5 reasons why I invested in Carlsberg Brewery Malaysia

After investing for close to a decade now, I am starting to realize that when it comes to investing, “Less is more”. Sorry for sounding too philosophical but what I mean is this: Sometimes, it’s better to invest in companies with a simple-to-understand business model rather than digging deep into a complicated business like Noble Group Limited (SGX: CGP), hoping it might be an undervalued stock.

I used to be an investor who liked the challenge of looking at complicated businesses and possibly finding hidden value I could take advantage of. However, over the years, I see myself looking at simpler and simpler businesses as investment targets.

Finding hidden value in a complicated business can be great fun, however it can make your portfolio more volatile than normal. This is because a complicated business or turnaround situation often has a binary outcome. This means that either the company thrives spectacularly or fails spectacularly after a few years.

On the other hand, some of the advantages of investing in a simple-to-understand business are:

  • Less time spent analyzing the business
  • Easier to forecast its future
  • Hit rate (percentage of investments which turn profitable) tends to be higher
  • I sleep better at night

That might be why a consumer company like Carlsberg Brewery Malaysia Berhad (Bursa: 2836) caught my attention. Carlsberg Brewery Malaysia is a listed subsidiary of Carlsberg A/S, the global brewery listed in Denmark.

Carlsberg Malaysia has a long history in Malaysia and is now one of only two licensed breweries in the country (the other being Heineken Malaysia Berhad). Carlsberg Malaysia produces and distributes popular alcoholic drinks like Carlsberg, Corona, and Asahi.

Interestingly, the company is also responsible for the sale of its products in markets like Singapore and Brunei. In fact, 33% of its operating profit came from Singapore in 2016. I first came to know about Carlsberg Malaysia when I first started investing in 2006. However, at that time, I had this misconception that large blue-chip companies like Carlsberg Brewery Malaysia would no longer give me an attractive return. I thought market-beating returns could only come from small, unheard-of companies.

Only after years of investing in the market and using different investment strategies did I realize that good returns can also come from high-quality large companies like Carlsberg Malaysia. When I started researching Carlsberg Malaysia in 2013, its share price had already more than tripled from when I first noticed the stock back in 2006 (how wrong I was).

However, although I was attracted to the business at the time, I was unable to swallow its high valuation. Luckily for me, its share price corrected itself over the next two years and I was able to invest in Carlsberg Malaysia in early 2015 when it was trading around 16 times earnings while giving me a 6% dividend yield.

Sure, I understand that a company like Carlsberg Malaysia will not double up my investment in one year, but here are…

5 reasons why I ended up investing in Carlsberg Malaysia

1. Carlsberg Malaysia is just one of the two breweries that are licensed to operate in Malaysia. This means that it is operating in a duopolistic environment. Over the past few decades, the company has used that advantage to build the scale necessary to maintain a very profitable business, thus creating a strong economic moat.

In fact, in the past decade, the Malaysia government did issue a third license for a brewery. However, without the scale needed to compete successfully with the two incumbents, the newcomer end up throwing in the towel after a few years of operation.

This highlighted the huge barrier to entry Carlsberg Malaysia (and Heineken Malaysia) has built around its business. The moat comes from the economies of scale it has already achieved in the market, rather than just relying government licensing protection.

2. Exposure to international markets — Singapore, Brunei, and Sri Lanka. On top of that Carlsberg Malaysia is not a purely domestic company. It has huge exposure to the Singapore and Brunei market. And through its associate, Lion Brewery, it is also exposed to the beer market in Sri Lanka. Although the company faced some setbacks in Sri Lanka due to the recent flood there, its diversification gives it stable revenue streams overall. This is due to the fact that the company is not overly reliant on just one market.

3. Huge portfolio expansion potential. In addition, Carlsberg Malaysia currently distributes about 10 products in its portfolio. However, its parent company, Carlsberg A/S is a global alcoholic beverage powerhouse with more than 400 products in its portfolio.

This means that Carlsberg Malaysia can still grow by introducing a more products to the markets it serves. With a wider product range, it can attract a bigger group of customers, potentially boosting its revenue in the future. This is extremely important for Carlsberg Malaysia for its Singapore market. This is because the Singapore market has matured and its population is moving toward more exotic choices such as craft beers for a different experience. Thus, Carlsberg Malaysia needs to increase its portfolio to address this segment of the market.

4. Long history of growth. The expectation I have in its growth potential is not based on pure hope as well — Carlsberg Malaysia has demonstrated a long history of growth in the past. Over the past 10 years, its revenue has close to doubled what it was in 2008 and its earnings per share has increased 175% over the same period. Its dividend per share has grown at an even more impressive rate of 19% a year on average from 2008 to 2016.

This shows that the management has the ability to grow the company even though it is already a market leader.

