3Q20 core PAT of RM61.3m (from a core loss after tax of -RM11.0m in 2Q20, YoY: -40.7%) brought the 9M20 sum to RM107.2m (-51.7% YoY). This is in line with ours and consensus expectations, making up 62.7% and 59.5% of ours and consensus forecasts, respectively. We deem this within expectations as 4Q is a seasonally strong quarter. As results were within expectations, our forecasts remain unchanged. Stronger QoQ earnings and relaxation of stringent MCO measures earlier this year lead us to believe the worst is over for Heineken. We tweak our WACC from 8.5% to 8.0%. Our TP rises from RM18.70 to RM20.45 based on DCF-valuation methodology (WACC: 8.0%, TG: 2.5%).

In line. 3Q20 core PAT of RM61.3m (from a core loss after tax of -RM11.0m in 2Q20, YoY: -40.7%) brought the 9M20 sum to RM107.2m (-51.7% YoY). This is in line with ours and consensus expectations, making up 62.7% and 59.5% of full year forecast respectively. We deem this within 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. Note that Heineken typically report core PAT of between RM90- 100m in 4Q. Core PAT figure of RM107.2m was arrived at after adjusting for one-off settlement of Customs’ Bills of Demand of RM7.2m.

Dividend. None declared (3Q19: None). 9M20: None (9M19: 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. Sales rebounded strongly (+86.7%) due to improved sales to businesses in ontrade (restaurants, bars with restaurant licences, coffee shops etc.) in addition to absence of production disruptions to Heineken’s brewery operations from MCO restrictions in 2Q20. Core PAT of RM61.3m (from –RM11.0m core losses after tax) marked a return to profitability in tandem with sales rebound.

YoY. Sales were lower by -21.4% due to volume decline in the ‘mid-teens’ region. Despite the gradual recovery in volumes and shift to in-home consumption on-trade sales continue to remain below previous year levels. Note that entertainment outlets such as pubs without restaurant licenses and clubs are still prohibited from operating. Core PAT fell -40.7% in tandem with lower sales.

YTD. Core PAT decreased by -51.7% in tandem with sales decline of -24.2%. This was due to suspension of brewery operations from mid-Mar to early-May in addition to softer on-trade sales volumes.

Outlook: Going forward, Heineken’s earnings are greatly reliant on Malaysia’s ability to keep the spread of Covid-19 under control, which would result in return to normal drinking behaviour. For the time being, we expect Heineken to continue investing in ecommerce platform ‘Drinkies’ and off-trade sales channels.

Forecast. As results were within expectations, our forecasts remain unchanged.

Maintain HOLD. Stronger QoQ earnings and relaxation of stringent MCO measures earlier this year lead us to believe the worst is over for Heineken. Additionally, recent encouraging vaccine news may drive sentiment on consumption recovery plays. Therefore, we tweak our WACC from 8.5% to 8.0%. Our TP rises from RM18.70 to RM20.45 based on DCF-valuation methodology (WACC: 8.0%, TG: 2.5%). While we reckon the worst is over for Heineken, reimplementation of CMCO and therefore continued closure of certain drinking venues (clubs, karaoke venues), we expect volumes to remain below FY19 (pre-Covid) levels for the near term.

Source: Hong Leong Investment Bank Research - 27 Nov 2020