Results

• FY16 revenue of RM1, 848m and net profit of RM266m came in above our expectations, accounting for 104% and 112% of ours, but in line with consensus estimates.

• The deviation stems from better than expected cost efficiencies and inelastic demand from consumers.

Dividends

• Heineken declared a final dividend of 35 sen/share (4Q15: 51 sen), bringing total dividends to 85 sen/share (FY15: 71 sen), representing a payout of 96.7% and yield of 5.0%.

Highlights

• YTD: FY16 revenue grew by 5.7% yoy attributed to higher sales driven by improved brand visibility, pricing and effective targeted commercial activities. Heineken continues to benefit from the Government’s measures against contraband beers which have aided the duty paid market.

• Net profit grew by a stellar 24% yoy on the back of greater efficiencies across the supply chain and operations. Subsequently, EBITDA margins improved by 2.32ppt yoy.

• It appears that the recent excise duty hike had not dampened consumer’s appetite for Malt liquor consumption. Nonetheless, there is an observable shift in consumption behavior amongst consumers as modern off trade continues to make ground versus other channels.

• As expected, commencing 1st July prices increased by circa 2.5% as the group passed on the full increase in the duty hike to consumers after having absorbed a portion of it since March.

• To note, Guinness Foreign Extra Stout has had its ABV reduced from 6.8% to 5.5% in June in order to minimize the magnitude of the price increase due to the duty revision.

• We believe that given the strong results from Heineken and unperturbed beer consumption amid recent ED revision, we are wary that the brewery sector will be subject to another ED revision in the near term more so than the tobacco sector due to the latter’s ED induced downturn.

• We believe the group will continue to focus on growing momentum through targeted commercial initiatives, innovation and investment efficiencies. Whilst management didn’t commit to double digit returns in FY17, they believe that they are on the right footing to perform well in FY17.

Risks

• Risks to this stock arise from two venues: 1) overhang of the customs bill to the amount of RM56m for duties and penalties in arrears. 2) Prolonged soft consumer sentiment bounds total industry volume growth.

Forecasts

• We raise our earnings forecast on the back of the strong results. Our FY17-18 EPS is increased by 17%-21%.

Rating

• BUY

• Decent earnings growth and attractive dividend yield present great investment thesis amid yield searching environment.

• Positives – 1) High dividend yield stock; 2) Duopoly industry;3) Resilient earnings and low capex requirements.

• Negatives – 1) Highly regulated industry; 2) Potential excise duty hike.

Valuation

• Maintain BUY on Heineken. Increase our TP to RM18.52 from RM15.68 as we raise our earnings on the back of the stellar results. (WACC: 8.00% TG: 3.0%)

Source: Hong Leong Investment Bank Research - 19 Jul 2016