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Investment Research

Company Report

Guinness Anchor Berhad

Date: 1 August 2012

Drink moderately for now

GUIN has undoubtedly been a quiet performer. In the last decade, revenue has consistently grew every year at a CAGR of 8% per year while margin continues to be protected despite the fact the last decade was characterized by a period of volatile commodity prices and macro shocks. However, GUIN current share price will only translate into roughly 4% yield for investors in the near future. While GUIN will continue to grow, it will be hard for dividend to grow fast enough to warrant investors interest at current share price. Based on DDM, we derived a fair value of RM13.00 for GUIN. We have also assigned an Average conviction rating to GUIN. Overall, we have a NEUTRAL call on GUIN.

Neutral
Fair value Previous FV Share price Yield Capital gain Total return Conviction Stock code Market cap RM13.00 N/A RM14.00 +3.4% -7% -4% Average GUIN MK RM4,229m

Robin HU
robin@nonameresearch.com

nonameresearch.com | 1 August 2012

A Strong Track Record Indeed

Strong revenue growth, consistent margin
Good CAGR revenue growth of 8%. GUIN has a very resilient business model. Revenue never declined in the period between 2001-2011 despite the fact that this period encompasses the 2001 tech crash and 2008 Lehman collapse. Between 2003-2011, revenue grew an average 8% per annum This ranged from a low of 1.1% in 2003 to a high of 11.4% in 2008

Figure 1: GUIN revenue growth and net income margin 2003-2011

Source: GUIN

Consistent NI margin at circa 11%. GUIN has a stable net income margin. Net income margin has consistently been around 11%. In the last few years, net income margin has gradually expanded due to (1) good control of raw material and packaging cost (2) no increase in excise duty.

Steady dividend growth

Resulting in steady dividend growth at 8% per annum. A revenue growth of 8% per annum and a constant net income margin of 11% imply that net income should be growing at close to the rate of revenue as well. This is indeed the case as net income grew 11% per annum between 2003-2011. The higher growth rate of 11% compared to 8% is due to margin expansion in recent years. A 11% per annum net income growth translates to circa 6%-8% in dividends. Except for a stagnant period between 2005-2007, DPS has grown steadily from 27 sen in 2003 to 45 sen in 2011.

nonameresearch.com | 1 August 2012

Figure 2: GUIN DPS and dividend yield 2003-2011

Source: GUIN

nonameresearch.com | 1 August 2012

Valuation and Conclusion

Valuation method and key assumption
Based on DDM, we derived a fair value of RM13.00 for GUIN. At current price of RM14.00, this represents a potential total return of -3.6% comprising 3.4% dividend yield and 7% capital loss. We expect GUIN to generate 64 sen in EPS for 2012. On a payout ratio of 75%, this translates 48 sen in DPS We also expect EPS to grow at least high single digit in the short term

Key risks
Low dividend yield. While GUIN operational performance has been excellent, the stock appears expensive. At current price of RM14.00, GUIN is only yielding 3.4% on our assumed DPS of 48 sen. In fact, while GUIN DPS has been growing at mid to high single digit annually, the share price has ascended too rapidly, depressing the dividend yield. As can be seen below, GUIN dividend yield has been on a steady decline. Bear in mind that declining dividend yield is not a development unique to GUIN but affects other consumer dividend stocks as well. In our view, such declining dividend yield, while no doubt influenced by the ultra low interest rate environment globally, is a negative for dividend stocks as a trend reversal in yield would result in significant capital loss for such stocks.

Conclusion
GUIN has undoubtedly been a quiet performer. In the last decade, revenue has consistently grew every year at a CAGR of 8% per year while margin continues to be protected despite the fact the last decade was characterized by a period of volatile commodity prices and macro shocks. However, GUIN current share price will only translate into roughly 4% yield for investors in the near future. While GUIN will continue to grow, it will be hard for dividend to grow fast enough to warrant investors interest at current share price. Based on DDM, we derived a fair value of RM13.00 for GUIN. We have also assigned an Average conviction rating to GUIN. Overall, we have a NEUTRAL call on GUIN.

nonameresearch.com | 1 August 2012

Historical Statistics
Profit and Loss (FYE-Jun)
1,600 1,400 1,200 1,000 1,489

Payout Ratio (FYE-Jun)

120% 100% 80% 60%

1,195 886
952

1,285

1,359

106%
86% 84% 82% 81%

976

1,072

79%

71%

78%

75%

RM m

800 600 400 200 -

797

40%
78 98

108 2005

128

113 2007

126

142

153

181

20%

0% 2003 2004 2006 2008 2009 2010 2011

2003 2004 2005 2006 2007 2008 2009 2010 2011 Revenue Net income
Payout ratio

Net Income Margin (FYE-Jun)

14.0% 13.1% 11.1% 11.3%

EPS and DPS (FYE-Jun)

70

12.2% 10.5% 10.5%

11.0% 11.2%

60

12.0%
10.0% 8.0%

60
50 47 51

9.7%

42
32 36 37 30

42

sen

40

6.0%
4.0% 2.0%

30
20 10

26 27

28

30

30

33

37

41

45

0.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011
NI margin

2003 2004 2005 2006 2007 2008 2009 2010 2011

EPS per 2011 num of shares DPS per 2011 num of shares

Revenue Growth (FYE-Jun)

12.0% 10.0% 8.0% 6.0% 11.2% 11.4%

Dividend Yield (FYE-Jun)

8.0% 9.6% 7.0%

9.8% 7.4% 7.6% 5.7%

7.0%
5.9% 6.2% 6.0% 5.3% 5.5%

6.0%
5.0% 4.0%

5.3%

5.1%

4.4%

4.0%
2.0% 1.1%

3.0%
2.5% 2.0% 1.0%

0.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011
Revenue

0.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011
Net DPS yield

nonameresearch.com | 1 August 2012 Rating structure The rating structure consists of two main elements; fair value and conviction rating. The fair value reflects the security intrinsic value and is derived based on fundamental analysis. The conviction rating reflects uncertainty associated with the security fair value and is derived based on broad factors such as underlying business risks, contingent events and other variables. Both the fair value and conviction rating are then used to form a view of the security potential total return. A Buy call implies a potential total return of 10% or more, a Sell call implies a potential total loss of 10% or more while all other circumstances result in a Neutral call.

Disclaimer This report is for information purposes only and is prepared from data and sources believed to be correct and reliable at the time of issue. The data and sources have not been independently verified and as such, no representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this report. The information and opinions in this report are not and should not be construed as an offer, recommendation or solicitation to buy or sell any securities referred to herein. Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction.