Now that two of the three so-called “sin sectors”, cigarettes and gaming, have seen taxes raised this year, expectations are high that the brewers are next in line.
Earlier in June 2010, gaming companies saw pool-betting duty raised from 6% to 8%. The latest round of tax increase for cigarette manufacturers, of three sen per stick, was announced earlier this week ahead of Budget 2011, which is to be presented on Oct 15.
Of the three sectors, cigarette manufacturers have been the worst affected, having been slapped with tax hikes every year for the past eight years. By comparison, brewers are “luckier” — they have been spared of any tax increase since 2005.
Back then, the government raised excise duty by 23% to RM7.40 per litre and introduced a new 15% Ad Valorem duty payment on the ex-brewery price for beer products. But at the same time, it also reduced sales tax to 5% of the ex-factory invoice price on all products sold. The net tax increase was thought to be around 8%-9%.
As such, many expect the time is ripe for fresh tax hikes — by as much as 10% — in Budget 2011. The government has hinted as much.
On the other hand, brewers contend that beer taxes in the country are already one of the highest in the world, second only to Norway. Government tax payments amounted to over 48% of Carlsberg Brewery’s revenue last year.
Like the cigarette industry, it is feared that further tax hikes — and the resulting higher selling prices — will fuel smuggling. Smuggled or illicit beer is estimated to make up roughly 20% of the local beer market. Volume sales of the duty-paid malt liquor market dipped in 2005-2006 after the last round of tax hike before recovering in 2007-2008. Industry volume sales are estimated to have declined by roughly 2% in 2009, impacted by the global downturn, but are expected to grow in the single digit this year.
Higher taxes and prices could send volume sales growth back into negative territory — affecting the earnings of the two local breweries, Guinness Anchor and Carlsberg.
Guinness fared better over past few years
Of the two, Guinness appears to have weathered the intensely competitive operating environment better. The company charted steady growth in sales and profits over the past decade, thanks, in part, to its success in gaining a steadily larger slice of the domestic market. At present, its market share is estimated at roughly 57%, up from about 45% back in 2001.
Sales grew at a compounded rate of more than 8% annually, from RM670 million in FYJune01 to RM1.36 billion in FY10. Over the same period, net profit increased at an even faster pace of 11.2% per annum, from RM58.7 million to RM152.7 million in the latest financial year.
By comparison, Carlsberg’s earnings growth has been patchier. Whilst sales increased at a compounded annual rate of about 2.3% between 2000 and 2009, net profit dipped to RM75.9 million last year from RM110 million in 2000. Indeed, Guinness’ shares had outperformed Carlsberg over the past five years. Shares of Guinness are currently trading at RM8.46, compared to RM5.75 at the start of 2006 whilst Carlsberg’s shares are hovering around the same levels as they were five years ago.
Expansion boost for Carlsberg
Nonetheless, Carlsberg’s prospects appear to be looking up. The company has been on an expansion trail, investing in Luen Heng F&B in November 2008 and Carlsberg Singapore in October 2009. The acquisitions have widened both its product range and market base — and appear to be paying dividends.
Carlsberg reported strong earnings in 1H10, boosted by contributions from Carlsberg Singapore. The latter accounted for RM28.7 million of its pre-tax earnings of RM69 million in the first six months of the year, and is well on track to meet the company’s estimated net profit contribution of RM37 million for the full year. At this pace, we estimate Carlsberg’s 2010 net profits to be sharply higher from last year’s RM75.9 million. In addition to operational synergies, the expansion in Carlsberg’s customer base is likely to temper the negative impact of a tax hike in the domestic market.
Carlsberg’s new ventures — Carlsberg Singapore was acquired for RM370 million — have come at the expense of dividends. The company lowered its dividend payout in 2008-2009 to 35% and 51% of profits, respectively, compared with the average payout of 108% in the preceding six years. The company has net debt of RM37.7 million at end-June 2010.
Assuming the same 51% profit payout this year, dividends will total 30 sen per share. That translates into a net yield of 4.3% at the current share price of RM5.20.
Guinness pays higher dividends
Guinness, on the other hand, remains focused primarily on the domestic market. With lower capital expenditure — estimated at roughly RM50 million in the current financial year — dividend payout has stayed high, averaging at some 85% of net profits in the past five years.
The stock will trade ex-entitlement for a final tax-exempt dividend of 35 sen per share on Nov 11.
Assuming dividends totalling 45 sen per share — the same as that for FY10 — in the current year, shareholders will earn a net yield of 5.3% at the prevailing share price of RM8.46.
Guinness is sitting on net cash totalling almost RM150 million at end-June 2010.
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