Reported 3Q19 core PAT of RM103.3m (QoQ: +57.2%, YoY: +31.0%) brought 9M19 core PAT to RM221.8m (YoY: +21.5%), accounting for 72.9% and 73.0% of ours and consensus expectations. We deem this above expectations as 4Q is a seasonally strong quarter. The better than expected earnings were due to better than expected sales volumes and improved cost efficiencies. We raise our FY19/20/21 earnings by 4.8%/9.0%/10.4% to account for better sales volumes going forward. After our earnings adjustment, our TP rises from RM26.50 to RM28.90 pegged to an unchanged DCF valuation methodology (WACC: 7.5%, TG: 2.5%). Maintain BUY call.

Above expectations. 3Q19 core PAT of RM103.3m (QoQ: +57.2%, YoY: +31.0%) brought 9M19 core PAT to RM221.8m (YoY: +21.5%), accounting for 72.9% and 73.0% of ours and consensus expectations. We deem this above expectations as 4Q is a seasonally strong quarter, making up ~35% of full year earnings due to strong sales associated with CNY in 1Q of the following year. The better than expected earnings were due to higher than expected sales volumes and improved cost efficiencies.

Dividend. None declared (3Q18: none). 9M19: 42 sen vs, 1H18: 40 sen.

QoQ. Robust sales growth of 17.6% was due to higher sales volume and favourable sales mix. In addition to higher sales, improved cost efficiencies and timing of commercial spend (marketing costs on new product launches in 3Q19 were incurred in 2Q19) resulted in core PAT spiking 57.2% to RM103.3m.

YoY. Sales grew 17.7% (11.0% after excluding SST impact) from volume growth in core brands and successful new product launches. Core PAT grew by 31.0% in tandem with higher sales and timing of marketing spend as mentioned in QoQ segment.

YTD. Top-line of RM1,640.2m represented 20.0% growth (13.0% after excluding SST impact) from continued robust performance in core brands and new product launches in 3Q19. Supported by better cost efficiencies, core PAT rose 21.5% in tandem with better top line.

Outlook: We expect Heineken to continue to invest in core brands (Tiger, Heineken, Guinness) which should result in volume growth. In terms of new product innovations, we expect Heineken to grow newly launched Heineken 0.0 (0% alcohol beer) and Tiger Crystal in order to cater to changing consumer preferences. We are particularly positive on the introduction of Heineken 0.0 as it sells at a shelf price higher than regular beer but is free of alcohol excise duty cost as it does not contain any alcohol, resulting in better margins. Furthermore, we are encouraged by Heineken’s venture into the online delivery business ‘Drinkies’ which delivers Heineken products to anywhere within the Klang Valley and Penang within 60 minutes for just a RM8 delivery fee. While we understand the venture will incur marketing spend, we expect it to add to Heineken’s already dominant market share position of the Malaysian market of an estimated 60-65%.

Forecast. We raise our FY19/20/21 earnings by 4.8%/9.0%/10.4% to account for better sales volumes going forward.

Maintain BUY. After our earnings adjustment, our TP rises from RM26.50 to RM28.90 pegged to an unchanged DCF valuation methodology (WACC: 7.5%, TG: 2.5%). Maintain BUY call.

Source: Hong Leong Investment Bank Research - 5 Dec 2019