Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Mon, 14 Oct 2019, 9:15 AM


Heineken Malaysia Berhad - 2Q18 Broadly Within

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1H18 Net Profit of RM103.7m (-6%) is deemed broadly within expectations in anticipation of lumpy profits in 2H18 with strong sales trajectory and comparatively lower operating costs. 40.0 sen dividend declared is also within estimates. The new 10% sales tax will be passed on, albeit at a rate lower than GST. We believe the remainder would be absorbed by the group and this could undermine earnings. Maintain MP with a lower TP of RM20.40 (from RM23.30).

1H18 broadly within. 1H18 Net Profit of RM103.7m is deemed broadly within our/consensus estimates, making up 32%/35% of respective forecasts. A lumpy 2H18 is anticipated ahead with stable sales growth backed by normalising marketing expenditure and improved operating efficiency. The interim dividend of 40.0 sen is as expected. We are anticipating an FY18 pay-out of 105.0 sen. Despite performing as expected thus far, the implementation of the 10% sales tax on 1st September 2018 is expected to have an impact on the group’s operating landscape (refer to the outlook commentary below).

YoY, 1H18 sales of RM855.4m (+8%) expanded on the back of stronger sales, especially in the off-trade market (i.e. supermarkets) fuelled by aggressive marketing and perky reception off less premium brands. However, it is also due to such higher cost and lower sales mix, which dragged the group's EBIT to RM138.7m (-5%) with thinner margins of 16.2% (-2.4ppt). Alongside higher effective taxes of 24.7% (+0.7ppt), net earnings for 1H18 recorded at RM103.7 (-6%).

QoQ, 2Q18 revenue of RM421.6m (-3%) was softer against a seasonally backed 1Q18. However, operating profit grew by 12% thanks to lower overheads, led by savings from the group’s streamlined procurement processes, at higher margins of 17.4% (+2.3ppt). Net Profit increased closely to RM54.9m (+13%).

Hopeful of a bigger pay-out. Persistent sales growth shown by the group can be attributed to its strong marketing investments into brand visibility and capitalising on customer loyalty. Management is confident that strong traction garnered earlier during the year should pay off favourably in 2H18. Additionally, the newly restructured procurement system has yet to perform to its optimal potential and could translate to further savings in the near future. With regards to the 10% sales tax,

management expressed that they will pass down the tax to selling prices,

but to a degree where prices could be lower than during the 6% GST regime. While this could keep the group’s product prices competitive and protect market share, it would be at the expense of absorbing the excess tax which could chip future earnings. Still, we believe this could be managed in the long term if better product mixes could be achieved on top of the abovementioned cost savings. However, on-trade demand could be under threat as certain establishments may be liable to pay a 6% service tax which could dampen sales.

Post-results, we cut our earnings assumptions by 6.3%/12.5% for FY18/FY19 to account for the impact of the sales tax above. Our dividend assumptions are also trimmed to 98.0 sen/100.0 sen from 102.0 sen/116.0 sen following the weaker earnings on a c.100% payout.

Maintain to MARKET PERFORM and TP of RM20.40 (from RM23.30).

Our target price is revised to a lower EPS on an unchanged 20.0x FY19E PER, in line with its 5-year mean. The stock is valued above its peer, CARLSBG (UP, TP: RM17.10)’s valuation of 19.0x FY19E PER. We believe this is fair given HEIM’s larger domestic market share and better dividend yields. In addition, CARLSBG is susceptible to wider macro factors due to its regional operations (i.e. Singapore, Sri Lanka).

Source: Kenanga Research - 29 Aug 2018

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