Heineken Malaysia (HEIM)’s 9M17 earnings increased by 4.6% yoy to RM 176.4m as a muted 1.1% yoy increase in revenue was somewhat mitigated by improved cost efficiencies. 9M17 earnings accounted for 63% of our FY17 forecast but within expectations as 4th quarter tends to be stronger due to festive seasons and continuous cost optimisation to improve profitability. We like Heineken’s dominant market position in the domestic malt liquor market and 5%-6% dividend yield should be supportive of the share price. We upgrade HEIM to BUY with a higher DCF-derived TP of RM20.10.

9M17 Earnings in Line

9M17 revenue increased marginally by 1.1% yoy to due to an earlier 2017 CNY which resulted in demand growing at the end of 2016 and also the higher sales in 1H16, in anticipation of the price increase implemented on 1 July 2016. 9M17 PBT improved by 6.8% yoy as a result of cost optimisation, improving the EBIT margin by 1ppts to 18.4%. We see the earnings as broadly in line with our and street expectations, accounting for 63% of full-year estimates. We believe that 4Q17 is likely to be stronger qoq on the back of the festive seasons and continuous cost optimisation to improve bottom line.

Better Product Mix and Cost Optimization

HEIM’s product mix continues to improve favourably as it concentrates on growing the high-margin premium brands. 3Q17 revenue was helped by the new mainstream cider brand Apple Fox launched in August 2017 and the commencement of sale of locally brewed Strongbow Apple Ciders. We believe that HEIM will continue to innovate with new product launches to meet rising consumer demand. Also, the 3Q17 PBT margin was slightly lower at 18.6% (vs. 19.5% in 3Q16) due to higher commercial expenses for brand launches. We expect the company to benefit from new launches in coming quarters.

Upgrade to BUY With Target Price of RM20.10

We increase FY18-19E earnings by 1.2%-2.4% to factor in stronger volume growth as we believe that HEIM is likely to benefit from a gradual recovery in consumer spending and a favourable 2018 budget that increases consumers’ disposable income. We roll forward our valuation to FY18 and increase our DCF-derived TP to RM20.10. Key downside risks include increasing rivalry from competitors and contraband beers, lower -than-expected sales volume growth and higher-than-expected operating expenditure.

Source: Affin Hwang Research - 22 Nov 2017