Carlsberg: Fairly Priced for Now, But Medium-Term Targets Look Challenging

Includes: CGBWF, HEINY
by: Véronique Adam

Stock price: DK 422 ($77.20 US)

Conclusion: We find the stock fairly priced in light of depressed volumes this year, notably in Russia. Carlsberg (OTC:CGBWF) should continue to trade at a discount vs. competitors which offer a better balance between emerging and mature markets.

2009 results: Sales down 1% to DK59.4bn, flat like for like. EPS up 5% to DK 23.6. Guidance 2010: 20% increase in net earnings.

Low visibility on the top line front.

  • Carlsberg anticipates a slight decline in Northern and Western European markets following 6% decrease in volume last year.
  • The Russian market will be negatively impacted by consumer price increases following the 200% excise duty increase on January 2010. Carlsberg assumes a low double digit decline in the Russian market. Asia (7% of sales) will continue to grow. We forecast sales to remain flat this year.

Earnings growth below the line.

  • Operating earnings should remain stable, notwithstanding the €300m one off earnings generated by stockbuilding in Q4 2009 in Russia. Carlsberg expects earnings to be skewed towards the second half of the year.
  • Net earnings (more than 20%) will benefit from lower financial expenses (net debt down €8.5bn to €35.7bn) and further reduction in average working capital during the year.

New medium target looks challenging.

Carlsberg has set new targets (3-5 years): Northern Western Europe at 15-17% (previously 14-16%), Eastern Europe at 26-29% (vs 23-25%), Asia at 15-20%. Carlsberg group could achieve 20%. We find these targets very ambitious in light of the depressed volume in developed markets (Europe and the US). In addition, it remains to be seen what will be the price elasticity for the Russian market. Last, we remain concerned by the overexposure to the Russian currency.

Carlsberg trades at 14xP/E and 7.6xEV/EBITDA based on our 2010 estimates. Our DCF suggests a value of DK440-460, using a discount rate of 11% justified by the risk attached to the Russian exposure. We think that Heineken (HINKY.PK) offers a better balance between mature and emerging markets.