Carlsberg Earnings: Q3 in Line, but We Lower Valuation on Russia Exit

Carlsberg CARL B reported a broadly in-line third-quarter trading update, but we are lowering our fair value estimate to DKK 870 per share from DKK 970 due to the value destruction created by the loss of the company’s Russian business. Carlsberg had been attempting to find a buyer for Baltika Breweries in order to comply with sanctions against Russia, but we now believe it will not receive any compensation for these assets, and we assign a zero value to them. The market appears to have anticipated this development, and we believe the stock is fairly valued.

Carlsberg narrowly missed our third-quarter forecasts, but there were some positives from the trading update. Revenue growth was marginally above that of competitor Anheuser Busch InBev, and management reiterated full-year guidance of organic operating growth of 4% to 7%. Our full-year estimate is at the lower end of that range.

Third-quarter revenue grew 5.8% organically, and was flat on a reported basis, with price/mix of 9% and an organic volume decline of 3%. The good news is that inflationary pressures, while still present, appear to have begun to fade. Price/mix was similar to those of the second quarter, but down from the 12% reported in the first quarter. The bad news is that volume is finally cracking under the pressure of the stacked price increases. The third quarter was the first time this year volume had turned negative. We anticipate inflationary pressures to ease further from the fourth quarter, however, and more balanced growth between volume and price/mix next year. Carlsberg initiated a share repurchase program of DKK 1 billion, perhaps indicating management shares our view that the cost environment is moderating. With the shares fairly valued, we doubt this will create long-term value and think the capital would have been put to better use in building share in some of Carlsberg’s premiumizing markets such as Southeast Asia.