12 things I learned from the 2019 Carlsberg Malaysia AGM

Established in 1969, Carlsberg Brewery Malaysia Berhad (Carlsberg Malaysia) is a listed subsidiary of Carlsberg A/S, which is incorporated in Copenhagen, Denmark. Carlsberg Malaysia is a brewer that carries various well-known alcoholic beverages ranging from Carlsberg to Somersby Cider.

Carlsberg Malaysia has operations in Malaysia and Singapore, and owns a 25% stake in an associate company, Lion Brewery (Ceylon) PLC, in Sri Lanka. It also exports products to various countries including Thailand, Taiwan, Hong Kong, Laos, Maldives, and Guam.

Carlsberg Malaysia recently saw its share price hit an all-time high of RM27.16 in April 2019 on the back of a record dividend. Can it sustain its level of performance? I went to its annual general meeting to find out more.

Here are 12 things I learned from the 2019 Carlsberg Malaysia AGM:

1. Revenue rose 14.6% year-on-year to RM2.0 billion in 2018. The achievement is due to 12% volume growth of its flagship brands Carlsberg and Carlsberg Smooth Draught across Malaysia and Singapore as well as 20% combined volume growth in premium brands portfolio — Kronenbourg 1664 Blanc, Somersby Cider, Asahi Super Dry, and Connor’s Stout Porter — in 2018. Besides traditional volume drivers such as Chinese New Year events, a football campaign conducted during the 2018 FIFA World Cup by Carlsberg Malaysia boosted its revenue by 10% on top of its underlying growth in June and July 2018.

2. Net profit grew 25.3% year-on-year to RM277.2 million in 2018. The hike in net profit is attributable to share of RM21.0 million profits in Sri Lankan operations in 2018 against a share of loss of RM0.2 million the year before. One-off charges relating to the 2016 floods in Sri Lanka and negative trade offer adjustments in 2017 did not recur in 2018. Carlsberg Malaysia had received all insurance claims from the 2016 floods and Sri Lankan operations are back to normal and generating profits. Product innovation and vigorous marketing efforts also contributed to the increase in net profit.

3. Dividend per share was up 14.9% year-on-year to 100.0 sen in 2018. In February 2018,Carlsberg Malaysia announced a new dividend policy by paying out 100% of its annual net profit and at least 75% of its quarterly net profit on a quarterly basis to shareholders. A special dividend may also be considered like the case in the recent two years by balancing between company needs such as cash flow requirements versus shareholder rewards. 

4. Free cash flow increased 7.4% year-on-year to RM328.0 million in 2018. A shareholder was concerned about the decrease in Carlsberg Malaysia’s retained earnings from RM363.5 million in 2009 to RM17.3 million in 2018. CFO Lim Chee Keat explained that the depletion of its retained earnings is due to the dividend payout. The same shareholder added that the company’s liabilities exceed its net current assets in 2018. Lim does not view it as a concern as the company has healthy free cash flow. Current liabilities jumped from RM16.8 million year-on-year to RM75.0 million in 2018. Lim shared that the loans were borrowed on a short-term basis to finance the company’s working capital.

5. As highlighted by the Minority Shareholder Watch Group (MSWG), revenue generated from Singapore operations shrank 0.3% year-on-year to RM569.1 million in 2018. The beer market is expected to remain stable in Singapore. However, the import tax on beer from the European Union will be removed once the European Union-Singapore Free Trade Agreement is implemented in 2019. Consequently, operations in Singapore will face stiffer competition.

6. Production costs are escalating with raw materials: Malt prices are up between 15% and 20% as a result of bad harvests in Europe and Australia, glass bottles prices up by 4% in 2019, and utilities costs up by 6.6% in July 2018. Carlsberg Malaysia will pass on the additional costs to its distributors and retailers by adjusting the price of its products upward between 3% and 6%. Malt prices are predicted to be on the uptrend and has been hedged for 2019. In the recent Budget 2019 in Malaysia, there was no further increase in the excise duties, which is positive news to Carlsberg Malaysia. Both Singapore and Malaysia charge the second and third highest excise duties on beer globally.

7. There is no added sugar in the products of Carlsberg Malaysia except Jolly Shandy and Nutrimalt. Therefore, the financial impact of the implementation of sugar tax (which has been postponed to 1 July 2019) is negligible at about RM0.5 million compared to other soft drinks manufacturers. Carlsberg Malaysia will try reformulating its product recipe to meet the added sugar threshold without compromising the taste. Otherwise, the company will pay the tax if it does not manage to maintain the taste after product reformulation.

8. MSWG asked if Carlsberg Malaysia aims to offer more non-alcoholic drinking other than Nutrimalt by 2020 as part of its ‘ZERO irresponsible drinking’ initiative. Toh acknowledged that sometimes consumers look for options with no alcohol other than low-alcohol beer. With regards to other niche beers such as gluten-free beer, Lars Lehmann shared that it will be good to have in their portfolio. It exists but does not taste well usually. Meanwhile, consumers can also opt for Somersby Cider which is gluten-free. The directors are open to exploring new options.

9. Contraband alcohol is an issue in Malaysia that requires intensified collective effort from the government and industry players to tackle. Carlsberg Malaysia is part of a joint task force, Confederation of Malaysia Brewers Berhad, that works with government agencies including the Ministry of Finance and Royal Malaysian Customs to fight against contraband alcohol. In January and February 2019, the crackdown on counterfeit alcohol saw roughly a 30% increase in excise duty on duty paid production. On the other hand, Carlsberg Malaysia has embarked on a distribution drive in East Malaysia in 2019 to increase consumer touchpoints. It has also strengthened its distribution network there where the percentage of smuggling is the highest by investing more in its infrastructure. It aims to benefit from the reduction in illicit alcohol and gain a bigger market share.

10. In 2018, Carlsberg Malaysia introduced Brooklyn Lager and Brooklyn East IPA in draught in Malaysia and new seasonal variants in Singapore. Chairman Datuk Toh Ah Wah shared that the company aims to lead the craft beer segment, which is a niche but growing segment following the trend from Europe and North America. Its craft beer segment achieved 178% volume growth in Malaysia and Singapore collectively from a very small base. In Sri Lanka, its 25%-owned associate Lion Brewery (Ceylon) PLC accounts for over 80% of the market share in Sri Lanka and is estimated to grow at rate of between 5% and 8% depending on the taxation. It is a strong beer market.

11. A number of shareholders asked about the cancellation of treasury shares in 2017. The management shared that the cancellation is done in accordance with the Companies Act 2016. Shares were bought back when they were undervalued and subsequently cancelled in 2017. It is a way to reward shareholders as the number of shares in the market is reduced, which increases earnings/dividend per share overall.

12. Lars highlighted that the management’s focus for 2019 is to invest in the maintenance capex of its brewery facility and upgrade its manufacturing processes to achieve higher operational efficiency and cost reduction. Approximately RM60 million will be incurred as capex in 2019 in Malaysia. On a separate note, Lars will step down as managing director and will be replaced by Theodore Akiskalos effective from 1 May 2019. Lars will assume the position as executive vice-president for Eastern Europe at Carlsberg A/S.

Liked our analysis of this AGM?Click here to view a complete list of AGMs we’ve attended »

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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