2023-12-26 15:03:41 ET
Summary
- Carlsberg trades at a reasonable valuation compared to other beverage peers.
- Pricing flex is getting absorbed reasonably well by markets despite overall pressure in the West from inflation on sentiment, and in Asia, there were substantial market share gains.
- Non-alcoholic suffered in Asia due to economic fallout from China, limiting that accretive growth, but otherwise performed well.
- Operating profit growth will be easy enough to accomplish at current rates, and there is latent earnings in scale and also general optionality with its brands.
- However, we have other, cheaper ideas and won't make space for Carlsberg in the portfolio.
Carlsberg (CABJF)(CABGY)(CABHF) trades at a reasonable relative valuation compared to some other beverage peers. They demonstrate decent pricing power, and the mixed effects are favorable, with strength in the premium portfolio in more emerging markets. The absolute earnings yield looks a little low compared to prevailing rates. So while there's a relative case to make on valuation, it's not a particularly compelling proposition.
Latest Q3 Releases
The overall quarter shows some decent growth per litre in revenues on a constant currency basis, driven by pricing action primarily, but also slightly by the fact that there is a tilting towards premium brands and high Laotian inflation. There were negative effects from a fall in non-beer volumes in some of the Asian markets.
In general, volume developments have been bad in the more developing markets as inflation has taken a toll on consumer sentiment. In more emerging markets, there is growth, and it is tilting towards premium rather than discount brands within the beer segment, but a collapse in revenues from non-beer beverages and other more premium items has limited the per litre growth in revenues from the geographies, although overall trends of volumes and revenues are positive. The non-beer revenues struggled due to knock-on effects in the region from China's economic woes, but the markets absorbed pricing action on beer products pretty well.
The performance in China itself was strong, with the market declining around 5%, but Carlsberg was able to grow its volumes by 5.6%. Tuborg was picking up well in India, with overall volume growth being strong there. Indochina revenues suffered on general market declines connected to these economies and their reliance on China.
The figures below are on a C.C basis, where FX declines actually caused the Asia segment to see around a 10% decline in revenues.
In Central and Eastern Europe, volumes were down, but major pricing effects raised CC revenues. There was quite a bit of inflation in Italy and the Baltics and weak consumer sentiment, and their Ukraine business is obviously not doing well either. Serbian volumes were up in the high single digits despite pricing action, and there was a shift towards premium brands. Alcohol-free did well in general.
There is no accounting for the Russian business anymore as it was seized by the Russian government and related receivables from the Russian government have been written down, with their Baltika investment they're no longer being counted as an equity investment either.
The strategic intent to grow non-alcoholic beverages also seems to be working excluding troubles in Asia, with it representing a larger share of the business, growing where developments for their alcoholic segments have been flatter.
Their portfolio is massive , and they are executing well on their craft and specialty strategy, which is relatively essential for major beverage companies as it's a more reliable way to gain a share in declining markets. Otherwise, their focus on emerging markets continues to take effect and provide growth.
Critically, there are several Asian geographies that still account for a small percentage of operating profits, with substantial space to scale up. Some of these markets are a little more iffy, as they are emerging after all, but they definitely offer opportunities for latent earnings growth, with growth markets in the Indochina countries as well as further buildout in major markets like China, India and Vietnam which are supporting strong volume growth offsetting declines in Western markets. The Nordics had a bit of an idiosyncratic one-off on volumes due to issues with flooding.
Moreover, they have a good lineup of non-alcoholic beverages that benefit from higher gross margin per litre, and are also not a market in decline while beer is due to changing consumer sentiment, particularly towards healthier or non-alcoholic options.
Bottom Line
Let's have a look at the DKK data and the more elaborate charts.
Outside of the growing market in Asia, there was clearly a volume hit on beers, driven again by inflation and weakening consumer sentiment. Non-alcoholic did badly in Asia.
Asian revenues were down quite substantially despite generally good volume and pricing developments, which were caused by FX effects. This means that overall revenue growth was just 0.3%.
Median forecasts show about a 4% profit growth, which is consistent with the guidance of the company including FX effects for the FY.
They have also started a buyback programme under 4% annually, which will be executed on a quarterly basis, which enhances shareholder returns.
While there is a relative case to be made with Carlsberg when comparing it with other beverage companies, which trade closer to 19-20x PE, we feel that the 16x PE and its implied earnings yield isn't especially competitive with the stocks we already include in our portfolio nor with prevailing rates. A 6% earnings yield isn't that great, and there isn't an edge here, as Carlsberg really isn't obscure or acute like some other brewery plays that exist on markets.
For further details see:
Carlsberg: Can Live Without It