Heineken Malaysia (HEIM)’s 2018 results exceeded our expectations but tracked consensus estimates. Core earnings grew by 5% to RM282.5m on the back of higher volume sales, partially offset by elevated A&P expenses over the World Cup year. Given HEIM’s strong share price since November 2018, we downgrade HEIM to a HOLD (from BUY) on valuations.

2018 Results - Above Our Expectations

HEIM’s 2018 core net profit grew by 4.6% to RM282.5m as revenue increased by 8.3% to RM2.03bn, with its bestselling Tiger beer anchoring the growth in volume sales. Despite incurring higher commercial expenses over the World Cup year, the impact to margins was cushioned by improved cost efficiencies. 4Q18’s sales growth of +12.3% yoy (+29.3% qoq) – partially lifted by the c.5.5% SST-driven ASP hike in Sep18 – was stronger than we anticipated, as we had expected a lull following SST’s implementation. Overall, the results exceeded our expectations but tracked consensus expectations, accounting for 108% and 102% of 2018 estimates respectively. A final dividend of 54sen was proposed (2018: 94sen).

Positive Outlook for the Brewers

HEIM’s strong 4Q18 performance came in tandem with that of its competitor, Carlsberg (CAB), albeit weaker than CAB’s +30% yoy local sales growth in 4Q18. We remain optimistic on overall industry demand for both brewers heading into 2019. Organic growth, alongside a potential decline in the contraband beer market (c.25-30% total market) would therefore support HEIM’s earnings outlook.

Downgrade to HOLD With Revised TP of RM23.80

We raise our 2019-20E EPS by 4.5%/4.4% respectively to reflect better sales performance and cost control going forward, and also introduce our 2021E estimates. However, we downgrade the stock to a HOLD call (from BUY) following its recent share price outperformance, but with a higher DCF-derived TP of RM23.80. Upside/downside risks: (i) Lower-thanexpected volume sales; (ii) improving/deteriorating consumer sentiment; and (iii) higher/lower-than-expected production costs.

Source: Affin Hwang Research - 21 Feb 2019