Heineken’s 1H18 core PAT of RM103.7m was below ours and consensus expectations, accounting for 34.5% and 35.0% respectively. The disappointment was mainly due to higher marketing cost. Rebounding consumer sentiment (which hit record highs in 2Q18) and sales tax holiday should benefit Heineken’s top line going forward. However, the persistence of the large contraband market will continue to impact business. Downgrade FY18/19/20 forecasts by 7.3%/3.6%/3.5% to account for higher marketing spend. After incorporating our lower earnings forecasts, our call is downgraded from Buy to HOLD. Our TP is reduced from RM25.50 to RM23.20 (WACC: 7.4%; TG: 3.0%).

Below. Reported 1H18 core PAT of RM103.7m was below ours and consensus expectations, accounting for 34.5% and 35.0% respectively. The poor results were mainly due to higher than expected marketing spend.

Dividend. 40 sen going ex on 26/9/18 (2Q17: 40 sen).

QoQ. Lower sales of 2.8% were mainly due to seasonality (as the occurrence of CNY in 1Q is usually a lucrative quarter for brewers). Core PAT increased by 12.6% to RM54.9m due to higher overhead costs in 1Q18.

YoY. Better top line (+6.4%) was mainly driven increased sales volume, partially attributed to the FIFA 2018 World Cup. However, higher marketing spending in 2Q18 and unfavourable product mix more than offset lower overhead costs, resulting in Core PAT decline of 10.8% from RM61.6m to RM54.9m.

YTD. Core PAT declined to RM103.7m from RM101.6m (-6.2%) due to higher marketing spend, as mentioned above.

Outlook: Rebounding consumer sentiment (which hit record highs in 2Q18) and sales tax holiday should benefit Heineken’s top line going forward. We expect marketing spend to be significantly lower in 2H18 (vs 1H18), which should boost profitability. However, the persistence of the large contraband market will continue to impact business.

Forecast. Downgrade FY18/19/20 forecasts by 7.3%/3.6%/3.5% to account for higher marketing spend.

Downgrade to HOLD. After incorporating our lower earnings forecasts, our call is downgraded from a BUY to a HOLD. Our DCF based TP is reduced from RM25.50 to RM23.20 (WACC: 7.4%; TG: 3.0%).

Source: Hong Leong Investment Bank Research - 29 Aug 2018