What is the future for breweries? PAS, a component party of the Perikatan Nasional government, has called for a blanket ban on alcohol.
That, coupled with the problems faced during the movement control order (MCO) and the Covid-19 crisis, have raised doubts over the attractiveness of listed breweries as reliable dividend plays.
Still, the government has remained pragmatic over the sector, UOB Kay Hian research analyst Vincent Khoo told FocusM.
“The government recognises Malaysia’s significant dependence on tourism, and alcohol sales are complementary to the tourism sector,” he said.
Kenanga Investors Bhd CEO Ismitz Matthew De Alwis agreed that the timing was not right to implement a blanket ban (of which there is a low possibility) or stricter regulations (which are more likely to occur).
“We think that the likelihood of a blanket ban is low, but it is still possible to see more restrictive regulations. The timing is also not good for now, as the government will need all the money it can collect, including the RM4 bil excise tax from alcoholic beverages,” De Alwis told FocusM.
These issues are not new either, he added, citing the KL Beer Festival in 2017, which was cancelled after being held annually in the past, and again in 2019, when Umno and PAS representatives called for a ban on liquor consumption in public areas, similar to the smoking ban.
How has the MCO treated breweries?
As every sector has suffered due to the Covid-19 pandemic and the MCO, so too has the brewery sector.
According to Khoo, brewery sales and bottom lines were “severely impacted” in the second quarter of 2020 due to the MCO.
“Nevertheless, we expect significant sales and bottom line recoveries in 2020, although sales trends will remain below pre-MCO levels,” said Khoo.
De Alwis noted that the outlook remains “quite challenging” for the sector, though there could be some gradual recovery in the second half of 2020. Still, this will be limited by social distancing hindering large group events and parties, while poor consumer sentiment and lower tourist arrivals then will also take their toll.
“On-premise consumption contributes between 60% and 65% of total volume. Nevertheless, we can still expect a more meaningful recovery in 2021, although this could also be a moving target, and largely depends on whether there is a second wave of Covid-19 after the conditional MCO,” said De Alwis, adding that, in the past 10 years, beer volume only shrank in 2005, following an excise hike of 26%.
Dividend play or nay?
On the topic of the dividend payouts of Carlsberg Brewery Malaysia Bhd and Heineken Malaysia Bhd, both Khoo and De Alwis agreed that, while payouts will still be generous, lower payouts compared to previous years should be expected.
“While the listed companies will continue to maintain generous dividend payout policies, full year dividends will be significantly cut,” said Khoo, pointing back to the weaker sales and bottom lines suffered by the two breweries.
De Alwis shared that it would be safer to assume a lower payout of 80%, along with an earnings decline of 15% year-on-year (yoy) for 2020.
“This will translate into dividend yields between 2.5% and 3% for the two brewers. However, investors will always look forward and the base case should be a meaningful recovery in 2021, and dividend yield can recover back to above 3.5% for Carlsberg and above 4.5% for Heineken,” said De Alwis.
Carlsberg saw higher revenue and net profit for its 2019 financial year, recording a revenue of RM573.9 mil (up 14% yoy) and a net profit of RM291 mil (up 5% yoy). Heineken also saw higher revenue and net profit for its 2019 financial year, with RM2.32 bil in revenue (up 14% yoy) and a net profit of RM312.96 mil (up 11% yoy).
Should breweries no longer be dividend plays in the coming days, De Alwis shared that investors can always look among the usual high yield stocks.
“Utility companies like Tenaga Nasional Bhd, Malakoff Corp Bhd, Taliworks Corp Bhd, and Mega First Corp Bhd should have lower risk for dividend cuts in 2020,” he said.
He also pointed to the banking sector, with players such as Malayan Banking Bhd and RHB Bank Bhd, also emerging as a high yield sector, with cheaper valuations after stock prices came down due to the deteriorating short-term outlook.
“In the consumer space, Power Root Bhd and Astro Malaysia Holdings Bhd are also good dividend plays,” he added. – May 29, 2020
