GAB - Stay Invested For Dividend Though Limited Upside

Brewery stocks appears have lost favor among investors, in start contrasts to the positive sentiment in the first half of 2013.

Although the sector was spared from higher taxes from the Budget 2014, volume demand for the malt liquor market has fallen short in the past two quarters.

GAB reported a declining 16.9% from the previous corresponding quarter to rm325.8 million. This was attributed to the company’s planned reduction in distributor stock levels. But the also indicates signs of weakening in consumer spending.

Domestic consumption has been robust over the past few years, fueled by easy and cheap credit. However, expect the outlook to be less rosy going forward.

The government is expected to continue with its subsidy rationalization plans for the foreseeable future – in order to rein in its budget deficit and public debt levels.

Weaker purchasing power would not bode well for spending on discretionary items such eating out and spending on beer. Thus, MLM volume demand may stay flattish.

Its share price are now (Nov 2013) trading roughly at 22 times annualised earnings for 2014, which may suggest limited upside gains in the near to medium term.

On a more positive note, shareholders can still depend on steady dividend income from the company. Cash flow from operations remain stable while its balance sheet is strong with net debt of just rm29 million as at end Sept 2013.

Assuming a payout ratio similar to that in FY2013, dividends are estimated to total roughly 68 en and 72 sen per share for FY2014 and FY2015 respectively. This would earn investors net yields of 4.3% at the current (19 Nov 2013) share price.

Aside from challenging operating conditions, weaker sentiment for GAB may also be partly attributed to high yielding stocks losing lustre amide expectations of a rising interest rate environment going forward – led by the world’s largest economy.

This will result in rising yields on risk free government bonds, making alternative investments such as high dividend paying stocks less attractive.

Indeed, evidence suggests that investors by and large do well by staying with companies with steady growth prospects – translating into rising dividends – over the longer term.

For GAB, domestic consumption will eventually regain traction, as rising disposable incomes offset the negative effect of higher price. Thus, do foresee better outlook in the long run, on the back of its strong market positioning and portfolio of brands.