Reported 1Q20 core PAT of RM56.9m (QoQ: -37.6%, YoY: +7.4%) was below ours and consensus expectations, accounting for 18.1% and 17.9% of full year estimates, respectively. While we note that 1Q typically makes up <20% of full year earnings, we deem this below expectations as we expect a significantly weaker 2Q20 due to MCO. As we factor in weaker earnings during the MCO period, we lower our FY20 forecasts by 4.7% to factor in significantly weaker sales in 2Q20. However, WACC adjustment and rolling over to FY21 lead to higher DCF-derived TP of RM22.45 (from RM17.85). Our HOLD call is maintained.

Below expectations. Reported 1Q20 core PAT of RM56.9m (QoQ: -37.6%, YoY: +7.4%) was below ours and consensus expectations, accounting for 18.1% and 17.9% of full year estimates, respectively. While we note that 1Q typically makes up <20% of full year earnings, we deem this below expectations as we expect a significantly weaker 2Q20 due to the MCO.

Dividend. None (1Q19: none). Meanwhile, Heineken announced the ex-date of FY19 final DPS of 66 sen to be on 14 Oct 2020.

QoQ. Core PAT declined -37.6% in tandem with lower sales of -24.1%. This was due to (1) seasonality as higher sales in 4Q19 was due to retailers stocking up on product in preparation for Chinese New Year in 1Q20; (2) weaker sales in March 2020 due to the suspension of brewery on 18 March and closure bars and restaurants during the MCO period.

YoY. Revenue declined slightly (-1.8%) mainly due to lower sales in the second half of March 2020 (50% decline vs. SPLY) due to the onset of MCO. Despite this, core PAT rose 7.4% due to successful Chinese New Year festive period sales in addition to higher prices implemented at the start of March.

Outlook: We are impressed by the steps Heineken have taken in response to the MCO hurdle that has befallen the two brewers. Heineken’s ‘Raise Our Bars’ campaign allows consumers to buy ‘Buy 1 Free 1’ vouchers online to redeemed at participating Heineken brewers after the conclusion of the MCO, with the additional cost to participating bars borne by Heineken. We feel positively as this not only provides financial assistance to Heineken’s partners, but also protects their future revenue streams and ‘brings forward sales’. Despite the positive steps Heineken have taken, we expect significantly weaker 2Q20 earnings as we note that Heineken had ceased production from 18 Mar – 2 May. This coupled with the absence of on-trade sales (bars, restaurants, hotels etc.) during the MCO period lead us to believe that sales will be lower by 30-40% in 2Q20 YoY.

Forecast. As we factor in weaker earnings during the MCO period, we lower our FY20 forecasts by 4.7% to factor in significantly weaker sales in 2Q20.

Maintain HOLD. We lower our WACC from 9.5% to 8.5% while keeping TG at 2.5% as we reckon Heineken’s dividend yield should prove attractive in the current volatile market conditions. This is to reflect the partial subsiding of “production risk” now that it has been allowed to recommence operations during CMCO (previously halted during MCO). In addition, FY20-21 yield of 4.2% to 4.9% should offer some attractiveness. All in, TP rises from RM17.85 to RM22.45 and HOLD rating is maintained. While we expect weaker earnings in FY20 overall, we reckon this has been somewhat priced in, as the current share price has already declined 23.6% from its peak in Feb-20.

Source: Hong Leong Investment Bank Research - 20 May 2020