Incorporated in Dec 1969, CBMB has been a long-standing player in the Malaysia beer and stout market. It manufactures and distributes beer, stout, wine, spirits, and other beverages in the Malaysian market via its subsidiaries: Carlsberg Marketing Sdn Bhd (CMSB), Luen Heng F&B Sdn Bhd (LHFB) with investments in associates, Lion Brewery (Ceylon) and Taiwan's Carlsberg Cottingham Ltd. Carlsberg Singapore Pte Ltd is been a recent addition to the Carlsberg Group in mid-2009. (Annual Report)
The acquisition and joint venture with the above entities over the years enabled CBMB to extend and offer a wide variety of locally brewed and imported beers and stouts to the Malaysian market, adding to and strengthening its market position. CBMB's brand portfolio consists of seven of the world's top international beer brands: Its flagship brand, Carlsberg, Tuborg, Corona, Budweiser, Stella Artois, Foster's and Beck's.
This method has been used on the basis that Carlsberg Bhd has a regular revaluation and replacement policy. Items of property, plant and equipment are stated at cost/valuation less any accumulated depreciation and any accumulated impairment losses. Furthermore, all current assets and inventories have been stated at the lower of cost and net realisable value.
In the calculation of the net assets method of share valuation for the years 2006 to 2009, the customised computer software that is not integral to the functionality of the related equipment is recognised as an intangible asset, and therefore has not been included.
The carrying amounts of assets except for financial assets (other than investments in subsidiaries, associate and jointly controlled entity) and inventories are reviewed at each reporting date to determine whether there is any indication of impairment.
Another reason is that liabilities have also been accurately quantified. Lastly, certain buildings and leasehold land of the Group and of the Company were revalued in 1981 by independent professional qualified valuers.
P/E Ratio (Earnings) Method of Valuation (Appendix 3)
This method of valuation is chosen as it is the most widely reported and used valuation by investment professionals and the investing public. It also is used mostly to estimate the performance of companies whose shares are traded in public.
There are several variations in this method, which can result in different valuations. For example, investors may use different forecasts for the firm's earnings or the mean industry earnings over the next year. The previous year's earnings are often used as a base for forecasting future earnings, but the recent year's earnings do not always provide an accurate forecast of the future.
It is chosen as it is easy to be implemented and is based on actual market values. In the valuation, the competitor's (GAB) P/E ratio can be used. In contrast, the earnings yield valuation method does not permit the usage of the competitor's Earnings per Share (EPS) value. This explains why the P/E ratio method has been employed instead of the earnings yield valuation method.
As companies are most commonly valued via earnings (also net income or net profit), they are compared with companies in a similar industry according to EPS. The EPS figure itself does not signify a lot. Investors may need to employ the P/E ratio to look at Carlsberg Bhd's earnings relative to its price.
Lastly, the P/E ratio is chosen as it reflects investors' expectations on the company's future growth prospects. Therefore, it acts as a market performance measurement tool, reflecting market expectation to a credible extent.
Dividend Valuation Model (Appendix 4)
This approach values shares at the discounted value of future dividend payments. A share is worth the present value of all future dividends. As it values shares on the actual cash flows received by investors, it is theoretically the most correct valuation model.
This valuation model is used as the dividends distributed by Carlsberg Bhd have been decreasing over the years. Negative dividend growth does not allow for the dividend growth model to be used.
In this case, we have used the constant growth rate dividend valuation model; with the assumption that Carlsberg Bhd's dividend is constant by using the average amount for the years 2005 to 2009.
Comparison of the Market Share Price
Analysis on Bursa Security Price (Appendix 5)
Carlsberg Bhd was in a bear market trend for approximately 4 years from years 2005 to 2008 as its share price decreased from RM5.43 to RM3.87 per share. A notable bear market was in 2008, which could be due to the market recession commencing in the United States. However, Malaysia's economy was not really affected by the recession, resulting in Carlsberg Bhd being able to escape the effects of recession in the next year (2009) and manage a modest growth of RM4.01 per share. Such growth might be due to the optimistic perception by investors on the company's future growth since the company has successfully acquired the entire equity interest of Carlsberg Singapore Pte Ltd in September 2009.
