• Heineken posted an unprecedented core net loss of RM18.2m in 2Q20 vs core net profit of RM65.7m in 2Q19 – largely due to the severe impact of the MCO.
• 6M20 core net profit came in at RM38.8m (-67.3% yoy), accounting for 14% of both our and street’s full-year forecast – below expectations.
• We cut our 2020E EPS by 29%, and adjusted the 2021-22E by -2.2% largely to impute lower sales volumes. Post-revisions, our 10-year DCF-derived TP remains at RM21.30. Maintain HOLD.

2Q20 Succumbed to a Core Net Loss of RM18.2m

Heineken posted a 2Q20 revenue of RM253.7m, a massive decline of 50.5% yoy – owing to the temporary closure of on-trade channels (est. at two-thirds revenue contribution) and the suspension of its brewery operations during the MCO which had severely affected production. The significantly lower sales could not offset fixed overheads, leading to an unprecedented core net loss of RM18.2m. On a cumulative basis, 6M20 revenue and core net profit stumbled 25.8% and 67.3% to RM769.6m and RM38.8m respectively. Earnings fell below our and street expectations, accounting for 14% of the respective forecasts. No dividend was declared thus far, pending management’s re-evaluation of the situation at the close of the financial year. We now assume a payout ratio of 50% (from 100%) for 2020, in view of the exceptionally challenging year.

Gradual Recovery Should Follow

On a qoq basis, revenue plunged 50.8% while earnings fell into the red owing to the aforementioned factors. Nonetheless, for the remainder of 2020, gradual improvement should follow as most hotels, restaurants and catering establishments are now operating at near-optimum capacity though we note that certain nightlife channels (pubs, nightclubs) will likely remain out of bounds. Near term, the group’s focus will likely continue to centre around effective commercial execution and undertaking cost control measures which, among others, include a revision of commercial and marketing spend.

Maintain HOLD With 12-month TP of RM21.30

We cut our 2020E EPS by 29%, largely to account for lower alcohol consumption, while the 2021-2022E earnings were adjusted slightly by -2.2%. We envisage an earnings recovery of 45.3%, off a low base, assuming a gradual reopening of the remaining nightlife channels by 2021. Post-revisions, our 10-year DCF-derived TP remains at RM21.30, implying a forward PER of 21x, near its 5-year average. Despite the headwinds in 2020, the stock is trading at a reasonable level (5-year mean) in our view, given the potential pent-up recovery off a low base. Maintain HOLD.

Source: Affin Hwang Research - 14 Aug 2020