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Raise your glasses to better days ahead

■ We expect MLM volumes to improve from 4Q21F onwards, driven by the gradual lifting of lockdown measures and higher Covid-19 vaccination rate.
■ In addition to higher sales volumes, we believe that brewers will benefit from better overall cost restructuring efforts and increase in selling prices.
■ Upgrade the sector to Overweight, with Carlsberg as our preferred pick.

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Brewers resumed operations since 16 Aug 21

Both HEIM and CAB have resumed their brewery operations since 16 Aug 21, after an 11-week suspension (since 2 Jun 21) to comply with the full movement control order (FMCO). This is in line with government initiatives to allow manufacturers with fully vaccinated employees to operate. We gather that >80% of both brewers’ employees have
been fully vaccinated, which means the brewers are allowed to operate at 100% capacity in Phases 1 and 2 of the current MCO.

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Better MLM sales volume from 4Q21F: likely to bottom in 3Q21F

While both CAB and HEIM should record weaker qoq results in 3Q21F due to the FMCO impact, we expect both brewers to record stronger malt liquor market (MLM) sales volume from 4Q21F onwards. This will be backed by: i) a gradual reopening of economic activities and higher vaccination rates, ii) higher on-trade sales with consumers allowed to dine in, and iii) ability to hold mass gathering events (i.e. weddings, events, etc.), which are key drivers for beer sales. Note that we estimate the sales breakdown between offtrade and on-trade to be 80:20 (from 45:55 previously pre-Covid-19).

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Expect to benefit from cost optimisation strategies and price hikes

Since the Covid-19 pandemic began in Mar 20, both HEIM and CAB have been focusing on increasing operating efficiencies. This is via various efforts, including digitalisation and streamlining of operations, including headcount optimisation. With these cost containment exercises since the first MCO, both CAB and HEIM should benefit from margin expansion in the long-term. In addition, both brewers have stated plans to further raise their
products’ selling prices. Despite mainly to pass on higher raw material costs, we expect the quantum of price increases to be more than sufficient, leading to better margins.

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Carlsberg is our preferred pick; We also have an Add on HEIM

While we have Add calls on both brewers, we prefer CAB over HEIM. This is premised on: i) an expected stronger recovery in CAB’s sales given its exposure to the Singapore market (32% of 1H21 revenue – Singapore has seen more relaxed lockdown measures compared to Malaysia), and, ii) strong traction in its premium beer segment, leading to a
more profitable sales mix. Despite impact of Covid-19 in 1H21, CAB’s premiumisation strategy is paying dividends as it recorded a 16% yoy growth in premium beer sales, despite its core beer sales declining 11% yoy in the same period.

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Upgrade brewery sector to Overweight; proxy to recovery play

We upgrade the sector to Overweight from Hold as we believe that the worse is over. We also expect brewers to record stronger results from 4Q21F, backed by: i) recovery in beer sales, with the gradual reopening of economic activities, ii) better consumer sentiment from higher vaccination rates, as well as ii) better cost efficiencies. Based on its forward
CY22F/23F P/E, the brewery sector is trading at 24.5x/20.0x which is at 10%/28% discount to its 5-year mean of 27.2x (sector net profit CAGR of 22.3% for FY20-23F).