Carlsberg: Solid 2023 Results, But Value Case Still Not Compelling (CABGY)

Carlsberg (OTCPK:CABGY)(OTCPK:CABJF) stock has been on a tough run since I last covered the company in May. Shares of the Danish brewer have delivered a negative 18% total return in that time, significantly underperforming peers Heineken (OTCQX:HEINY)(OTCQX:HINKF) and Anheuser-Busch InBev (BUD) as well as global staples more generally.

While ultimately keeping my Hold rating in place due to valuation concerns, price elasticity was something that surprised me in a good way last time out, with Carlsberg’s beverage volumes proving much more resilient in the face of inflation-driven price hikes than I expected. That relationship did finally start to break down in the second half of last year, though both volumes and revenue still came in slightly ahead of consensus in H2 and the full-year. Coupled with a slight increase to longer-term financial goals, that was enough to send the shares around 4% higher on the day (Wednesday, February 7).

While improved revenue and EBIT targets are always welcome, I would note that 2024 guidance is actually slightly weaker than analysts had penciled in pre-results. These shares aren’t overly expensive at around 10x EBITDA, but I still think the value case here is lacking without a meaningful discount to better-positioned peers Heineken and AB InBev. As such, I maintain my Hold rating.

A Resilient Set Of Results

Better than expected price elasticity was a big plus-point back in early 2023, with Carlsberg still reporting virtually flat beverage volumes in core markets like the Nordics despite pulling off double-digit price increases to counter the impact of inflation on its cost base.

Volumes did finally soften in the back half of last year, though they still came in better than expected alongside revenue. With that, full-year total sales volumes landed at 125.1 million hectoliters, down around 0.5% year-on-year on an organic basis but slightly ahead of consensus. H2 organic volume fell 1.8% year-on-year, representing a softening on H1 (0.8% growth) as consumers finally started to push back harder against price increases. Even so, company-wide H2 volumes (60.3 million hectoliters) also landed a touch ahead of consensus.

Taking Q4 in insolation, virtually flat organic volume (-0.2%) performance looks resilient to me given the ~3% year-on-year decline in Q3, with price/mix taking organic revenues up over 9% year-on-year. Year-on-year organic volume and revenue growth showed improvement across all of the company’s reporting geographies (Western Europe, Asia and Central & Eastern Europe) compared to Q3.

Asian performance looked particularly bright given the weak macro environment in key markets like China and Vietnam, something I touched on when covering peer Heineken after Q3 results last year. In China, Carlsberg outperformed a flat market by around 5 points in 2023. Deterioration over the course of the year means the Chinese market turned negative in H2, which management said had stabilized in the early part of 2024. In Vietnam, macroeconomic weakness resulted in a roughly 5% decline in the overall market, with Carlsberg’s high-single-digit growth implying double-digit outperformance overall.

H2 revenue of DKK 35.8 billion (~$5.2 billion) and full-year revenue of DKK 73.6 billion (~$10.6 billion) were also both slightly ahead of consensus, while organic operating profit growth of 5.2% was within guidance.

Guidance Upped, But 2024 Will Be Softer

Longer-term revenue guidance has been upped a point to 4-6% annualized growth from 3-5% previously, with organic EBIT seen growing ahead of sales. While welcome, 2024 will actually be slightly softer, with organic EBIT growth seen in the 1%-5% range versus pre-results consensus implying around 7% growth.

As mentioned above, key faster-growing markets in Asia deteriorated sequentially in the back-half of last year and have remained broadly stable in the first few weeks of this year. Inflation is also still weighing on margins, while investments to support future growth will likewise limit operating leverage in 2024. Beyond that, management targets look fairly reasonable to me. Asian markets will recover at some point, while near-term investments and a gradual step-up in marketing should also support slightly higher sales growth.

We will aim at growing organic operating profit faster than revenue, and by that, deliver long-term margin expansion. The baseline for our updated growth ambition in 2024 being the first year of Accelerate SAIL. There are no changes to our ROIC focus or our capital allocation principles. To support our growth agenda, we will step up marketing investment levels in the coming years.

Consequently, marketing to revenue will increase from the current levels of 8% to 8.5% to around 9% in 2027 and eventually to around 10%. We will also increase sales investments to strengthen route to market, specifically in Asia, in markets such as China and Vietnam and later India.

Jacob Aarup-Andersen, Carlsberg CEO, Q4 2023 Earnings Call

In terms of operating leverage, I would note that margins remain below pre-COVID levels, with company-wide gross margin still around 5ppt below 2019 levels.

This should improve over time as inflation pressure on COGS moderate, contributing to positive operating leverage as SG&A expenses are seen flat overall. While Carlsberg’s premium beverage portfolio is light versus peers, it is nonetheless growing faster than lower-priced categories. This continues a longer-term structural trend which has seen the premium category outperform the wider beer market by a factor of two, as outlined by peer Heineken in an investor presentation last year. This should provide a tailwind to margins from price/mix.

Value Case Still Not Compelling

Carlsberg ADSs trade for $27.11 each as I type, with shares on the primary listing in Copenhagen going for DKK 940. That works out to an EV/EBITDA of circa 10x based on a current EV of ~DKK 152 billion (~$22 billion) and 2023 EBITDA of DKK 15.2 billion (~$2.2 billion).

While I wouldn’t describe that valuation as being rich, my main issue with Carlsberg is the lack of a discount to peers AB InBev and Heineken, which also trade for around 10x EBITDA. The problem here is that Carlsberg’s geographic footprint skews more to lower-growth European markets versus peers, while by management’s own admission it is under-indexed in the premium category.

Step-up in premium remains a key growth engine for us. We have attractive premium brands and portfolios, but nevertheless, we under-index in premium in most markets, and premium only accounts for 20% of our total volumes and 24% of our beer volumes.

Jacob Aarup-Andersen, Carlsberg CEO, Q4 2023 Earnings Call

Premium brands represent around 20% of Carlsberg’s total volumes as per above. While that likely maps to a higher share of revenue, the company will still lag Heineken (~40%) and AB InBev (~55%) on that metric. Without a discount to reflect this, Carlsberg shares continue to lack appeal versus larger peers, and I maintain my Hold rating as a result.

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