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How Long before Carlsberg Recovers from Abandoning Russia?


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

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