Malaysia: Hard liquor excise duty hike could possibly bring benefits to brewers

The 150% excise duty hike on Malaysia-produced hard liquor effective Dec 15 could possibly perk up the performance of brewers producing beer and stout as consumers shift to these options since it’s cheaper, The Star Online reported on December 19.

This excise duty does not impact imported hard liquor and malt liquor products (beers).

Two brewers that stand to gain from the shift are Heikenen Malaysia Bhd and Carlberg Brewery Malaysia Bhd.

On December 16, Carlsberg shares closed unchanged at RM13.90, with a market capitalisation of RM4.28bil, while Heineken ended 20 sen higher at RM16.90, arriving at a market value of RM5.11bil.

CIMB Research said in its report that the increase was expected to drive prices of locally-produced hard liquor up by about 75%.

Since it is known that consumers prefer locally produced liquor as it’s cheaper than other alcohol beverages, CIMB believed that this may result in people switching to beer and stout as cheaper options from liquor produced locally.

“And Malaysian brewers are likely to benefit from this,” said CIMB Research, adding that this could also cause contraband alcohol to persist.

On Dec 9, the Finance Ministry announced a 150% increase in excise duty for locally produced hard liquor from RM24/litre to RM60/litre.

The price hike effective four days ago caused a stir among local producers, who cried foul over the matter as this increased the cost of locally made alcohol products by almost 75%.

The recent hike could raise concerns of possibly another excise duty hike for beers.

Recall, local brewers have witnessed excise duty hikes usually after the national budget. The last hike took place during Budget 2006, according to reports. Brewers faced a March 1 duty hike, which saw a structure of RM175 per 100% volume/litre from RM7.40/litre. The 15% ad valorem (according to value) tax was removed.

Heineken Malaysia Bhd, meanwhile, declined to comment on its prospects next year with the recent excise duty hike on local hard liquor.

“If another hike takes place, it would be a lose-lose situation for Malaysia’s beer industry and the government.

“Another unprecedented excise duty hike will dampen brewers’ sales volume, leading to lower excise duty collection for the government, according to CIMB Research.

For now, the research house was not inputting any hikes in the near term as the previous hike in March was the first in 11 years.

CIMB liked the brewer sector due to its defensive nature and inelastic demand for malt liquor market products.

It said the sector’s attractive dividend yield of 5.2% to 6.1% was a rerating catalyst as it offered investors a safe haven in volatile times.

Heineken Malaysia remained CIMB Research’s top pick.

“The downside risk is an unprecedented hike in excise duty for malt liquor products,” it added.

While brewers have adopted different marketing strategies to target further growth in the Malaysian market amid an extremely tough operating landscape surrounding the industry, what is obvious is the sector’s earnings have been rather subdued.

Maybank Investment Bank Research (Maybank IB) kept a “hold” call and lower target price of RM14.60, from RM14.70 previously on Carlsberg, as it forecast lower sales and higher operating expenses for the brewer.

Carlsberg’s third quarter 2016 results came in weaker-than-expected on lower sales growth and possibly timing of advertising and promotions (A&P).

On the back of 8% drop in revenue year-on-year (y-o-y), mainly on the divestment of its 70% stake in Luen Heng F&B Sdn Bhd, weaker sentiment and higher A&P expenses, earnings before interest, tax, depreciation and amortisation (EBITDA) fell 16%.

It said higher A&P costs and price discounts to clear old inventory had caused EBITDA to fall 27% y-o-y. Pre-tax profit was weak in the third quarter due to losses from its associate Lion Brewery, which was impacted by a major flood.

“We expect the fourth quarter to come in stronger driven by the festive period.

“Carlsberg could also see some pre-Chinese New year stocking activities given that it falls in January,” said Maybank IB, adding that its Singapore operations could also see better margins post stock clearing exercise in the quarter.

Maybank IB rated Heineken with a “hold” and a lower target price of RM17.40 from RM18.10 previously.

It said the last quarter’s results fell short of expectations on weaker consumption, higher A&P costs, lower pre-tax profit and lower volume.

“We believe the recent price hikes in July might have impacted Heineken’s malt liquor volumes.

“Nonetheless, its coming quarter FY16 (fourth quarter calendar year 2016) should see growth quarter-on-quarter driven by the festive period,” said MaybankIB.

Recall, Heineken had also increased prices in March after the excise duty hike.

19 December, 2016