Results

• 1Q17 revenue of RM401m and net profit of RM48.9m accounted for 20% and 17.1% of HLIB and consensus estimates respectively.

• We deem this to be broadly in line with our estimates as the period under review reflects the normalization of consumption post festivities season. We continue to expect a stronger 2HFY17.

Dividends

• No dividends were declared during the period under review.

Highlights

• Qoq: Revenue declined by 30.6% qoq to RM401.1m vs. RM577.5m, namely on the back of lower volume off take post festive demand (CNY, Christmas and New Year). Recall that the previous quarter ended 31 December 2016 saw an earlier sell in for the 2017 CNY which was earlier during the calendar year. Subsequently, PAT declined by 53.2% to RM48.9m from RM104.7m qoq.

• Yoy: Revenue declined by 12.6% yoy reflective of cyclicality of the industry as mentioned above. Subsequently, PAT declined by 3.7% yoy. Margins expanded by 1.45ppts on the back of greater efficiencies across the supply chain and better timing of marketing spend yoy.

• Management applauds all efforts made by the Royal Malaysian Customs to curb the inflow of contraband beers, however affordability issues plaguing Malaysian consumers give rise to the demand of cheap contraband beers. This continues to plague the industry and is a particularly pertinent issue in East Malaysia.

• On the back of a sluggish consumer sentiment environment, we continue to expect the modern off- trade channel to be the key growth channel which will continue to drive the consumers evolved drinking habits, at the expense of the on trade channels due to lackluster sentiments.

• Moving forward we expect the group to benefit by leveraging on Heineken group’s procurements. We reiterate that we anticipate a slower 1HF17 on the back of a dry festive calendar and as consumption normalizes post festivities season.

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

• Unchanged.

Rating

• HOLD

• 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. However given the recent share price run since our BUY call, we downgrade the stock to a HOLD .

Valuation

• We maintain our DCF derived TP of RM18.15 (WACC: 8.00% TG: 3.0%)

Source: Hong Leong Investment Bank Research - 13 Apr 2017