Malaysia: Excise duty hike unlikely for local brewers - CGS-CIMB Research

CGS-CIMB Research does not expect excise duty hikes for beer in the upcoming Budget 2024, scheduled for October 13, the New Straits Times reported on October 11.

The research firm said a further increase in duties may have a negative impact on tax revenues as it could spur illicit activities such as smuggling.

The firm noted that the Confederation of Malaysian Brewers Bhd said the country already has high excise duties, the second highest globally.

"As a mitigating factor, we note that in four out of the last five instances of tax hikes, both Heineken Malaysia Bhd's and Carlsberg Brewery Malaysia Bhd's shares were up three months after hikes in duties were announced.

"In 2016, it took between 4-6 months for the market to factor in the fact that beer consumption is largely inelastic and for share prices to post positive returns," CGS-CIMB Research said in a report.

Interestingly, CGS-CIMB Research's analysis of the monthly share price performances of Carlsberg Malaysia and Heineken Malaysia suggests that investors seek entry points into these shares in the fourth quarter (Q4) of this year.

Heineken Malaysia showed an average 13.1 per cent return from October to February between 2017 and 2023, while Carlsberg Malaysia has delivered an average of 15.2 per cent return from October to April since 2017.

"The strong performance in the later part of the year is a function of improved demand around the festive seasons in Q4 and the first quarter (Q1).

"Secondly, this is also due to some elements of stocking up ahead of the government budget announcement, typically in October or November.

"The poorer performance in the ''mid-year period'', meanwhile, is fueled by destocking of earlier inventory build-up, a lack of major festivities to fuel beer demand, and the typical fear of excise duty increases heading into the national budget announcements in our view," CGS-CIMB Research said.

Further, the firm also noted that 2023 was also hit by the state elections in July, which may have prompted some selling of brewers' shares on the perception of a changing political landscape.

CGS-CIMB Research maintains its ''Overweight'' stance on Malaysian brewers.

"We believe the share price underperformance year-to-date (YTD) (Carlsberg -14 per cent YTD, Heineken -2 per cent YTD) provides an attractive opportunity for both companies' shares.

""We also upgraded Heineken Malaysia from ''Hold'' to ''Add'' as a result.

"Our target prices for both are also raised as we switch to a Gordon Growth model for valuing their shares," CGS-CIMB Research said.

Key downside risks include an excessive excise duty hike or a move to curb alcohol sales.

"The lack of added taxes and measures to lift consumption in Budget 2024 would be near-term catalysts, in our view," it said.

11 October, 2023