We expect Heineken’s top line to benefit from zerorisation of GST, improving consumer sentiment, occurrence of the FIFA World Cup and potential clamp down on the illicit market. We raise our FY18/19/20 forecasts by 4.2%/8.9%/12.2% to reflect better top line growth going forward. Upgrade to BUY from HOLD with a higher TP of RM25.50 based on DCF valuation (WACC: 7.4%; TG 3.0%).

Potential clamp-down on the illicit market to boost volumes. Pakatan Harapan’s alternative 2018 budget states the newly elected government intend to collect RM2.5bn from alcohol excise duty (higher than the RM1.7bn targeted by BN). We expect the government to clamp down on illicit alcohol and drive volumes back to the legal market in order to collect more excise duty. We reckon the increase in excise duty collection is likely via clamping down of illicits, leading to a larger legal market share as opposed to an outright duty rate increase as Malaysia’s excise duty is already one of the highest in the world.

“Zerorisation” of GST. The absence of sales tax between June and September (i.e. 0% GST but before SST is reintroduced) should fuel to rebounding consumer spending. Note that even before the newly elected government came into power, the MIER Consumer Sentiment Index rose from 82.6 in 4Q17 to 91 in 1Q18 (highest post GST implementation). We expect consumer sentiment to accelerate going forward due to the zerorisation of GST and fixed fuel prices (i.e. subsidies).

FIFA 2018 World Cup to boost volumes. We expect the ongoing FIFA 2018 World Cup to boost Heineken’s top line significantly, given kick-off times are mostly between 6pm and 11pm. Note that when the FIFA World Cup last occurred with favourable kick off times in 2010, Heineken reported a top line YoY growth of 11.1% in the quarter that the World Cup matches took place in.

Leading brewer of aspirational brands. We expect Heineken to continue its mission of becoming the ‘leading brewer of aspirational brands’ with the availability of low alcohol offerings in the Tiger Radler line (Tiger Radler Grapefruit 2.0% ABV, Tiger Radler Lime Mint 0.0% ABV).

Forecast. We raise our FY18/19/20 forecasts by 4.2%/8.9%/12.2% to reflect better top line growth going forward from reasons mentioned above.

Upgrade to BUY. We like Heineken for its greater market share in a duopolistic industry, resilient earnings, low capex requirements and decent dividend yield. We upgrade our call from HOLD to BUY with a higher TP of RM25.50 (from RM18.13) after adjusting our earnings and DCF assumptions WACC: 7.4%; TG: 3.0% (previously WACC: 8.0%; TG: 3.0%).

Source: Hong Leong Investment Bank Research - 25 Jun 2018