Apb presentation eng leetanwong

3/28/2012

1

Asia Pacific Breweries Limited

Research Analysts

ENG You Si (Isaiah) | George LEE Ye Han

Rachel TAN Si Jing | WONG Hong Wei

Recommend BUY with target price of $52

APB Overview

• Brewing and sale of beer and related products

• Headquartered in Singapore

• Over 40 Brands

• Catering needs through 30 brewery operations

Economic & Industry Analysis

Company Analysis

Accounting Analysis

Profitability & Risk Analysis

Recommendation Valuation Analysis

Industry: Beverages (Alcoholic)

Porter’s 5 Forces


Company Analysis

Accounting Analysis



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3

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4

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5

5

Beer Industry Intensity of Competitive Rivalry

Power of Suppliers

Power of Buyers

Threat of a New Entrant

Threat of a Substitute Product

HIGH

LOW

Porter’s 5 Forces


Company Analysis

Accounting Analysis



Supplier Power: Low

Large number of farmers as suppliers

Low switching costs for brewers

Buying Power: High Inelastic demand for beer but low consumer

brand loyalty

Wholesalers: control over purchases

Retailers: limited shelf spaces & multiple

brands to choose from

Threats of Substitutes: Medium Beer has strong consumption position

But other alcoholics beverages (e.g. Spirits)

have increased in consumption

Beer brewers forced to adjust pricing

Threats of New Entrants: Medium High fixed costs to invest in equipment,

buildings, ingredients, recipes & HR for beer

brewery production

Small breweries are enter market only when

offering unique products to niche markets

Competitive Rivalry: High

Breweries produce at near capacity to achieve EOS to overcome high fixed costs

Many consolidated to cut loss & reduce costs of production

High costs of advertising to differentiate products

SWOT


Company Analysis

Accounting Analysis



Strengths

Consistent, high quality products

Strong brand equity

Significant flexibility for localization

Weaknesses Small presence in top beer consuming

countries

Significant reliance on Tiger Beer

brand

Opportunities Increasing demand in:

Emerging markets (Russia, India)

Non-alcoholic beverages

Threats Government regulations

Global economic slowdown

Industry consolidation pushing prices

down

APB’s Objective


Company Analysis

Accounting Analysis



To be the leading brewery group

in the Asia Pacific region

3/28/2012

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Aggressive multinational marketing strategy


Company Analysis

Accounting Analysis



Core group of beer brands distributed

across multiple markets

Supports brands with aggressive, multinational marketing strategy –

high marketing expenditure 52% of total operating expenses in year 2011

Distributed across

Asia Pacific region

Portfolio of breweries via active acquisitions


Company Analysis

Accounting Analysis



Acquisitions &

Divestments

IN YEAR 2011

•Divestment of stakes in

Chinese brewery - new

focus on premium

segment in China

• Investment in a

97.69% stake in

brewery in Solomon

Islands

Produces multi-market

core group of brands

Localized beer brands in each country

Accounting policy

• Compliant with FRS

– 2010: Only restatement for accounting policy

Total Equity ($ ‘000)

Currency Translation Difference

(20,045)

Total Equity ($ ‘000)

Currency Translation Difference

(15,570)

Share of JV and associated companies’ reserves

(4,475)

Other comprehensive loss

(20,045)


Company Analysis

Accounting Analysis



No cause for concern

Accounting Policy

• Depreciating for Fixed Assets

APB Limited Useful life

Leasehold Land Lease term

Building 10-60 yrs

Plant and Machinery 5-40 yrs

Other fixed assets

Motor Vehicles 4-10 yrs

Office equipment, Furniture

2-15 yrs

Others 5-20 yrs

Carlsberg Useful life

Buildings 20-40yrs

Technical installations 15 yrs

Brewery Equipment 15 yrs

Filling and Bottling Eqmt 8-15 yrs

Warehouse Installations 8 yrs

On-trade dist. eqmt 5 yrs

Other Plant and Eqmt 5-8 yrs

Returnable packaging 3-10 yrs

Hardware 3-5 yrs


Company Analysis

Accounting Analysis



Slight cause for concern

Accounting Policy

• Goodwill

– Annual Impairment tests

Goodwill Gained on acquisition (2010) = $417 million Change in non-current assets (2010) = $479 million


Company Analysis

Accounting Analysis



No cause for concern

41.5% increase over 2009

Quality of Disclosure

• Less transparent segment reporting

– 2010

– 2011


Company Analysis

Accounting Analysis



No cause for concern, but not positive

Export markets

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Quality of Disclosure

• Discontinued operations

FRS 105: An entity shall classify a non-current asset as held for sale if its carrying amount will be recovered principally through a sale transaction rather than continuing use.

