Carlsberg

Stock price: DK 480
Conclusion: Except for Russia, results were not that bad in Q1. Carlsberg grew faster than peers in most markets. Nevertheless, medium term growth prospect in Russia remains a key question mark. We think the stock looks fairly priced based on our valuation range of DK 480-500 per share (slight upgrade related to RUB).

Q1 results: Sales declined 7% to DK11bn (down 7% organic). EBIT down 7%- Net earnings: DK 81m vs -212m. Full year guidance reconfirmed: EBIT in line with 2009. Net profit growth above 20% (excluding one-off items).

Carlberg grew faster than peers in most markets.
-Northern&Western Europe reported 3% organic volume growth, which is good news. Carlsberg improved overall market share, helped by a strong gain in the UK. EBIT tripled thanks to improved gross margin, despite flat price/mix impact.
-Asia also reported strong organic growth (+16% mainly volume) driven by Indochina and China. EBIT jumped 50% from a low base, thanks to higher gross margin and positive leverage.
-The increase in central costs results primarily from higher marketing costs which clearly paid off in Q1.

Eastern Europe collapsed as expected, due to Russia.
-Total beer volumes declined 27% in Q1. Adjusted for the destocking impact in Russia (-15%), volume fell 12%.
-The Russian market declined by 12% as a result of the 200% excise tax increase early this year. Carlsberg’s share eroded 180bp to 39.1% in Q1. We find it surprising given that Carlsberg has chosen to pass on the tax increase on a gradual basis. Except Heineken (12.1%), most of Baltika’s smaller competitors improved share, notably ABI (17.7%), Efes (9.7%) and SAB Miller (7%).
-EBIT declined 54%, mostly due to the destocking impact estimated at DK300m.
-Carlsberg is looking for a low double digit decline in 2010. We assumed a slight increase in reported sales, driven by a higher Ruble. Margin could retreat 200bp to 26.5%.

Russia to remain a question mark.
-Russia should still account for half of EBIT by the end of 2010.
-Further regulation is being currently discussed at the Duma. It is still too early to assess the long term impact of rising taxes on Russian consumption and whether Carlsberg might have to revise its growth assumptions.
-Notwithstanding higher price increases at the low end of the market, consumers are still trading down in Russia, which does not bode well for mix.
-Baltika might have to raise marketing spending in order to reverse its market share trend.

Carlsberg trades at 15xP/E and 8xEV/EBITDA based on our 2010 estimates (EPS DK32). Although we recognize the good work done in Europe and in Asia, we think the stock looks fairly priced in light of the uncertainties affecting half of its profit pool.

Carlsberg

Stock price: DK 422
Conclusion: We find the stock fairly priced in light of depressed volumes this year, notably in Russia. Carlsberg should continue to trade at a discount vs competitors which offer a better balance between emerging and mature markets.

2009 results: Sales down 1% to DK59.4bn, flat like for like. EPS up 5% to DK 23.6. Guidance 2010: 20% increase in net earnings.

Low visibility on the top line front.
-Carlsberg anticipates a slight decline in Northern and Western European markets following 6% decrease in volume last year.
-The Russian market will be negatively impacted by consumer price increases following the 200% excise
duty increase on January 2010. Carlsberg assumes a low double digit decline in the Russian market. Asia (7% of sales) will continue to grow. We forecast sales to remain flat this year.

Earnings growth below the line.
-Operating earnings should remain stable, notwithstanding the €300m one off earnings generated by stockbuilding in Q4 2009 in Russia. Carlsberg expects earnings to be skewed towards the second half of the year.
-Net earnings (more than 20%) will benefit from lower financial expenses (net debt down €8.5bn to €35.7bn) and further reduction in average working capital during the year.

New medium target looks challenging.
Carlsberg has set new targets (3-5 years): Northern Western Europe at 15-17% (previously 14-16%), Eastern Europe at 26-29% (vs 23-25%), Asia at 15-20%. Carlsberg group could achieve 20%. We find these targets very ambitious in light of the depressed volume in developed markets (Europe and the US). In addition, it remains to be seen what will be the price elasticity for the Russian market. Last, we remain concerned by the overexposure to the Russian currency.

Carlsberg trades at 14xP/E and 7.6xEV/EBITDA based on our 2010 estimates. Our DCF suggests a value of DK440-460, using a discount rate of 11% justified by the risk attached to the Russian exposure. We think that Heineken offers a better balance between mature and emerging markets.

Carlsberg

Stock price:DK392

Conclusion: Unchanged, we maintain our valuation range of DK390-DK420 and think that the stock looks fully priced.

Carlsberg raising EBIT estimates of DK9.3bn (vsDK9bn) following Russian stock building in Q4.

The stock building following the decision to increase beer excise duty by 200% in January 2010 has a positive one-off impact on profits this year. The subsequent destocking in Q1 2010 will have a similar negative one-off impact on operating profit next year.

Carlsberg trades at 14xP/E based on 2010 estimates, implying a slight dicount to peers. We think it is justified by the low visibility affecting Russia, which accounts for half of its profits.

Carlsberg

Stock price: DK392

Conclusion: Growth in 2010 will be held back by excise increases in Russia. Carlsberg looks fully priced based on our valuation range of DK390-DK420.

