Carlsberg: Large-Cap Defensive Stock

Jean-Pascal Rolandez presented his in-depth investment thesis on Carlsberg (Copenhagen: CARLB) at European Investing Summit 2015.

Carlsberg is a large-cap defensive stock which has become a world leader further to a significant expansion into emerging markets. Carlsberg has targeted essentially Eastern Europe, including Russia and the Ukraine, and Asia. In this breathless expansion Carlsberg has remained focused , making sure to be # 1 or #2 in all the markets or segments where it operates. This expansion into Russia, China and India in particular is key for the group long term growth. Indeed, for various reasons, Western European markets are stable, even declining by 2% to 3 % a year in volume terms. Consequently, Carlsberg must run for 53% of its EBITDA to grow by 2% to 3% per annum there. However, this highly cash generative EBITDA can be reinvested in emerging markets where not only volumes are growing but also where premiumization is at a low stage. Carlsberg is gaining market share in every market where it operates but the UK, confirming its sound strategy and robust management. Strongly penalized by its heavy investment in Russia where it now has close to 40% of the market, Carlsberg’s operating margin ought to bounce from 13% at group levels, a low figure by the beer sector standards. After a brutal recession and a 50% collapse of the ruble in tandem with oil prices, the Russian economy gives signs of stabilization. Carlsberg’s new management is currently carrying a thorough review of its brands and markets. We do not expect much other than normal trimming and a gentle exit from the UK where 14 % of the market is no longer enough to boost margins significantly. The share trades at a discount of about 30% its estimated 2016 EV/EBITDA vs. peers which, on 9.0x represents to us good value for money given its 5% to 6% per annum expected long-term EBITDA growth, higher by 1% than Nestlé’s. To us current levels can therefore be considered as entry points for the Carlsberg share, due to the group’s excellent management and solid long-term fundamentals.

About the instructor:

Jean-Pascal Rolandez is the manager of The L.T. Funds, a Geneva-based investment firm focused on a buy and hold strategy based on a limited number of European stocks with a 5+ year investment horizon. Jean-Pascal has more than 25 years of equity investment experience and has founded the first investment club at the leading French business school ESSEC. Prior to establishing The L.T. Funds, Jean-Pascal held various executive positions at BNP Paribas for 22 years, including as Paribas’ French equity strategist.