30 Sept 2009 Feb 2010

Continuing Operations

Status of 2 Indian subsidiaries:

Asset fully disposed,

sale completed


Company Analysis

Accounting Analysis



Slight cause for concern

Earnings Quality

• Excellent Earnings

Quality

• AR accounts for:

– Exceptional items (Disposal)

– Strategic Thinking behind disposal

2011 Total Equity ($ ‘000)

Profit Before: Taxation Exceptional Items

619,178

Exceptional Items 38,162


Company Analysis

Accounting Analysis



Signals clarity & transparency

Profitability Analysis

• (Net) Profit Margin increasing

• Steady EBITDA Margin

11.0%

14.3% 15.4%

6.1%

8.9% 8.1%

16.0%

7.2%

9.5%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2009 2010 2011

(Net) Profit Margin

APB Carlsberg Foster's

19% 22% 23%

21% 22% 20%

31%

16%

70%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2009 2010 2011

EBITDA Margin



Company Analysis

Accounting Analysis



Positive signal for profitability

Operating Efficiency Analysis

• Higher total assets turnover & inventory turnover ratio than

competitors

9.41

8.37 8.69

6.77 7.44 7.44

1.37 1.82 1.80

0.00

2.00

4.00

6.00

8.00

10.00

2009 2010 2011

Inventory Turnover


1.07 1.09 1.10

0.43 0.44 0.44

0.75 0.78 0.74

0.00

0.20

0.40

0.60

0.80

1.00

1.20

2009 2010 2011

Total Assets Turnover

APB Carlsberg Foster's Group


Company Analysis

Accounting Analysis



Positive signal for operating efficiency

Liquidity Analysis

• Low quick ratio, may signal liquidity risk

• Strengthening current ratio

Current Ratio

2009 2010 2011 Average

APB 1.13 1.16 1.40 1.23

Carlsberg 0.59 0.57 0.71 0.63

Foster's 4.03 4.42 3.66 4.04

Quick Ratio

2009 2010 2011 Average

APB 0.37 0.37 0.38 0.37

Carlsberg 0.42 0.38 0.49 0.43

Foster‘s 1.77 2.20 1.59 1.85


Company Analysis

Accounting Analysis



Signals liquidity risk, but not a cause for concern

Financial Stability Analysis

• Debt to capital ratio more than doubled

• Better liabilities to equity compared to Carlsberg

• Altman Z-score = 8.02 (Low bankruptcy risk)

Total Debt/Total Capital

2009 2010 2011 Average

APB 0.10 0.26 0.23 0.20

Carlsberg 0.41 0.37 0.35 0.38

Foster's 0.00 0.00 0.01 0.00

Total Liabilities/Total Equity

2009 2010 2011 Average

APB 0.73 0.73 0.64 0.70 Carlsberg 1.34 1.14 1.14 1.21

Foster's 0.25 0.22 0.24 0.24


Company Analysis

Accounting Analysis



0.38

Positive signal for financial stability

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Forecast – Income Statement

• Projected growth segmented by regions

• 5 year CAGR used (except North Asia)

• 3% terminal growth rate

Revenue Growth Projection ($ in 000,000)

2007 2008 2009 2010 2011 CAGR (5 Yr)

CAGR

Used

South & Southeast Asia 514 548 548 769 979 17.49% 17.49%

Indochina/Thailand 662 771 832 935 1,033 11.80% 11.80%

North Asia 5 14 15 23 28 57.71% 26.33%

Oceania 599 656 636 768 919 11.27% 11.27%

Corporate Office 4 8 10 15 15 37.22% 37.22%


Company Analysis

Accounting Analysis



Forecast – Balance Sheet

• Most assets and liabilities items used average as

percentage of sales

– Most figures fluctuated from year to year

• Items not related to direct operations held constant

– Joint venture, associated companies


Company Analysis

Accounting Analysis



Forecast – Assumptions validity

• Actual future performance could differ significantly

– Operates in highly volatile Asia-Pacific region

– Aggressive expansion strategy

• LT debt grew from S$24m to S$368m in year 2010


Company Analysis

Accounting Analysis



Valuation - RIM

$ in '000 2012F 2013F 2014F 2015F 2016F

Net Income 334,854 379,409 430,559 489,366 557,083

Beg BV 1,446,587 1,712,483 2,024,751 2,390,256 2,816,967

Abnormal Earnings (NI - Cost of Equity *BV) 256,738 286,935 321,223 360,292 404,966

