Reported 2Q20 core loss after tax of -RM18.7m (from a core PAT of RM56.9m in 1Q20 and RM65.9m in 2Q19) brought 1H20 sum to RM38.2m (-67.8% YoY). This is below expectations, making up 12.9% and 13.5% of ours and consensus forecasts, respectively. The shortfall in earnings was due to larger-than expected impact on sales volumes from MCO restrictions during 2Q20. We lower our FY20/21/22 forecasts by 42.8%/21.9%/15.5% to account for slower recovery in sales volumes. After our earnings adjustment, our TP falls from RM22.45 to RM18.70, based on a DCF-derived valuation methodology (WACC: 8.5%, TG: 2.5%). Downgrade to SELL.

Below expectations. Reported 2Q20 core loss after tax of -RM18.7m (from a core PAT of RM56.9m in 1Q20 and RM65.9m in 2Q19) brought the 1H20 sum to RM38.2m (-67.8% YoY). This is below expectations, making up 12.9% and 13.5% of ours and consensus forecasts, respectively. The shortfall in earnings was due to larger-than expected impact on sales volumes from MCO restrictions during 2Q20. Sales decline of -50.8% YoY was much higher than our anticipated 30-40% decline for 2Q20.

Dividend. None declared (2Q19: 42 sen per share). 1H20: None (1H19: 42 sen per share). Whilst Heineken typically declare dividend twice a year in 2Q and 4Q, they have decided to adopt a cautious approach in light of Covid-19 impact.

QoQ. Core loss after tax of -RM18.7m (from core PAT of RM56.9m) was due to the temporary closure of their Sungai Wei brewery and many of their sales channels. This was despite sales and distribution activities rebounding in May and June following the easing of MCO restrictions.

YoY. Sales shrank by approximately half (-50.5%) due to the temporary suspension of operations of Heineken’s brewery for approximately six weeks. Unsurprisingly, Heineken also shared that the sales in on-trade channels (bars, clubs, restaurants etc.) were particularly weak. The decline in revenue caused Heineken to report core loss after tax of -RM18.7m (from core PAT of RM56.9m) due to the fixed portion of their cost structure.

YTD. Core PAT dived -67.8% due to core loss after tax in 2Q20 for the same reasons mentioned above.

Outlook: Despite the relaxation of MCO restrictions, we note that many bars and clubs are still prohibited from opening, while others are operating with shorter opening hours. Additionally, we expect the lack of tourists in FY20 and some consumers’ preferring to avoid drinking venues altogether to continue to dampen volumes. While we expect Heineken to turn profitable in 3Q20, we continue to expect subdued sales volumes. Additionally, increased marketing spend from their marketing campaign “Raise our Bars” which allows consumers to “Buy 1 Free 1”, with the additional cost at participating bars being borne by Heineken is expected to impact margins. Overall, we expect Heineken’s core PAT to decline by ~45% in FY20.

Forecast. We lower our FY20/21/22 forecasts by 42.8%/21.9%/15.5% to account for slower-than-expected recovery in sales volumes.

Downgrade to SELL. After our earnings adjustment, our TP falls from RM22.45 to RM18.70, based on a DCF-derived valuation methodology (WACC: 8.5%, TG: 2.5%). Downgrade to SELL. With expected sharp decline in earnings and poor sales volumes visibility, we reckon Heineken is too expensive at current price levels, of close to 40x FY20 earnings

Source: Hong Leong Investment Bank Research - 20 Aug 2020