Heineken Malaysia (HEIM)’s 9M18 results were in line with our expectations but fell below consensus estimates. Revenue grew by 6.5% yoy to RM1.37bn in 9M18 while bottom-line growth was weaker at 3.5% yoy (9M18: RM182.5m) on the back of higher commercial spend recorded for 1H18’s festivities. The SST-driven price hike will likely temper HEIM’s earnings momentum, but nevertheless demand for malt liquor is rather inelastic and the resulting impact will be manageable, in our view. The stock is looking attractive at current levels after its price fell by 21% over the last 3 months. As such we upgrade HEIM to a BUY (from HOLD) with a CY19E TP of RM21.15.

Higher A&P Expenses Weighed on Operating Margins

HEIM’s 9M18 core net profit increased by 3.5% yoy to RM182.5m albeit recording sales growth of 6.5% yoy, as higher A&P spending dampened profitability (EBITDA margin -2ppts yoy) amidst the CNY and World Cup promotional campaigns in 1H18, offset by lower tax rates. Overall, 9M18 earnings were in line with our expectations but tracked below consensus, accounting for 70% and 65% of FY18E estimates respectively.

Strong 3Q Performance

Sequentially, HEIM 3Q18 performance was much stronger, as earnings leapt by 43.7% qoq on the back of strong sales preceding SST’s implementation as well as recovery in margins after 1H18’s promotional campaigns. 4Q performance is seasonally the strongest due to year-end festivities, but could be weaker this time around due to the implementation of SST. Nevertheless, the impact on breweries’ earnings growth as a result of past price hikes was short-lived, as demand for malt liquor is inelastic while beer remains the cheapest form of alcoholic beverage.

Upgrade to BUY

We trim FY19-20E EPS by -3.5% and -2.9% to reflect short-term impact from the SST-led price hike. However, the stock has been oversold following adverse reaction to the SST hike and looks undervalued at current levels, while offering attractive yields of 5%-6%. We hence upgrade HEIM to a BUY recommendation (from HOLD), albeit with a slightly lower DCFderived TP of RM21.15. Downside risks: Lower-than-expected volume growth seen after SST hike, and higher A&P expenditure

Source: Affin Hwang Research - 1 Nov 2018