5. Strong free cash flow and dividend. Going back to my point of investing in a simple-to-understand business; Carlsberg Malaysia definitely fits the bill. It basically manufactures alcoholic beverages and distributes them to key markets in the region. Compared to, maybe, a more complicated business, this simplicity means that Carlsberg has been able to rapidly create a large-scale business model with strong free cash flow. In turn, the management has always decided to pay a good level of dividend from this cash flow to investors.

But Carlsberg Brewery Malaysia is not for everyone

However, I understand that a stock like Carlsberg Brewery Malaysia is not for everyone. There are still risks associated with investing in this company. One of the key risks is currency. We have seen how the Malaysian ringgit has depreciated sharply over the past few years. For a foreign investor, this would mean that some of the gains might be lost to foreign exchange.

Moreover, Carlsberg Malaysia is operating in a highly-regulated industry. And the trend from the government is to push for more regulation in the industry. Carlsberg Malaysia and its investors can’t decide how the Malaysian or Singapore governments regulate this industry in the future, and it could potentially hurt the company’s profitability if the governments introduce rules that are restrictive for the company.

Lastly, remember that I invested in Carlsberg Malaysia back in 2015 when its valuation was quite attractive to me. Since then, the share price of the company has moved up quite significantly and it is now trading around 21.5 times earnings with a dividend yield of 4.8%.  That is quite a wide spread from the time I invested at 16 P/E with a 6% dividend yield. Investors need to take note of its valuation as well.

The fifth perspective

There is no right or wrong way to invest. Some people prefer the challenge of researching complicated businesses to unearth hidden value. While others prefer to look for simple-to-understand businesses that are well-managed and growing steadily. I started investing like the former group. However, over the years, I see myself leaning closer and closer toward the latter group of investors.

I have found that investing in more of these simple-to-understand businesses gives me a peace of mind and frees up my time to work on other things. The key for you is find a strategy you are comfortable with and is the ideal strategy for you.

(Photo: Niklas Morberg)

Stanley Lim has spent the last decade in the investment industry with a focus on Asian equity markets. He has written close to 2,000 articles featuring his investment analysis, opinion, and education. Stanley is also the co-founder of ValueInvestAsia.com, a website that provides Asia-focused investment data and information to investors. Personally, Stanley is a father of three and believes that financial literacy is a key component of the solution to ending global poverty.

8 Comments

  1. R

    June 19, 2017 at 9:59 am

    Why not have more options for forwarding/sharing of article? WhatsApp email etc

    • The Fifth Person

      June 19, 2017 at 11:01 am

      Hi R,

      Thanks for the feedback! We’ll look at more options for sharing our articles.

  2. TrakInvest

    June 19, 2017 at 10:45 am

    My one question to this would be, why not find companies that have easy to understand business models but also are undervalued. The reason valuations are less precise with complex businesses is because many of the assumptions you make are also complex. When it comes to an easy to understand business model, the assumptions are easier to make so your valuation is more precise.

    I guess the other side to this is, if you are able to make more precise assumptions to those complex companies than you can find value and make excess returns, but that is not always the case.

    What do you think?

    • Stanley Lim

      June 19, 2017 at 11:29 am

      Hi,
      Thanks for the question. You are right. The ideal situation would be to find a simple business that is deeply undervalued. However, valuation can be a very subjective topic so it really depends on the investor.
      For the case of Carlsberg Malaysia, I did not feel I was buying it at an undervalued price. The most I was buying it at a fair price at that time. However, I was pretty confident that the profit of the company would not decline over the long term.

      So to me, I assume I can get at least a 6% return from that investment just on the dividend alone, consistently. And if it can increase its dividend over time, I will get a higher yield on my cost and the share price could also increase to reflect the higher dividend. So to me, it was a relatively low-risk investment at that time, regardless of whether it is undervalued. As Buffett pointed out, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

      As you pointed out, for complicated business, you have to make much more assumptions in your analysis. And the more assumptions you make, the more mistake you make.

  3. Alfred

    July 16, 2017 at 9:57 pm

    Hi Stanley

    Thanks for the insightful article. Could you help to confirm that the withholding tax rates on dividends for Malaysian stocks is 10%?

    • Stanley Lim

      July 17, 2017 at 9:58 am

      Hi Alfred,

      Malaysia has moved to the Single Tier Dividend system a few years ago. This means that there is no tax for shareholders on dividend received, even for foreigners because the tax has already been paid on the company level.

      There is no capital gain tax for an individual in Malaysia as well. But if you have a special situation, you might want to check with a tax consultant on any other tax implication.

      Cheers
      Stanley

  4. NB

    August 7, 2017 at 5:28 pm

    Hi, I’m a Malaysian. Its opposite for me. I started out investing in simple-to-understand businesses such as sin, banking and telco stocks, but now I’m bored and starting to look for growth companies. :)

    • Stanley Lim

      August 7, 2017 at 7:20 pm

      That works as well. :)
      The fun thing is there is never one way to investing.

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