Heineken reported a 1H22 core net profit of RM199.5m (+101.9% YoY) which came in above both our and consensus projections at 5 8% and 63%, respectively. The positive result surprise was due to a higher-than-expected beer demand following the transition to endemicity. We raise our earnings forecasts for FY22-24f by 2-7% as we pencil in higher sales volume assumption to reflect the stronger-than-expected beers demand recovery. Subsequently, our TP is raised to RM30.85 (from RM28.87), implying a PE multiple of 25x on its FY23f EPS of 123.4sen. Reiterate BUY rating on Heineken.

Above expectations. Heineken’s 2Q22 core PAT of RM86.1m (-24.1% QoQ, +240.6% YoY) brought 1H22’s sum to RM199.5m (+101.9% YoY). The result was above our and consensus expectations, accounting for 58.1% and 63.2%, respectively. The positive result surprise was due to a higher-than-expected beer demand following the transition to endemicity.

Dividend. Declared DPS of 40 sen (2Q21: None), which goes ex on 19 October 2022. 1H22 DPS amounted to 40 sen vs 1H21’s 15 sen.

QoQ. 2Q22’s revenue of RM644m was down by -7.7% due to the high base effect – first quarter has seasonally stronger sales due to Chinese New Year. Coupled with the erosion in EBIT margin (-4.9pts) due to the rising input cost despite being cushioned by the group's ongoing cost optimization effort and the price adjustment in 4Q21, core PAT was down at a higher rate of 24.1%.

YoY. Revenue increased by 84.5% due to the low base effect as 2Q21 was hit by brewery closure from MCO3.0. The combination of upsurge in sales following the reopening of the economy and international borders, coupled with a stronger EBIT margin (+6.2 pts), core PAT surged by 240.6%.

YTD. Revenue rose by 49.7% as a result of stronger sales performance during the 1Q festive period and pent-up demand for out-of-home drinking following the lifting of restrictions. Core PAT grew at a stronger pace to 101.8%, thanks to margin expansion on the back of prices adjustment in 4Q21, better operating leverage and favorable product mix.

Outlook. Going into 2H22, beer sales are expected to remain strong, considering (i) pent-up demand for out-of-home drinking, (ii) the strong return of foreign tourists, and (iii) the 2022 FIFA World Cup. In particular, the depreciating ringgit which bodes well for local tourism, which should lead to a stronger foreign tourist arrival in 2H22 thus boosting on-trade sales. Despite lingering concern on demand slowing down following HEIM raising its beers price by 6-8% (both off-trade and on-trade) effective on 1 August in response to the rising input cost, we are not overly concerned as beer remains the cheapest alcoholic drink in the market, and thus has relatively inelastic demand. We opine the price hike, together with better operating leverage (due to the absence of forced brewery closures) and “premiumisation push” should help to cushion any margin erosion arising from cost inflation.

Forecast. We adjust our FY22-24f earnings projections upwards by 2-7% as we pencil in a higher sales volume assumption to reflect the stronger-than-expected beers demand recovery.

Maintain BUY, TP: RM30.85. Post earnings adjustment, we roll over our valuation base year to FY23. Subsequently, TP is raised to RM30.85 (from RM28.87), implying a PE multiple of 25x on its FY23f EPS of 123.4sen. Reiterate our BUY rating on Heineken.

Source: Hong Leong Investment Bank Research - 15 Aug 2022