9m results: Sales up 1% reported (flat like for like), EBIT up 26% (+27% organic), net profit up 28%. Guidance full year 2009: Sales DK 59-60bn, EBIT DK9bn, net profit DK3.5bn.

Low visibility affecting half of its profits.
Russia is planning to triple excise duty on beer from 6% of the average retail price to 19% by 2012. Excise on beer will be raised by 200% in 2010, followed by 10% in 2011 and 20% in 2012. Both Heineken and ABI stated that they will try to pass on the increase to the consumer. As to Carlsberg, a dominant player in Russia with a 41% share, passing through the increase would be easier to achieve in the premium end than in the lower mainstream segment. It remains to be seen what will be the price elasticity for the Russian market. We assume that Russian market will fall by 10% in 2010 and that Carlsberg sales in Russia will decline by 6%, while margin could be down 100bp.
However, we expect Northern and Western Europe to offset lower Russian profits next year. Management stated that the region is benefiting from accelerated efficiency improvements (margin up 380bp in Q3 vs 180bp 9months). NW Europe margin could reach 14-16% medium term, against 12.3% estimated this year.

Carlsberg trades at 14xP/E based on 2010 estimates, implying a slight discount to peers. We think that such a discount is justified given Carlsberg’s exposure to Russia. Based on our DCF valuation (10% Wacc and 1.5% terminal growth) we reach a stock price of DK420.

Carlsberg

Stock Price: DKK 319,5
Conclusion: To early to play a rebound. 10% discount to brewers (based on 2010 estimates) looks justified in light of the poor visibility which is affecting the Russian beer market.

First half 2009: Sales +9% reported, flat like for like, Ebit +38%, eps -10%
Guidance for 2009: DKK61bn sales, EBIT>DKK9bn, Net profit>DKK3.5bn .

As expected (cf our previous comment), management had to revise down sales guidance by 3% this year from DKK 63bn to DKK 61bn, owing to the sharp deterioration of volume. Except for Asia (only 10% of volume), Carlsberg’s key markets, Northern Europe (47% of total volume) and Eastern Europe (43%) should continue to decline in H2, albeit at a slower rate than in H1. We are looking for a -4% volume decline in 2009 versus -5% in H1, coupled with negative mix .Organic growth should remain flattish thanks to pricing.

The good news came from the bottom line, much better than anticipated in H1. We expect operating earnings to continue to benefit from the conjunction of positive pricing (+5%), lower media spending (media costs fell by 15%), accelerated efficiency programmes and synergies from the integration of Scottich&Newcastle. We look for 210bp gain in EBIT margin from 13.3% to 15.4% of sales. EBIT could exceed management initial guidance of DKK9bn, which implies only +2.6% increase in operating profit in H2. Net profit could achieve DKK3.66m, up 4.5% versus initial guidance. However, these numbers are in line with consensus and should not surprise investors.

The major risk for Carlsberg is a significant increase in the excise tax. The tighter alcohol regulation should lead to beer excise increase which will be effective as of January 2010. According to press reports, the increase could be between 25% to 200%, implying retail price increases from 1% to +10%. The scale of the increase should be known early October.

Given the uncertainty, we expect the stock price to remain under pressure.
Carlsberg trades at 12.5x P/E based on 2010, implying 10% discount to peers and FCF yield exceeds 12%. Our DCF points to DKK360 per share.

Carlsberg

Stock Price: DKK 290
Conclusion: Stock fully priced

2009 Q1 results: sales up 1% like for like, 25% reported, EBIT margin up 260bp. Management confirmed 2009 guidance (DKK 63bn revenues,9bn EBIT, 3,5bn net profit)

Q1 is a traditionally small quarter for a brewer like Carlsberg, accounting for less than 20% of full year sales. Numbers look encouraging at first sight with slightly positive organic revenue growth, coupled with a 260bp gain in margin. However, the gain came purely from pricing (+6%) while volume declined by 5%, notably in Western&Northern Europe (-8%), but also in Eastern Europe (-5%), partly offset by 9% growth in Asia.
Management’s assumption that volumes could remain stable in Russia by the end of the year looks optimistic in light of the 5% fall observed in Q1; In addition the negative mix impact of 2% in Russia implies that consumer are trading down. We have no reason to forecast a rebound in Western Europe (except Easter impact) and expect the next quarters to stay weak. As to margins, the gain came exclusively from marketing & selling expenses, while gross margin was down 90bp and administrative expenses were stable relative to sales.
All in all, we do not think that Carlsberg will meet guidance this year as a result of lower than expected volumes and a weaker currency. Russia accounts for around 50% of operating profits. Consequently, we value the stock based on more conservative assumptions: DKK 60bn sales, DKK 8,7bn EBIT (130bp gain in margin) and DKK 3,35bn net income. Net debt/EBITDA should fall to 3,4x versus 3x estimated by management.

Carlsberg posted the worst performance in European beverages last year, with a stock price falling by 72% following the acquisition of part of S&N businesses and the subsequent right issue. The stock has regained some lost ground and is up 68% YTD. Carlsberg is trading at 13,2x and 10,9x our estimates for 2009 and 2010 (7,2x EV/EBITDA) which is not cheap. Our DCF model, implies no upside based on DKK 290 share price.
Last, we feel the risk exist to see management revising guidance this year.