Carlsberg relies on contracting western European markets for 60% of its top line
Carlsberg relies on contracting western European markets for 60% of its top line © Bloomberg

In the UK Carlsberg has publicly reversed out of a famous advertising claim of making “probably” the best beer in the world. It still has a great recipe for profitable brewing, even in flat European markets. Chief executive Cees ’t Hart has overseen a turnround at the Danish brewer since taking over in 2015. Its shares reached fresh highs this week after strong half-year results. They are up 30 per cent compared with a year ago. Shares of many global rivals have done little.

While rivals AB InBev and Heineken have expanded aggressively with large acquisitions, Mr ’t Hart has focused on refining Carlsberg’s own recipe. Operating profits grew almost a fifth in the first half of the year. But at close to 22 times forward earnings, a two-decade high, its valuation is too frothy.

Once, Carlsberg too had a thirst for expansion. The company's 2008 £7.8bn joint acquisition with Heineken of Scottish & Newcastle led to large exposure to Russia for Carlsberg. A later decision by Russia to increase sharply the tax on beer soured that deal. Elsewhere, an overemphasis on volume watered down the brand. That filtered through to weaker operating margins, which hit a low of 12 per cent in 2015.

Carlsberg has since invested in craft and non-alcoholic beer brands. These both had growth rates in the high teens in the first half. Investments have been funded by cost-cutting. Overheads have fallen since 2016, lifting profitability to more than 15 per cent. Debt has also been paid down. Net debt is just 1.3 times ebitda, lower than the same multiples at Heineken and AB InBev.

Then again, its rivals’ acquisitions have bolstered their exposure to faster-growing emerging markets. While Carlsberg’s Asian sales were up 13 per cent, it relies on contracting western European markets for 60 per cent of its top line. Drinking is falling out of fashion with health-conscious Europeans, although non-alcoholic beer sales will help. Investors looking for a cheap pint should seek value elsewhere.

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