Analysis on Income Based Valuation
The above graph illustrates a lower market share price based on the P/E ratio method of valuation compared to the market share price. This could be due to the fact that the components of the formula used in calculating the price do not truly reflect the company's performance.
Carlsberg Bhd's share value is calculated using GAB's P/E ratio. Although both companies are listed, the earnings growth for both companies may be varied in terms of the size of the investment of the company, location and market potential.
In 2007, the Bursa Security price depicted a drop to RM4.88 per share, whereas the market price from the income based valuation method increased to RM4.07. This inconsistency was due to an increase in GAB's P/E ratio from 12.85 (2006) to 15.82 (2007) but there was a fall in Carlsberg Bhd's EPS to 25.7 during the year. Consequently, the valuation method shows a growth in market price by RM0.46 in 2007. Hence, using another company's P/E ratio to value Carlsberg Bhd does not always reflect its true market.
The income based valuation model is merely a mechanical valuation tool, which makes it subject to the adage 'garbage in, garbage out'. Tiny differences in inputs can result in large changes in the value of a company. Besides, the P/E ratio's denominator (EPS) is based on accounting conventions related to a determination of earnings that is susceptible to assumptions, interpretations and management manipulation. In a nutshell, the quality of the P/E ratio is only as good as the quality of the fundamental earnings number.
Comment on Considerations
Carlsberg Bhd's P/E ratio is higher than GAB's for all years, resulting in a high P/E share price when bootstrapped to GAB's P/E ratio.
2005
Based on the average P/E share price of 3.73 (Appendix 6), there is an RM0.86 increase in share price for the year 2005. This is attributable to the increase in revenue of 10 per cent, primarily due to the price increases after the excise duty increases and growth in export sales. Another factor would be due to the share split exercise implemented in June 2005, possibly benefiting its market price, increasing share marketability. This initially leads to a minor decrease in share price but it eventually rises when investors are more interested in purchasing the company's shares at a lower price.
2006
In 2006, a slight decrease of RM0.12 was recorded, possibly due to the fact that the Group's associate company, The Lion Brewery Ceylon Ltd (TLBCL) had been operating in a challenging year as the Sri Lankan Government increased the duties for beer products twice in 2005 and the ensuing higher beer prices adversely affected sales and financial performance during the year.
2007
There was also a RM0.34 increase noted in year 2007's P/E share price. Carlsberg Bhd had a poor 1st half performance largely due to the earlier restructuring initiatives which were not successful and this was compounded by cost escalation particularly in packaging material costs but had recovered in the 2nd half of the year with improved results in the 3rd and 4th quarters of 2007. Furthermore, the duty paid malt liquor beverage market which had been declining recovered marginally in 2007.
2008
A larger decrease of RM0.60 in share price for year 2008 could be due to the significant increase in world prices of oil and commodity products and inflation rising to record levels in Malaysia during the 1st half of the year. This coupled with the significant cost escalation experienced for most of the year and the loss of the contract manufacturing export business to Carlsberg Singapore for 10 months could be a reason for the decrease in share price.
2009
In October 2009, the Group capitalized on its strong liquidity position to acquire Carlsberg Singapore for RM370 million, reducing cash flow and cash balance in the short term. There was also a rights issue payment made for TLBCL. These are possible reasons for a P/E share price decrease of RM0.50.
Advice to Investor
Using GAB's P/E ratio to compute the market value of Carlsberg Malaysia's share, we obtain a forecast price of RM6.10. (Appendix 7) The current market value on November 16, 2010, however stands at RM5.95. It is apparent that Carlsberg Malaysia's shares are undervalued and investors should take such opportunity to acquire more of their shares.
