Post briefing, we are reaffirmed that the group is due for sequential improvements moving ahead, to be fuelled by a pick-up in beer consumption in 2H. Nonetheless, the foresaid merits could be partially diminished by the lack of visibility for FY20 dividend payout, as well as the uncertainty surrounding the speed of its earnings recovery in the absence of a vaccine. Hence, we are keeping our MARKET PERFORM call with unchanged TP of RM22.95.

2QFY20 results recap. Recall that for 2QFY20, the group posted 51% and 129% YoY drop in respective revenue and bottom-line. The losses recorded in 2Q were mainly dragged by the closure of breweries and major on-trade channels in April, leading the group to record zero revenue for a span of 46 days. However, we gathered that the group has observed improvements from May onwards, as demand for beer began to gradually pick-up following the easing of movement restrictions.

Playing defence. While the unexpected disruptions brought by the MCO have had a tremendous impact on the group, brisk actions were taken in attempt to alleviate the burden. For instance, the groups have carried out campaigns like “Tiger Beer Save Our Street Food” and “Heineken Malaysia Raise Our Bar” to provide financial support to its partners as well as to generate higher traffic. Moreover, efforts have been taken to streamline its FY20 cost base through (i) the postponement of close to half of FY20 capex spending to the following year, coupled with (ii) more targeted A&P spending and rationalisation of brand promoter headcount. The group has also been strengthening its route to market strategy through its own e-commerce platform – Drinkies (which has since expanded from 3 regions to 7 regions) and by listing its products on Shopee platform. Meanwhile, in respond to the growing sales of illicit beer on online channels, the group has been actively engaging relevant authorities to collectively combat the illicit beer issue (which takes up c.28% of entire market share).

Not out of the woods yet? Barring a second wave of infections, the group is likely to experience earnings rebound moving ahead, underpinned by: (i) resumption of its brewery operations from May, and (ii) anticipation for a pick-up in beer demand in 2H, likely fuelled by the pent-up demand as consumers feel more at ease to dine out now with the local infected cases remaining under control. That being said, the expected recovery should be partially dulled by c.20% of the on-trade channels (i.e. pubs and entertainment centres) that are still prohibited from operating, as well as the absence of major sporting events this year.
Post meeting, we revised our FY20E earnings upwards by 40.3% while maintaining FY21E earnings, as we account for more generous growth assumption for the year. While the group is keeping its 100% dividend pay-out policy unchanged for now, we maintain a more conservative dividend pay-out estimates at 53% and 92% for FY20 and FY21, respectively.

Maintain MARKET PERFORM with unchanged TP of RM22.95, premised on an unchanged FY21E 22.0x PER (closely in-line with - 0.5SD over its 3-year mean). While we still like the name for its market leader position and expectation for a gradual recovery ahead, we are nonetheless cautious over its near-term outlook being clouded by: (i) possibility for a lower dividend pay-out for the year, coupled with (ii) uncertainty surrounding the speed of its earnings recovery in the absence of a vaccine. Risks to our call include: (i) stronger/weaker-than expected sales volume, and (ii) excise duty hike.

Source: Kenanga Research - 17 Aug 2020