Shares Outstanding 258,200 258,200 258,200 258,200 258,200

Abnormal EPS (AE/Shares Outstanding) 0.9943 1.1113 1.2441 1.3954 1.5684

PV of Abnormal EPS 0.9640 1.0222 1.0857 1.1553 1.2321 Sum of PV of EPS 5.4592 PV of TV of A EPS 52.8758 PV of all Abnormal EPS 58.3350 Current Eq. BV 5.6026 Estimated Current Share Price (Feb 2012) 63.94

Terminal Growth

3.00%


Company Analysis

Accounting Analysis



Valuation - FCFF

Year 2012 2013 2014 2015 2016 EBIT 604,553 688,445 784,753 895,478 1,022,979 Less : Tax 183,700 200,381 228,412 260,640 297,751 Add: Depreciation + Amortisation 80,338 91,487 104,285 118,999 135,943 Less : Change in WC 99,506 114,077 130,961 150,564 173,378 Less : Cap Ex 110,340 131,178 155,101 182,604 214,274 FCFF 291,346 334,296 374,565 420,669 473,519

Fair Present Value ($ in '000, except Share Price) PV of FCF 1,611,692 Terminal Value 22,169,283 PV of Terminal Value 17,205,724 Enterprise Value 18,817,416 Add: Cash 90,060 Less: Debt 434,629 Fair Value of Equity 18,472,847 Shares Outstanding 258,200 Fair Value / Share (S$) 71.54


