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Author: HLInvest   |   Latest post: Fri, 8 Nov 2019, 4:28 PM

 

Heineken Malaysia - Excise Duty Uncertainty Dissipates

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Finance Minister Lim Guan Eng reaffirmed the government’s stance on cracking down on illicit alcohol trade in lieu of increasing Malaysia’s alcohol excise duty structure. We expect Heineken to focus on growing the premium brands in its portfolio which should lead to better margins. After accounting for returning legal volumes and better margins from the growth of premium brands, our FY20/21 earnings rise by 3.4%/3.8%. Given the anticipated growth in legal volumes from government clamp down on illicit, we tweak our WACC in DCF valuation methodology from 8.0% to 7.5% while TG is unchanged at 2.5%. After earnings adjustment, our TP rises from RM21.00 to RM26.50. Upgrade to BUY.

Recap. Recall that Heineken recorded sales growth of 14.0% (after removing SST impact) in 1H19 from robust performance in 1Q19 and growth in core brands in 2Q19.

War on illicit alcohol trade to continue. Finance Minister Lim Guan Eng reaffirmed the government’s stance on cracking down on illicit alcohol trade in lieu of increasing Malaysia’s alcohol excise duty structure. Furthermore, note that in the recent Budget 2020 announcement, the government allocated RM235m to purchase an additional 20 cargo scanners to clamp down on illegal import activity. Currently, counterfeit alcohol market share is believed to be as high as 25% in Peninsular Malaysia and 80% in East Malaysia.

Growth in premium brands to boost margins. We expect Heineken to focus on growing the premium brands (Strongbow, Apple Fox, Heineken 0.0) in its portfolio which should lead to better margins due to (1) higher shelf prices (despite similar production cost); and (2) lower alcohol content (Strongbow, Apple Fox cider: 4.5% ABV and Heineken 0.0: 0% ABV). Note that increased volumes of Heineken’s lower ABV product lines result in lower excise cost incurred to Heineken, which would result in better margins.

Heineken 0.0. We are particularly optimistic on Heineken’s launch of Heineken 0.0, a 0% ABV product offering. We expect Heineken 0.0 to tap into the global trend of moderate alcohol drinking and healthier consumption patterns. Note that Heineken 0.0 has half the calories of a regular Heineken beer at just 21 calories per 100ml. To date, Heineken 0.0 has been made available in over 50 countries, including neighbouring countries Singapore and Thailand.

E-commerce venture ‘Drinkies’. Heineken’s venture into online delivery with their e commerce platform ‘Drinkies’ is set up to deliver Heineken products to anywhere within the Klang Valley and Penang within 60 minutes for just a RM8 delivery fee. While we expect the venture to incur marketing investment, we expect it to add significant volumes to Heineken’s already leading market share position in the Malaysian market of an estimated 60-65%.

Forecast. After accounting for returning legal volumes and better margins from the growth of premium brands, our FY20/21 earnings rise slightly by 3.4%/3.8%.

Upgrade to BUY. Given the anticipated growth in legal volumes from government clamp down on illicit, we tweak our WACC in DCF valuation methodology from 8.0% to7.5% while TG is unchanged at2.5%). After earnings adjustment, our TP rises from RM21.00 to RM26.50.

 

Source: Hong Leong Investment Bank Research - 21 Oct 2019

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