Heineken Malaysia (HEIM)’s FY17 core earnings decreased marginally by 1% yoy to RM270m. The results were broadly in line with our and consensus expectations. While top line growth was meagre at 2.6% yoy, cost efficiencies helped to lift HEIM’S FY17 EBIT by 5% yoy. Being the leader in domestic malt liquor, we believe that HEIM should benefit from an improvement in consumer spending and additional volume growth driven by the World Cup in June. But, we downgrade HEIM to HOLD with an unchanged TP of RM20.10 after the recent share price performance.

Muted Total Volume Growth Helped by Premium Brands

HEIM recorded a higher FY17 revenue of RM1.93bn (+2.6% yoy) but lower core net profit of RM270m (-1.2% yoy). Revenue growth was attributable to the launch of new brands and favourable product mix driven by demand for premium brands such as Heineken and Guinness. EBIT increased by 5% yoy to RM366m due to improvement in product mix and cost optimisation, improving the EBIT margin by 0.4ppts to 19%. However, its core net profit decreased marginally by 1.2% yoy due to a slightly higher tax rate of 25.6% vs 21.3% in CY16. We see the earnings as broadly in line with our and street expectations, accounting for 96% and 98% of full-year estimates respectively. HEIM also announced a 50 sen DPS, bringing total FY17 DPS to 90 sen.

Maintaining Market Leader Position

HEIM maintained its leading position in the domestic malt liquor market with more than 50% market share. Going forward, it plans to continue to grow its premium segment which enjoys higher margin and also extend its current portfolio to increase addressable market. For instance, Apple Fox Cider (introduced in August 2017) and Strongbow had helped to increase HEIM’s cider volume shares. Recently it also launched 0% alcohol content Tiger Radler to observe market’s response.

Downgrade to HOLD With Unchanged Target Price of RM20.10

We introduce FY20E earnings while leaving FY18-19E earnings unchanged. We believe that HEIM’s outlook in 1H18 should be positive, driven by the Chinese New Year festivities and World Cup event in June. We maintain our DCF-derived TP at RM20.10 and downgrade our call to HOLD after the decent share price performance over the past 2 months.

Source: Affin Hwang Research - 15 Feb 2018