pool.

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