Investeringskommentar, Philip Gorham, Analyst, 16/3/2016
Carlsberg's SAIL 22 strategic update revealed little in the way of significant changes, but we welcome the clarity on capital allocation and think the commitment to improving returns on invested capital, or ROICs, is the appropriate strategy for creating an economic moat. Until evidence emerges of Carlsberg's ability to generate sustainable excess returns, however, we are reiterating our no-moat rating and our DKK 570 and $17 respective fair value estimates for the ordinary shares and ADRs.
There was little news regarding Carlsberg's strategy in the company's update. Significantly, however, management stated it will focus on large cities and utilise an asset-light model, a strategy that we think has the potential to improve returns on capital. Carlsberg's single-digit ROIC materially lags that of its competitors, and we think the firm should rightsize its invested capital base. The asset-light model should help the company achieve this, albeit at the expense of profitability owing to the costly nature of beer distribution. However, the strategy of targeting densely populated areas should improve distribution efficiency, mitigating the margin pressure.
Carlsberg revealed some long-term financial targets in its strategic update. Management will target a net debt/EBITDA ratio of 2.0 times, which implies some debt reduction from the net debt/EBITDA ratio of 2.6 times at the end of 2015. We think the firm can achieve its leverage target by 2018. The stated dividend payout ratio target of 50% is significantly above both the 2015 payout of 24% and our medium-term assumption of 30%, and we have adjusted our cash flow model accordingly. We think the implied increase in the dividend is an appropriate use of capital. If Carlsberg had paid out 50% of its earnings (excluding one-time charges) in 2015, its dividend yield would be 3.1% at its current market price and 3.3% at our fair value estimate, a valuation much more in line with its consumer staples peer group.
Bulls Say
- Carlsberg's portfolio includes well-known regional brands such as Carlsberg, Baltika, Tuborg, and Holsten.
- Leading positions in western China, Scandinavia, France, and northern Germany give Carlsberg some scale.
- The beer markets of Asia should continue to expand during the next five years, while Eastern Europe could rebound.
Bears Say
- The Russian government's stance on taxes and regulation on beer is unpredictable, and further tax hikes could disrupt volume beyond 2016.
- Several other publicly traded brewers sport superior margins and higher returns on invested capital.
- Carlsberg lacks a dominant global brand like Heineken or Budweiser.
