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Q2 2022 hedge fund letters, conferences and more
What’s interesting about Carlsberg is that goodwill accounts for a massive 40% of assets
Highlights:
- Poor organic growth outlook for European markets
- Acquisition strategy to scale into Asian growth market
- Premiumization to get margin back on track
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Carlsberg to cease Russian operations
Carlsberg to cease Russian operations
Russia constituted an important market for Carlsberg
- The Russian market accounted for 10% of its 2021 revenue
- Following its announcement, Carlsberg will exit the Russian market within 12 months
- The divestment includes the disposal of Carlsberg’s brand Baltika which has a market share of 27% in Russia
- The share price dropped by almost 25%
Revenue breakdown 2021
Poor organic growth outlook for European markets
- Carlsberg has a dominant market share in 6 Western European markets
- Though, the average consumption of the Western European market (at 63 liters) is already high
- The beer market of Western Europe seems saturated
- For the past 5 years, Carlsberg’s revenue from Western Europe has grown at an average of 2% only
Eastward expansion to unlock new growth engine
- The importance of the Asian market to Carlsberg has grown significantly over the past decade
- As of 2021, the revenue contribution of Asia amounted to 29%, compared to 14% in 2012
- Besides the Chinese market, the company also focuses on expanding to India and Vietnam
Acquisition strategy to scale into Asian growth market
- Beer consumption in Asia is much lower than in Europe, but has been in a rising trend
- Carlsberg mainly relies on acquisitions of local brands to tap into foreign markets
- This helps to immediately establish a dominant presence in different countries
Premiumization to get margin back on track
- In the context of rising local competition, Carlsberg realigned its strategy
- Instead of entering a price competition, the company decided to focus on premiumization
- Hence, it focuses on its premium brands and has started to discontinue its low margin products
- This could help to revert the falling gross margin
Consensus is bullish
- Analyst consensus has a tendency toward a BUY recommendation
- Over the past 4 months, analysts have maintained their target price
- They believe that Carlsberg can maintain revenue growth despite exiting the Russian market
Get financial statements and assumptions in the full report
P&L – Carlsberg
- In contrast to the analyst consensus, I expect weaker net profit in 22E as Russia was a significant profit contributor in the past
Balance sheet – Carlsberg
- Increasing goodwill reflects ongoing acquisition strategy to tap into foreign markets
- I expect Carlsberg to reduce its long-term debt that it acquired mainly during the pandemic
Cash flow statement – Carlsberg
- Rising dividends following the management’s announcement to increase dividend per share
Ratios – Carlsberg
- Exiting the Russian market has been a drag on short-term revenue growth that can only be partly compensated by higher growth prospects in Asia
- Cash conversion cycle is negative due to long payables deferral period
Stock Picking Checklist
Can this company be a ten bagger?
Free cash flow – Carlsberg
- In the past, free cash flow has been very volatile due to abrupt changes in working capital
Value estimate – Carlsberg
- I expect weaker revenue growth than consensus, but similar margin
- To value the company, I use FCFF and a terminal growth rate of 2%
Key risk is legal issues in foreign markets
- Exposure to challenging legal environments especially in Asian markets
- Lower than expected return from acquisitions
- Failure to keep up with consumer trends
Conclusions
- European beer consumption is already high, leading to low growth expectations
- Growth engine Asia might take time to fully compensate for lost Russian revenue
- Focus on premium products to enhance margin
Download the full report as a PDF
Article by Andrew Stotz, Become a Better Investor.
