Accelerate SAIL Strategy And Britvic Acquisition Will Strengthen Future Market Position

Key Takeaways

• Strategic acquisitions and market entries are poised to drive long-term growth, supporting revenue and market expansion.
  
• Efficiency improvements and gross margin recovery are expected to enhance net margins and operating profit growth.
  
• High leverage and macroeconomic challenges, combined with losses in key segments, threaten Carlsberg's margins and flexibility, amidst rising investments and uncertain growth in emerging markets.

Catalysts

Produces and markets beer and other beverage products in Denmark, China, the United Kingdom, and internationally.

• The launch of the Accelerate SAIL strategy with a new long-term top-line growth ambition of 4% to 6% CAGR is expected to contribute positively to Carlsberg's future revenue growth.
  
• The acquisition of Britvic is anticipated to provide margin and EPS accretion through cost synergies and increased exposure to the CSD category, which could improve operating margins and earnings.
  
• The buyouts in India and Nepal and entry into high-growth markets are seen as opportunities to capture long-term growth, supporting revenue and market share expansion.
  
• The integration of the Pepsi license in Kazakhstan and Kyrgyzstan by 2026 is expected to double the business size in Kazakhstan, potentially boosting future revenue growth.
  
• Efficiency improvements in the supply chain and the recovery of the gross margin are planned to provide operating profit growth ahead of revenue growth, enhancing net margins.

Carlsberg Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Carlsberg's revenue will grow by 11.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.1% today to 9.5% in 3 years time.
• Analysts expect earnings to reach DKK 9.9 billion (and earnings per share of DKK 74.94) by about February 2028, up from DKK 6.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as DKK8.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, down from 15.3x today. This future PE is lower than the current PE for the GB Beverage industry at 15.3x.
• Analysts expect the number of shares outstanding to decline by 1.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.47%, as per the Simply Wall St company report.

Carlsberg Future Earnings Per Share Growth

Risks

• The acquisition of Britvic and other businesses has significantly increased Carlsberg's net interest-bearing debt to EBITDA ratio, leading to a leverage of around 3.4x, which could impact financial flexibility and net margins until it's reduced to the target of below 2.5x by the end of 2027.
  
• The macroeconomic uncertainties, including weak consumer sentiment in key markets like China, could pose risks to revenue and operating profit growth if negative sentiment persists or worsens.
  
• The loss of the San Miguel brand in the UK will have an estimated negative impact on group operating profit, potentially affecting overall earnings as Carlsberg faces challenges in replacing these volumes with its own brands in the short term.
  
• With significant investments required in India and Nepal to capitalize on growth opportunities, the volatile and complex nature of these markets, combined with regulatory challenges, could impact Carlsberg's ability to grow revenue and maintain margins in the region.
  
• Increased investments in marketing and sales, along with ERP renovations and capability building, will result in a moderate rise in overall costs, which, if not offset by corresponding revenue growth, could impact net earnings and operating margins.

Valuation

• The analysts have a consensus price target of DKK936.857 for Carlsberg based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of DKK1190.0, and the most bearish reporting a price target of just DKK650.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be DKK103.6 billion, earnings will come to DKK9.9 billion, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 4.5%.
  
• Given the current share price of DKK795.2, the analyst price target of DKK936.86 is 15.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.