Results

• 1QFY17 revenue of RM384.82m and net profit of RM56.92m accounted for 20.5% and 19.8% of our and consensus estimates. We deem this to be inline as the Jul-Sep quarter historically is dull period due to seasonality.

• The group has announced that it will change the financial year end from 30 June to 31 Dec. We will utilize the June year end convention for ease of analysis.

Dividends

• None.

Deviations

• None.

Highlights

• Qoq: revenue declined by 16.3% qoq due to lower volume off take in the current quarter under review as well as strong performance in the preceding quarter due to the month-long Euro 2016 football campaign. Subsequently, PAT declined by 6.5%. Despite this, margins improved by 2.63ppts on the back of greater efficiencies across the supply chain and operations.

• Yoy: revenue contracted by 5% due to subdued consumer sentiment arising from economic uncertainties. PAT declined by 11% due to lower revenue and early timing of commercial spending.

• We believe the shortfall in revenue is a knee-jerk reaction attributed to consumers adjusting to the 1st July price increase of circa 2.5% as well as sales tapering off due to some pre-emptive stocking up by distributors in the prior quarter in anticipation of the price hike.

• We expect the coming quarters to be stronger as this evolution normalizes in tandem with the improving consumer sentiments. Furthermore, as the player with the greater market share, Heineken will undoubtedly benefit most from the government’s increased measures against contraband beers.

• We continue to stress that the duty hike effect is nullified by the potential to reduce the ABV or “water down” beers under the new excise structure.

• Moving forward the group will continue to focus on growing momentum though targeted commercial initiatives, and strengthening operational efficiencies to deliver value to shareholders.

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

• Results are inline as subsequent quarters will be stronger, nonetheless our forecast are in the midst of adjustment.

Rating

BUY

• We like Heineken for its relatively high dividend yield, greater market share in a duopolistic industry, resilient earnings and low capex requirements. Furthermore, we believe the risk of a duty hike is nullified by rebasing of the excise calculation.

Valuation

• Maintain BUY on Heineken. Our TP of RM18.52 remains unchanged (WACC: 8.00% TG: 3.0%)

Source: Hong Leong Investment Bank Research - 21 Oct 2016