Heineken Malaysia (HEIM)’s 1H18 results came in below our and street’s expectations. Core net profit declined 6.2% yoy to RM103.7m in 1H18, despite top-line growth of 7% in tandem with higher commercial spend recorded around CNY and World Cup promotional campaigns. We expect a seasonally stronger 2H18, supported by the brief tax holiday, World Cup event as well as recent improvement in consumer sentiment. However, we note that the new SST’s implementation might muffle earnings growth going forward. Maintain HOLD with a rolled-forward CY19E TP of RM21.75.

Higher A&P Expenses Tempered Profitability

HEIM’s 1H18 revenue rose by 7.0% (unadjusted) to RM855.4m, attributable to strong demand for its best-selling Tiger Beer. 1H18’s core earnings however declined 6.2% yoy, mainly due to higher A&P costs and timing differences of these expenses, given this year’s later Chinese New Year festivities as well as the World Cup event. Overall, earnings were below our and street expectations, accounting for only 35% of FY18E estimates. A first interim dividend of 40sen per share was also announced.

Potential Hike in Sin Taxes

While we expect stronger volume sales and better margins to carry 2H18’s performance, a reportedly higher sales tax of 10% and service tax of 6% imposed on alcoholic drinks served in F&B outlets might dampen the industry’s volume growth going forward. Both Heineken and Carlsberg have voiced their intention to pass on costs to consumers, with the former stating its next price adjustment to be effective on 15 September although off-trade prices will still be lower than that under GST. Nevertheless, strong demand inelasticity was observed in the past for both breweries’ beverages.

Maintain HOLD With Rolled-forward TP of RM21.75

We trim FY18E EPS by 10% to reflect higher A&P expenditure, but maintain FY19-20E forecasts at this juncture. At current levels, the stock remains fairly valued in our view. Maintain our HOLD recommendation albeit with a revised DCF-derived TP of RM21.75 as we roll forward our valuation horizon to CY19E. Upside/downside risks: Stronger-than-expected demand for its portfolio brands/lower-than-expected volume growth seen after SST hike and higher A&P expenditure.

Source: Affin Hwang Research - 29 Aug 2018