Company Analysis

Accounting Analysis



Sensitivity Analysis - RIM

Cost of Equity

Terminal Growth Rates

63.9376 5.40% 5.90% 6.40% 6.90% 7.40% 7.90% 8.40% 8.90% 9.40%

1.00% 39.34 34.81 31.12 28.06 25.49 23.29 21.40 19.75 18.30

1.50% 43.13 37.66 33.32 29.80 26.87 24.41 22.31 20.50 18.92

2.00% 48.02 41.25 36.03 31.88 28.51 25.71 23.36 21.35 19.62

2.50% 54.61 45.90 39.44 34.45 30.48 27.26 24.59 22.34 20.42

3.00% 63.94 52.15 43.84 37.67 32.91 29.13 26.05 23.50 21.35

3.50% 78.18 61.00 49.76 41.84 35.95 31.41 27.80 24.87 22.44

4.00% 102.59 74.51 58.15 47.44 39.89 34.28 29.96 26.52 23.72

4.50% 154.12 97.68 70.96 55.38 45.19 38.00 32.66 28.55 25.27

5.00% 334.48 146.58 92.91 67.50 52.70 43.00 36.17 31.09 27.17

0.00

100.00

200.00

300.00

400.00

Shar

e P

rice

Terminal Growth

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

0.00

100.00

200.00

300.00

400.00

Shar

e P

rice

Cost of Equity

5.40%

5.90%

6.40%

6.90%

7.40%

7.90%

8.40%


Company Analysis

Accounting Analysis



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Sensitivity Analysis - FCFF

WACC

Terminal Growth Rates

5.20% 5.70% 6.20% 6.70% 7.20% 7.70% 8.20% 8.70% 9.20%

1.00% 39.13 34.69 31.09 28.13 25.65 23.55 21.73 20.16 18.77

1.50% 43.95 38.41 34.04 30.52 27.62 25.19 23.12 21.34 19.79

2.00% 50.28 43.13 37.69 33.42 29.96 27.12 24.73 22.70 20.96

2.50% 58.94 49.34 42.33 37.00 32.80 29.41 26.62 24.28 22.29

3.00% 71.54 57.84 48.42 41.55 36.32 32.20 28.88 26.14 23.85

3.50% 91.56 70.21 56.77 47.53 40.79 35.66 31.62 28.36 25.67

4.00% 128.26 89.85 68.90 55.71 46.65 40.04 35.01 31.04 27.85

4.50% 217.39 125.86 88.18 67.62 54.69 45.80 39.31 34.37 30.48

5.00% 752.15 213.31 123.51 86.54 66.38 53.69 44.96 38.60 33.75

0.00

100.00

200.00

300.00

400.00

Shar

e P

rice

Terminal Growth

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

0.00

100.00

200.00

300.00

400.00

Shar

e P

rice

WACC

5.20%

5.70%

6.20%

6.70%

7.20%

7.70%


Company Analysis

Accounting Analysis



Sensitivity Analysis

0.00

100.00

200.00

300.00

400.00

5.40

%

5.90

%

6.40

%

6.90

%

7.40

%

7.90

%

8.40

%

8.90

%

9.40

%

Shar

e P

rice

Terminal Growth

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

0.00 50.00

100.00 150.00

200.00 250.00

300.00 350.00 400.00

Shar

e P

rice

Cost of Equity

5.40%

5.90%

6.40%

6.90%

7.40%

7.90%

8.40%

0.00

100.00

200.00

300.00

400.00

Shar

e P

rice

Terminal Growth

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

0.00

100.00

200.00

300.00

400.00

Shar

e P

rice

WACC

5.20%

5.70%

6.20%

6.70%

7.20%

7.70%

8.20%


Company Analysis

Accounting Analysis



FCFF

RIM

Relative Valuation


Company Analysis

Accounting Analysis



Technical Analysis - Indicators

MACD bullish/bearish crossover

RSI – trending along 50% mark

Momentum –trending along 0 point


Company Analysis

Accounting Analysis



Technical Analysis - Charts

Indication

Trending upwards along

the support line which

indicates a positive outlook

and upward movement in

the share price.

Support line which

indicates an upwards

trending pattern along this

line.


Company Analysis

Accounting Analysis



Flag

Support

Line

Test of Mean Returns

Hypothesis Testing :

Null hypothesis : mean = 0 against

Alternative hypothesis : mean ≠ 0 at 95%

significance level

Sample Size: 816

Sample Mean: 0.001473

Std Deviation: 0.060123

z statistic: 0.699871

Given Z = 0.699871 < 1.96, there is

insufficient to conclude that the returns

deviates from the zero. The means of the

returns is close to zero implies that the returns

are not very volatile in general , which would

thus imply less risk.


Company Analysis

Accounting Analysis



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Conclusion

• Economic

• Industry

• Company Business Analysis

• Accounting

• Profitability

• Valuation Financial Analysis


Company Analysis

Accounting Analysis



•Growth stage

•Aggressive expansion strategy

•Effective distribution channel

•Conservative valuation with the

lower of 0.5% decrease in

terminal growth or 0.5%

increase in cost of equity

Asia Pacific Breweries Limited Recommend BUY with target price of $52

Target Price: $ 52.00

Current Price: $ 35.00

Q&A Appendix: Relative Valuation

Companies PE PB P to CFO PS 1 SAPPORO HOLDINGS LTD 37.37 0.92 5.11 0.25 2 KIRIN HOLDINGS CO LTD 133.13 1.06 4.57 0.43 3 ANHEUSER-BUSCH INBEV NV 19.71 2.61 7.83 2.50

4 CHINA RESOURCES ENTERPRISE 23.26 1.76 10.83 0.58

5 ASAHI GROUP HOLDINGS LTD 15.26 1.23 7.25 0.54 6 SABMILLER PLC 24.04 2.67 14.13 3.69

PE PB P to CFO PS Mean 42.13 1.71 8.29 1.33 Median 23.65 1.49 7.54 0.56 Min 15.26 0.92 4.57 0.25 Max 133.13 2.67 14.13 3.69

APB Per Share 2011 ratios Ratios Min Median Max Mean Net Profit After Tax Per Share 1.65 PE 25.24 39.12 220.21 69.68 Net Book Value Per Share 5.21 PB 4.81 7.77 13.92 8.90 Net CFO Per Share 1.84 PC 8.42 13.88 26.02 15.26 Sales Per Share 10.71 PS 2.69 5.99 39.52 14.27

Appendix: TA – Indicators

Interpretation of Indicators

MACD

The upwards move is called a bullish crossover and the downwards move a

bearish crossover

A crossing of the MACD line through zero happens when there is no difference

between the fast and slow EMAs. A move from positive to negative is bearish

and from negative to positive, bullish. Zero crossovers provide evidence of a

change in the direction of a trend but less confirmation of its momentum than a

signal line crossover.

RSI

RSI readings greater than the 70 level are considered to be in overbought

territory, and RSI readings lower than the 30 level are considered to be in

oversold territory. In between the 30 and 70 level is considered neutral, with the

50 level a sign of no trend.

Momentum

When the momentum indicator crosses above the zero line. The crossing of the

zero line implies that the price of the stock, future, or currency pair is reversing

Momentum indicator crosses below the zero line. A cross of the zero line can

generally mean two things: the future, currency pair, or stock's price has topped

out and is reversing or that the price has broken below recent lows, either way, a

bearish signal course, either by having bottomed out or by breaking out above

recent highs, a bullish signal.

Apb presentation eng leetanwong

Business

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