Carlsberg Malaysia - Singapore acquisition

Carlsberg Malaysia has entered into an MoU with parent, Carlsberg A/S, to acquire 100% of Carlsberg Singapore for RM370 mn. This related party transaction will be put up for minority shareholder vote in late October. We view the deal positively, the price tag is fair, offers significant potential upside to future earnings and allows Carlsberg Malaysia to diversify geographically.

The price tag of RM370 mn implies a transaction P/E of 15.4x, based on Carlsberg Singapore’s actual FY08 net profit. However, at an analyst briefing Wednesday, management indicated that merger synergies could conservatively amount to RM22 mn in 2010E. The potential synergies are likely to result from Malaysia assuming contract manufacturing for Singapore (versus an external producer in Thailand) and lower logistics cost. Malaysia will not require any additional capex to take on the Singapore manufacturing contract.

Taking the contribution from Carlsberg Singapore and potential merger synergies into account, there is as much as 47% potential upside to Carlsberg Malaysia’s FY10E net profit, translating into a P/E of 11.3x. This is 23% below the market’s FY10E P/E of 14.7x. Even if the merger synergies are half of what is expected, there is as much as 22% potential to Carlsberg Malaysia’s FY10E net profit.

Carlsberg Malaysia had slashed its FY08 dividend payout to just 37% (from 99.5% in FY07) when it decided to look out for potential acquisitions. One of the terms of the transaction is a proposal for a dividend payout of 50-70%, which implies FY10E net dividend yield of 4.4-6.2% based on the prospective post-acquisition net profit base. This is attractive compared with the market’s net yield of 3.6%.

We upgrade Carlsberg Malaysia to an OUTPERFORM from Underperform with a new target price of RM5 (from RM2.80 previously). This spells 18% potential upside from current levels. Despite having risen 10% Wednesday, the stock has underperformed the market by 18% since our February 2009 downgrade.