Heineken’s 9M19 core net profit of RM222m (+22% yoy) surpassed both market and our expectations. The impressive set of results was driven by robust sales growth (+20% yoy) across both its core brands as well as new products launched in 3Q19. The sustained sales traction YTD augurs well for the group heading into its seasonally strongest 4Q19. We raise 2019-21E earnings by c.5% and subsequently reiterate BUY, with a higher TP of RM30.30.

Above Expectations

9M19 core net profit of RM221.8m (+21.5% yoy) broadly beat consensus and our expectations, accounting for 73% and 71% of 2019E forecasts respectively – with Q4 typically making up for 35-38% of full-year earnings. This came on the back of organic sales growth of 13% yoy, attributed to strong sales performance across its core brands and new product variants – Heineken 0.0 and Tiger Crystal – launched in 3Q19. EBIT margins also inched up by 0.5ppts due to improved cost efficiencies despite additional A&P expenses incurred for the new product launches.

Sales Growth Momentum Tracking Above Historical Trends

With both Heineken and Carlsberg posting double-digit domestic top-line growth – well above their historical average of c.4% over the decade – we gather it is likely that volume sales have been further boosted by the authorities’ enforcement efforts against contraband alcohol. As such, we believe Heineken is well-poised to capitalise on a sustained clawback in volumes from the illicit trade – said to account for 20-30% of the total malt liquor market – given its mainstream brands’ dominant market position. The launch of its new non-alcoholic and easy-to-drink product variants, in addition to its Drinkies e-commerce platform are also expected to expand its addressable market as well as customer reach, in our view.

Reiterate BUY

We raise 2019-21E earnings by 4.8-5.1% to factor in stronger sales momentum. Post-earnings revision, we reiterate BUY on Heineken, with a lifted DCF-derived TP of RM30.30 (from RM29.00). Forward yields still look attractive at 4.7-5.1%. Downside risks include: (i) surge in raw material input costs; (ii) proliferation in contraband alcohol; and (iii) slowdown in consumer spending.

Source: Affin Hwang Research - 29 Nov 2019