DESPITE its tiny market and the challenging environment with the second highest excise duty on malt liquors in the world, Carlsberg Brewery Malaysia Bhd’s Singapore operations have turned out to be the group’s saviour in a difficult operating environment on this side of the Causeway.

After a series of stock rationalisation and organisational changes undertaken since the middle of last year, the brewery’s Singapore operations recorded a strong operating profit growth of 30.7% year on year to RM24.9 million in the second quarter ended June 30, 2014.

Carlsberg Malaysia managing director Henrik Juel Andersen says the group now has a stronger base for growth in Singapore, following the acquisition of a 51% stake in MayBev Pte Ltd, the exclusive distributor of Asahi beer in the city state.

“Our Singapore operations delivered a nice turnaround ... it was unexpected. If you’ve followed our announcement last year, we took a decision in the middle of the year that we needed to make some changes in the way we do business in Singapore.

“What we’re seeing now is the effect of the changes coming through nicely. I think we have a very strong base for growth in Singapore,” says Andersen, who took over as managing director on July 1, 2013.  

The acquisition of the MayBev stake by Carlsberg Singapore Pte Ltd was completed in April 2014. MayBev supplies Carlsberg Singapore with brands including Asahi, which is the second largest premium beer brand in the republic.

With MayBev in its stable, Carlsberg Malaysia expects synergistic values, as the brands carried by the former could be integrated and marketed as part of Carlsberg Singapore’s portfolio. Apart from Asahi, MayBev distributes Nikka whisky and other liqueur and vodka brands.

“The main reason we saw an opportunity to work with MayBev is the Asahi brand. We carry the Asahi brand in Malaysia and have a successful collaboration with the principal in Japan. We felt that by adding the Asahi brand in Singapore, it would strengthen our portfolio there.

“I’m happy that we are off to a great start with MayBev. We saw the volume of Asahi grow very nicely in the second quarter, and it looks like for the full year, we will be able to deliver on MayBev,” says Andersen.

For the six months ended June 30, 2014, Carlsberg Malaysia registered a 13.6% increase in profit after tax to RM93.9 million, despite a slight drop in revenue due to the soft market conditions for malt liquor. The higher PAT has been attributed to operational efficiencies and stock rationalisation.   

The group’s Malaysian operations posted an operating profit of RM94.1 million, an increase of 5.9% y-o-y, while its Singapore outfit’s operating profit jumped 30.7% in the half-year period to RM24.9 million.

In comparison, Guinness Anchor Bhd (GAB) recorded a 12.8% decline in PAT to RM94.62 million for the six months ended June 30, 2014. GAB’s PAT for the financial year ended June 30, 2014 (FY2014) was RM198.2 million, 8.9% lower than the previous financial year.

However, according to Soong Wai Siang, an analyst with Kenanga Investment Bank Bhd, both Carlsberg and GAB are not going to do any better financially, given the weak consumer sentiment and rising competition of contraband beers.

“Sales growth will be limited due to the flooding of contraband beers and the higher tax payments following a revision in the valuation base for beers in the market that resulted in higher selling prices.

“Moving forward, the focus is on better cost management as industry growth is hit by the reasons mentioned as well as softening consumer sentiment. Carlsberg Malaysia’s better performance in the first half can be attributed to the better results in Singapore,” says Soong.

He expects the malt liquor market in Malaysia to grow between 0.2% and 1% in 2014 to 2016, lower than his initial estimate of 4.1% to 4.3%. For the first half of 2014, volume could be down by a high single digit, he estimates.

Soong expects Carlsberg Malaysia’s share price to reach RM12.21 within the next 12 months, supported by a dividend yield of 5%. He foresees a 62.5 sen per share dividend for FY2014. Based on the stock’s price of RM11.86 at last Thursday’s close, this works out to a dividend yield of 5.2%.

Andersen admits that the rest of the year will still be challenging. However, he says, Carlsberg Malaysia will continue to perform well as it has lined up several events and promotional activities to boost its brand presence.

“It does not mean that we cannot deliver good results, but I would say this is our realistic measure in the environment that we are operating in,” he adds.

On what Carlsberg Malaysia expects from Budget 2015, he hopes the government will be “sensible” when it considers raising excise duty on beer. Citing an example, Andersen says when the UK cut excise duty on beer by 2% in 2013, the government’s tax collection from beer consumption rose.

“So, raising excise duty on beer in an attempt to increase revenue is not the right thing to do,” he says.

This article first appeared in The Edge Malaysia Weekly, on September 29 - October 5, 2014.

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