Wednesday, 19 August 2015

Carlsberg - Russia, profit warnings and levels

It is almost a year since I last wrote specifically about Carlsberg the Danish brewer (link here) when a big dump in sentiment around the Russian/Eastern European business led me to write:

'A day for a starter position?  Despite the scary technical look of the Carlsberg 3 year chart sub DKK500...yes'.

That actually proved to be a reasonable call with the share ending up nicely above the DKK600 level as recently as a quarter ago.  But as the far right of the graph shows this is not the case now.

Now the reason for this fall is relatively easy to understand.  The company cut profit hopes...

'Carlsberg said it expects "organic operating profit" to decline slightly, versus a previous forecast of growth in the mid to high single digits, with growth in Asia unable to offset weaker performances in Europe exacerbated by instability in Ukraine and Russia'.

...and it is easy to see the Eastern European lag:

With Eastern Europe being just under 30% of profits (and Russia c. 20% alone) issues here have impacted.

Look closely at the geographic chart above again.  I note that the company's price-mix remained excellent at 5% but this hid a non-FX offsetting shift in the Eastern European price-mix.  Let's not forget that the fall of currencies like the Russian ruble have been phenomenal: 

By contrast Asia was phenomenal.  Part of the reason for this latter occurrence is the continued growth of strong emerging brads such as Tuborg.  

If you factor in the new 'organic operating profit' to decline slightly then Carlsberg will end the year generating around a DKK8bn operating profit (with probably over DKK5bn in free cash).  That puts the company's EV/ebit prospective rating around x14 with a free cash flow of around 4.2% (current dividend yield c. 1.7%).  That's not super cheap...but given the low sentiment towards emerging market and related companies currently it is getting there especially given Carlsberg's good brands.  

You know what I am going to conclude?  If you can buy (at least for a trade) Carlsberg shares below DKK500 you should - just as I noted a year ago.  

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