1Q19 Net Profit of RM52.8m (+8% YoY) and absence of dividends for the quarter are within expectations. The group should continue to be sustained by its market-leading position, sticky consumer demand and marketing capabilities, against potential pressures arising on higher selling prices to consumers. Maintain MARKET PERFORM with a higher TP of RM23.25 (from RM21.90) as we roll over our valuation base year to FY20E.

1Q19 within. HEIM’s 1Q19 Net Profit of RM52.8m made up 18% of both our/consensus respective full-year expectations. We deem this to be within estimates owing to lumpy 4Q periods typically seen by the group, given heavy Chinese New Year (CNY) front-loading. No dividend was announced, which was also expected.

YoY, 3M19 sales of RM525.1m (+21%) was likely boosted by better marketing strategies with some front-loading ahead of the price increase in April 2019 across the group’s portfolio. However, operating profit only improved by 9% to RM71.4m (margin registered at 13.6%, - 1.5ppt) on higher marketing spend in conjunction with the CNY festivities and rising input costs. This then translated to a 3M19 net earnings of RM52.8m (+8%).

QoQ, 1Q19 sales was a 21% dip from 4Q18 owing to high forward spending in lieu of the CNY festivities. Operating profits fell by 51% owing to lower sales generated and higher expenses (mainly on marketing) during the current quarter. This led to a 47% decrease in net profit in 1Q19.

Finding a sweet spot for pricing. Commencing April 2019, brewers raised prices by up to 6% to support the higher production costs between their products. Recall that there were two rounds of price increases in 2018; (i) in April similarly for the above, and (ii) September 2018 due to SST. While this could lead to some pricing pressures on consumer spending, we believe that this may not be overly detrimental to the group given their market-leading position in the brewery space and sticky consumer demand. Additionally, plans to expand its capabilities are poised to improve overall efficiency and economies of scale, which could bring about savings in cost.

Post-results, we tweak our FY19E/FY20E earnings estimates by 1.0%/0.6% as we incorporate its FY18 annual report.

Maintain MARKET PERFORM with a higher TP of RM23.25 (from RM21.90). Our TP is based on an unchanged 23.0x PER on a rolled over FY20E valuation base year. The ascribed valuation is close to the stock’s +1SD over its 3-year mean, which we believe is reflective of a stronger appetite for brewers for their sticky market demand environment and decent dividend yields. In comparison, large cap F&B players only offer dividend yields of c.2% on average.

Risks to our call include: (i) stronger/weaker-than-expected sales volume, (ii) better/softer sales mix, and (iii) more/less favourable cost factors.

Source: Kenanga Research - 24 May 2019