Heineken’s (HEIM) 2019 core net profit of RM313m (+10.8% yoy) was broadly in line with expectations. The strong performance was underpinned by continued growth in the group’s core and new brand launches. However, we trim our 2020-21E earnings forecast by 5-6% in light of a more cautious tone exacerbated by the Covid-19 outbreak. In spite of the earnings cut, our DCF-derived TP is raised to RM37.30 after applying a lower discount rate. Trading at a steep discount to Carlsberg, we expect this valuation discount to narrow given its equally compelling growth profile while forward yields are more attractive. Maintain BUY.

Broadly Within Expectations

HEIM’s 2019 revenue grew to RM2.32bn (+14% yoy), underpinned by robust sales across its core brands and new product launches. Core net profit came in at RM313.0 (+10.8% yoy) with higher sales volume although offset by increased marketing spend and uptick in both raw material and packaging costs. Overall, the results were within our and consensus expectations, accounting for 95% and 97% of respective forecasts. We note that 4Q19 margins were particularly weak (-3.5ppt yoy) owing to elevated marketing spend on new product launches (Tiger Crystal and Heineken 0.0) and an earlier commercial spend for 2020 Lunar New Year.

Bracing for a Challenging 2020

HEIM announced a DPS of 66 sen, bringing full year DPS to 108sen (2018: 94 sen). Moving forward, we foresee the start of 2020 to be challenging for brewers, no thanks to Covid-19 on top of already softening consumer sentiment. Lower tourist arrivals and a drop in local footfall in malls and bars would likely weigh on the group’s on-trade sales, in our view. Nevertheless, we are fairly comforted by the group’s continued focus in sharpening its commercial execution while concurrently driving cost efficiency measures. Following through, the on-going efforts by the government to clampdown on contraband alcohol is another positive for the brewers to thrive upon.

Maintain BUY at Higher TP RM37.30

In view of the potential negative impact on sales volume amidst the Covid-19 outbreak, we trim our 2020-21E earnings by 5-6%. Meanwhile, our DCFderived TP is raised to RM37.30 (implied 2020E PER 32.7x) as we incorporate a lower discount rate of 6.8% (TG: 2.5%). We believe the stock deserves a premium for its earnings resiliency while yields hover at an attractive 3.7-4.2%. Maintain BUY.

Preferring Heineken Over Carlsberg for Brewer Exposure

For brewer stock exposure, we prefer Heineken (HEIM) (BUY: TP RM37.30) over Carlsberg (CAB) (HOLD: TP RM39.50). HEIM continues to lead in domestic market share (estimated at c.60%) while its projected core earnings growth of 7-10% (fueled by an expanded mainstream product offerings) triumphs that of CAB at 5-7% over 2020-22E. Yields-wise, HEIM offers an attractive 3.7-4.2% against CAB’s 2.6-2.9%, whereby the latter’s recent surge in share price has largely moderated its yields.

Heineken’s Valuation Comparatively Undemanding

From a valuation perspective, we note that both HEIM and CAB historically traded closely at about 20x PER based on a 5-year average. However, CAB broke out of the trend in the past year (1-year average 28x vs HEIM 23x) likely owing to its perceived domestic market share gain at the expense of HEIM. CAB had a stellar 2018 as revenue and core earnings grew by 15% and 26% yoy respectively (vs HEIM’s yoy growth of 8% and 5%). Meanwhile, 2019 saw the brewers on equal ground as both recorded domestic sales growth of 10% yoy. HEIM’s current 2020E PER stands at 27x - a steep 30% discount as compared to CAB’s 39x PER. Hence, we believe there is considerable upside potential to HEIM, as valuation looks comparatively undemanding (given its stronger earnings growth prospects) and we expect the huge valuation gap between the two brewers to eventually narrow going forward.

Source: Affin Hwang Research - 24 Feb 2020