Morningstar | Carlsberg Emerges the Winner in 3Q With Strong Performance in Asia. See Updated Analyst Note from 01 Nov 2018
Carlsberg beat our forecasts for third-quarter revenue growth, reaping the rewards of its execution of its cost-saving programs and favourable weather in some key markets. We are raising our fair value estimate to DKK 743 from DKK 705 to account for the time value of money and slightly more optimistic near-term assumptions. We are reiterating our no-moat rating but acknowledge that this performance is likely to improve Carlsberg's returns on invested capital.Organic revenue growth was 9%, ahead of previous guidance, which implied 7.6% growth during the second half of the year, and ahead of our expectations. The biggest differential to our estimates came in Western Europe, where we significantly underestimated Carlsberg's organic volume growth of 10.7%. We do not believe this growth rate is sustainable, but there are reasons for optimism. The company was cycling a weak quarter a year ago, and the FIFA World Cup and warm weather probably also boosted volume. Price/mix was negative (down 2%), which would also have helped the company gain volume share in the region. While these factors are mostly temporary, it seems possible that the company's packaging innovation may give some support to near-term volume.
While growth may be temporarily inflated in Western Europe, we believe Carlsberg's growth in Asia is more sustainable. The company is executing extremely well; it is delivering cost savings from the SAIL '22 and Funding the Journey programs and investing this to good effect in growth in Asia, where third-quarter organic revenue growth was 11%. Furthermore, this growth was well balanced between price/mix and volume. During the quarter, Carlsberg increased its economic interest in Cambodia's Cambrew to 75% from 50%, and while Cambrew's volume share of 20% does not deliver the share improvement we would hope to see in order to award Carlsberg an economic moat, it is a sensible strategy to drive growth in the long term.
The 5% increase in our fair value estimate is driven by several factors: the time value of money (DKK 13 of the increase), faster growth assumptions over the next two years (DKK 10), higher margin assumptions (DKK 10), and a lower Stage II investment rate (a further DKK 5), driven by higher returns being generated on new invested capital as a result of the effective removal of costs from the business.
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