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Morningstar | Another Strong Quarter for Carlsberg Shows Rationale of Asia Investments

There were few surprises in Carlsberg's fourth-quarter results, with key metrics very much in line with our forecasts. The big news from the press release is an increase in returns of capital to shareholders, with the announcement of a DKK 4.5 billion share repurchase program this year and an increased dividend. We are maintaining our DKK 743 fair value estimate for the ordinary shares, but will raise this in due course to account for the time value of money. We also reiterate our no-moat rating but acknowledge that this performance, if sustained, is likely to improve Carlsberg's returns on invested capital. The company is outperforming its peers, and recent execution is to be applauded, although we think a lack of a strong competitive advantage against its larger peers may mean that growth is likely to normalize in the next few quarters.

Full-year organic revenue growth was 6.5%, in line with consensus, guidance, and our forecasts, and implying strong second half growth of around 7.5%. Volumes were marginally ahead of our expectations in Western Europe, but not by a material amount. Asia drove the growth last year, with 8.6% organic volume growth and a solid 4.7% price/mix. Carlsberg recently strengthened its position in the region by increasing its ownership of Cambodia's Cambrew to 75%, a transaction that should bolster long-term growth, in our view. Amid mixed results from western companies in China, Carlsberg reported a strong performance, with 15% organic growth balanced between volume growth and price/mix. Premiumisation is helping to drive Carlsberg's growth, both in terms of volume share gains and positive mix. The company is fairly well-positioned in premium price segments in most markets with brands such as Tuborg and Kronenbourg 1664. The benefit of premiumization was significant in China, where the premium portfolio grew 13%, and this is the reason we think Carlsberg's investments in markets in Asia should drive growth in the medium term.

Carlsberg is heading in the right direction, but has more to do on its cost structure. The full-year adjusted operating margin of 16% lags peers, although it is not likely to match the 30% margin of AB InBev due to its smaller market shares. Nevertheless, the organic operating profit growth of 11% and EPS growth of 9% represents solid progress. This success is allowing Carlsberg to return some capital to shareholders, despite its acquisitions last year. The company announced a share repurchase program of DKK 4.5 billion in 2019, and a full-year dividend hike of 13%. We had anticipated a DKK 2 billion in buybacks this year and a near-20% dividend increase, so this has little impact on our valuation. With the shares at or slightly above our fair value estimate, however, and with internal opportunities to expand in growth markets such as Asia, we find the share repurchase announcement uninspiring.