Brewers, tobacco firms' upsides to improve, says HLIB

NST Mon, Jan 02, 2023 01:47pm - 1 year View Original


KUALA LUMPUR: The upsides to the brewery and tobacco industries are expected to improve as they offer continued exposure to the reopening play via the tourism angle which still has legs to go.

Hong Leong Investment Bank Bhd (HLIB) said tourists arrivals had thus far exceeded the government's expectations, leading to a revision in targets from 2.0 million to 4.5 million in 2022 and 9.2 million in 2023.

"Nevertheless, this is still a far gap from pre-pandemic levels of 26.1 million in 2019, suggesting there are still more legs for the recovery trend to continue into 2023. 

"A key catalyst would be China's potential reopening in 2023 which seems increasingly likely following loosening of Covid restrictions in stages since November 2022," it said in a note.

Despite the absence of a major football event in 2023 and the fading of pent-up demand, HLIB said brewers were expected to still post year-on-year (YoY) growth in earnings.

This is premised on the absence of the prosperity tax, full year reflection of average selling price (ASP) hike and continued recovery in tourist arrivals.

"On the cost front, brewers are relieved by the declining barely and aluminium prices. 

"While there is risk of beer demand slowdown due to inflationary pressures, higher interest rates and softer economic growth in 2023, we expect beer to continue retaining its inelastic properties. After all, it remains one of the cheapest alcoholic drinks on the market," it said.

HLIB said tobacco players could see improved prospects as the implementation of the Control of Tobacco Product and Smoking Bill 2022 was expected to be deferred following its reintroduction from the first reading in the Dewan Rakyat.

"When asked whether the 'Generational End-Game (GEG)' will continue to be implemented, Health Minister Dr Zaliha Mustafa stressed that decision-making cannot be 'drastic', but must be 'incremental'.

"With this, we reiterate our view that the legislative path of the Tobacco Bill will be challenging," said HLIB.

In the case of no major policy changes in the new "2023 Budget", the firm said the measures introduced to curb smuggling activities augured well for the sin sector. 

HLIB said the measures were expected to lift tobacco player's earnings, as the illicit market share still stood at a buoyant level of 56.1 per cent in the third quarter (Q3) 2022. 

Same goes for brewers, the firm said, whose market share of illicit beers was estimated to be around 20 per cent and 80 per cent in Peninsular Malaysia and Sabah and Sarawak respectively, based on an estimation from Confederation of Malaysian Brewers Bhd in 2018.

"We continue to favour brewers and tobacco players and believe the risk-reward ratio is skewed to the upside due to the combination of respectable earnings growth and undemanding valuations. 

"We have Buy ratings on both the brewers as we opine they offer continued exposure to the reopening play via the tourism angle which still has legs to go.

"We have Buy calls on Carlsberg Brewery Malaysia Bhd and Heineken Malaysia Bhd with target prices of RM30.77 and RM31.18 respectively.

HLIB also has a "buy" on British American Tobacco(Malaysia) Bhd with a target price of RM12.08.

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