Results

• 1H17 revenue of RM807.7m translated into net profit of RM110.6m which came in below expectations, accounting for 38.5% and 38.6% of ours and consensus estimates.

Dividends

• Declared first Interim dividends of 40sen (12M16: 35sen), representing a payout of 109% yielding 2.3%.

Highlights

• Qoq: Revenue was flattish, growing 1.36% qoq to RM406.6m vs. RM401.1m reflecting seasonality. PAT grew 25.7% to RM61.6m from RM48.9m qoq on the back of synergies with the Heineken global procurement systems and better sales mix during the quarter under review.
• Yoy: Revenue declined 11.5% to RM406.6m from RM459.5m due to lower offtake and softer sentiments partially offset by revenue growth from premium brands and greater efficiencies arising from the group procurement system. Subsequently, PAT grew 1.2% to RM61.6m.
• 1H17: Revenue declined 12.0% yoy on the back of higher volumes sold during SPLY due to anticipation of a price increase in July 2016. This is reinforced by lower volumes in the period under review due to earlier timing of CNY 2017 which saw higher sales towards end 2016. Subsequently, PAT declined marginally by 1.1% yoy to RM110.6m.
• The group recently introduced Guinness bright, a Malaysian exclusive product with a micro brewery’s touch, infusing a touch of ginger and lemongrass in a stout classic. The groups cider segment (Strongbow) continues to make strides in the market recording double digit yoy growth.
• Affordability issues and subdued consumer sentiment continue to give rise to the demand of cheap contraband beers which continues to plague the industry. To reiterate, Malaysia ties with Singapore as the second most expensive nation to consumer beers globally.
• Moving forward, we expect the group to continue to benefit by leveraging on Heineken group’s procurements. We expect a stronger 2HFY17 buoyed by seasonality.

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 pending analyst briefing later today.

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 at these levels the stock is a HOLD as it’s fully priced.

Valuation

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

Source: Hong Leong Investment Bank Research - 27 Jul 2017