Carabao Group

Carabao Group Plc (CBG) 

 

Investment thesis

From our recent meetings with CBG’s management, we maintain the view that we held in our May 18 report. Despite an improved margin, there are still headwinds against its domestic market growth as consumption remains stagnant.  For its carbonated energy drink, the new product has this month been launched in Cambodia, however, we believe its contribution will be minuscule until at least 3Q15. Even though there are a few growth drivers for CBG this year, we would like to see these contributions solidify further before we see to any additional earnings upgrade. We believe that with the current price, the market has priced in a substantial amount of the firm’s growth for this year and any further top-line degradation will definitely disappoint the market’s expectation. Therefore, we maintain our HOLD rating and Trading Price of Bt45.

Fingers crossed for domestic market 

Currently, we anticipate a 5% growth in CBG’s 2015 domestic sales, as we believe that the firm’s effective product promotions and new cash van programs can help them acquire some market share in the current low-consumption environment. This 5% growth, however, does not represent a completely pessimistic stance, as 1Q15 experienced a 3% YoY fall back in domestic sales. Furthermore, the firm’s receivable days have increased from 16 days in 2014, to 24 days and inventory day sales have also extended from 20 days to 35 days. The rise in credit terms along with a larger portion of sales through modern trade is indicating that there is a slight strain on the domestic market. 

New product launched, but contribution as yet insignificant

The firm has announced that it had launched its much-anticipated carbonated product in the Cambodian market this month. Initial shipment stands at 1.2m cans (CBG’s past four-quarter average sales were 249m bottles/cans per quarter) and we still hold the view that it will take some time for it to catch on in the market. Since the cost and GM for the product have yet to stabilize as well, we have not accounted for much of its contribution in our forecast. However, once demand for the carbonated energy drink has picked up within the region, we are likely to see CBG’s GM and bottom line grow considerably. 

Upside for export GM improvement

We see that 1Q15’s better GM of 36.6% was primarily due to a huge improvement in domestic GM (from 33.3% to 38.8%). However, its export GM has declined from 2014’s 34.6% to 31.6% in 1Q15. There is upside in the improvement of overall GM as we believe that export GM can improve this year. The main drivers of this gain will stem from the return of the higher-margin Middle-Eastern orders and also when the carbonated product’s sales contribution becomes substantial.