• Sequential improvement in on-trade sales in 3Q20 lifted the company into the black with a core net profit of RM61.3m (-40.7% yoy).
• 9M20 core net profit stood at RM100m (-54.9% yoy) - below our (51%) and consensus (56%) expectations.
• We cut our 2020E earnings forecast by 15.2% to RM166.3m, largely to input the higher opex, but keep those for 2021/22E unchanged. Looking forward past a badly-hit year, we upgrade Heineken to HOLD with a higher 12-month TP of RM22.00 with a lower WACC assumption of 7.7% (from 8.5%).

9M20 core net profit -55% yoy; below expectations

Heineken posted a 9M20 revenue of RM1.23bn (-24.2% yoy) on the back of lower sales volumes and disruptions to its brewery operations during the MCO. Flowing through from the lower sales, core net profit slumped to RM100m (-54.9% yoy). The result was below our and consensus expectations, accounting for 51% and 56% of the respective full-year forecasts. The variance to ours was largely on a higher-than-expected opex. No dividend was declared as per the previous corresponding quarter, and also as the group looks to adopt a prudent approach in view of the challenging environment.

3Q20 back in the black

Sequentially, the group returned to the black with earnings of RM61.3m as a sales recovery ensued post the MCO-hit quarter. Going into 4Q20, the reinstatement of the CMCO puts a dampener on the recovery momentum especially in on-trade sales. Nevertheless, into 2021/22, we expect the worst to be behind the group, as demand recovers off the low base in 2020 in anticipation of a gradual resumption of normalcy in on-trade activities. In addition, with the group looking to right-size its cost base to adapt to the new normal, margins should be supported going forward.

Upgrading to HOLD

We cut our 2020E earnings forecast by 15.2% to RM166.3m, but kept the 2021/22E estimates unchanged. We also lower our WACC assumption to 7.7% (from 8.5%) as the worst looks to be behind the group, and to reflect the increasingly positive developments with regards to vaccine availability going into 2021. Post-revision, our DCF-derived TP is revised higher to RM22.00. We upgrade the rating to HOLD considering the potential upside of 4.8% from current levels. Up/downside risks: (i) earlier/later-than-expected containment of Covid-19, and (ii) sharp decline/spike in raw material costs.

Source: Affin Hwang Research - 27 Nov 2020