Traditional on-trade requires liquor licence

■ Recent media reports state coffee shops and restaurants in Malaysia require a liquor licence to sell alcohol products, including beers effective 1 Jan 2022.
■ While this news is negative, we estimate that sales contribution from coffee shops nationwide is less than 10-15% of brewers’ total sales.
■ In our view, this enforcement could see delays due to the short time frame provided to comply with the new regulation.

Restaurants and coffee shops require alcohol licence from 1 Jan 22

According to recent media reports, all restaurants and coffee shops nationwide will require a liquor licence to sell alcoholic beverages, including beer and stout. At this juncture, this is scheduled to be effective from 1 Jan 2022F onwards; the licensing requirement falls under Excise Act 1976 and Excise Regulations 1977 by Malaysia’s Customs Department.

Negative, in our view: 10-15% of brewers’ sales from this channel

In our view, this is negative for brewers as this move could lead to lower sales. Based on our in-house estimates, sales of beer and stout in traditional on-trade sales locations (coffee shops and restaurants) made up an estimated 10-15% of total sales prior to the start of Covid-19 pandemic (before Mar 20). However, we believe that this number has plummeted further since Covid-19, due to movement restrictions and various lockdowns that led to lower beer and stout sales at these locations.

Expecting lower sales volume from traditional on-trade

Assuming the enforcement of liquor licence for all restaurants and coffee shops is effective from 1 Jan 2022, we believe will this hurt brewers’ sales volume as: i) owners may opt not to apply for this licence (RM840-RM1,320 licence fees annually based on operating hours), resulting in an inability to sell alcoholic products; ii) it may lead to lower affordability as these sales locations may raise selling prices to compensate for the licensing fee; and iii) some restaurants and coffee shops could cease operations due to lower overall profitability.

Could lower our FY22-23F EPS forecasts

Based on our sensitivity analysis, every 10% reduction in traditional on-trade sales will lower CAB’s/HEIM’s FY22-23F EPS by 1.0-1.2%/1.4-1.8%. Still, we are of the view that the demand for beer and stout is relatively inelastic in nature. With the potential enforcement of liquor licence on restaurants and coffee shops, we expect part of the beer and stout sales to shift to other sales channels including modern on-trade (bars, modern restaurants, etc.) and off-trade sales channels (convenience stores, retailers, etc.) in the longer term.

Reiterate Overweight as a proxy to recovery in consumer activities

While this news is negative in nature, we await further updates on this matter (could be prone to delays). We make no changes to our Overweight call on the brewery sector and our Add calls on both Carlsberg (CAB MK) and Heineken Malaysia (HEIM MK). In our view, current valuations of both brewers are attractive (HEIM and CAB’s CY23F P/E is at a 26.2%/21.5% discount to the brewery sector’s 5-year mean P/E of 24.2x) while both stocks are a proxy for a recovery in consumer activities from the lifting of lockdown measures.