We Attended Heineken’s 2Q20 Results Online Briefing and Came Away Feeling Pessimistic on Their Prospects Going Forward. We Expect Heineken to Return to Profitability in 3Q20 With the Partial Opening of On-trade Outlets. However, We Continue to Expect Sluggish Sales Volumes, as Many Drinking Outlets Operate With Shorter Opening Hours and Certain Bars and Entertainment Venues Still Remain Closed. We Keep Our Forecasts Unchanged. We Maintain Our DCF-derived TP of RM18.70 (WACC: 8.5%, TG: 2.5%) and SELL Call.

We attended Heineken’s 2Q20 results online briefing and came away feeling pessimistic on their near term prospects going forward.

Scaling up e-commerce business ‘Drinkies’. The closure of on-trade venues during the MCO period led consumers to turn to off-trade (supermarkets, convenience stores etc.) and online sources to procure beer. Heineken took this opportunity to scale up their e-commerce platform ‘Drinkies’. By increasing the available regions, launching a mobile application and partnering with Shopee, Heineken’s online presence continues to grow.

Excise duty hike risk and illicit trade. Heineken shared they do not expect the government to hike alcohol excise duty as Malaysia’s alcohol excise duty is already the second highest in the world. In addition to this, we reckon an increase in excise duty may force brewers to raise prices, which would fuel illicit market activity. Note that in the tobacco industry, after tobacco excise duties were increased in 2015, legal volumes shrank drastically at the expense of illicit options as consumers began seeking cheaper alternatives (Figure #1-2). This resulted in the government collecting less tobacco excise duty revenue despite raising the excise duty structure. For this reason, we believe the current government will not risk the same happening in the alcohol market. Heineken shared that they estimate illicit trade currently accounts for ~28% of the total market, which is within our internal estimate of 20-30%.

Heineken 0.0. In response to the growing hard-line stance of the government against drunk-driving, Heineken shared they will continue to invest in Heineken 0.0 (0% alcohol beer) which would allow consumers to drink a 0% alcohol variant of Heineken and legally drive afterwards. Note that Heineken 0.0 is sold 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.

2H20 earnings outlook. We expect Heineken to return to profitability in 3Q20 with the partial opening of on-trade outlets. However, we continue to expect sluggish sales volumes, as many drinking outlets operate with shorter opening hours and certain bars and entertainment venues still remain closed. Worryingly, 20% of Heineken’s modern on-trade sales partners currently still remain closed.

Forecast. Unchanged.

Maintain SELL. We maintain our DCF-derived TP of RM18.70 (WACC: 8.5%, TG: 2.5%) and SELL call. While we are positive on Heineken’s foray into online delivery service ‘Drinkies’, we understand that it still represents a fraction of volumes, and will be unable to compensate for lost volumes from reduced opening hours and continued closure of certain on-trade venues. Overall, we expect core PATAMI to decline by ~45% in FY20.

Source: Hong Leong Investment Bank Research - 24 Aug 2020