HEIM’s 1HFY22 net profit beat expectations due to a stronger than-expected rebound in sales volume on the economy reopening. We raise our FY22F/23F earnings forecasts by 12%/3%, largely to reflect a strong sales volume in 1H and the price hike from 1 Aug 2022, though partially offset by a slowdown in sales volume from 2H and rising operating cost pressures. We cut our TP by 7% to RM25.60 based on 21x FY23F PER with a 5% ESG discount. Downgrade to MP from OP.

Beat forecasts. HEIM’s 1HFY22 net profit beat expectations, at 61.9% and 63.3% of our full-year forecast and the full-year consensus estimate, respectively. The deviation against our forecast came largely from a stronger-than-expected rebound in sales volume following the lifting of movement restrictions. The declared interim dividend of 40.0 sen is in-line with our full-year forecast of 108.0 sen as the group normally pays out the bulk of its dividend in the second interim.

1HFY22 revenue grew 49.7% as sales volume buoyed by the transition to the endemic phase. Meanwhile, its net profit more than doubled from a year ago thanks to better economies of scale on a significantly higher sales volume, partially eroded by a higher effective tax from Cukai Makmur (29.5% vs. 23.9% in FY21).

Outlook. The company effected a price hike to the tune of 6-8% across all channels from 1 Aug 2022 to counter sustained high cost of inputs such as barley, hops and aluminium as well as elevated distribution cost on the back of high inflation and prolonged global supply chain disruptions.

In the recent past, when HEIM raised prices by 5-7% in 4QFY21, the impact on its sales volume had been relatively muted. However, this time around, against a back of high inflation that is eating into consumers’ disposable incomes, we expect some erosion in demand.

There is also concern over a potential hike in excise duty on alcoholic products in the coming budget, given that the industry has been relatively spared since the rebasing of the excise calculation in 2016 and a direct excise increase in 2006 (+23%, RM6.00/litre to RM7.40/litre).

Forecasts. We raise our FY22F/23F earnings forecasts by 12%/3%, largely to reflect a strong sales volume in 1H and the price hike from 1 Aug 2022, though partially offset by a slowdown in sales volume from 2H (on the price hikes) and rising operating cost pressures.

Recommendation and TP. We cut our TP by 7% to RM25.60 based on 21x FY23F PER (from RM27.40 based on 22x FY23F PER previously) largely to reflect a higher risk premium on the back of high inflation and to bring our valuations more in line with the sector’s historical forward PER. We also impute into our TP a 5% discount to factor in a 2-star ESG rating as appraised by us. Coupled with a decent performance in share price in recent months which has exhausted its upside, we downgrade HEIM to MP from OP.

Risks to our call include: (i) More restrictions on the sales of alcoholic products; (ii) higher taxes on alcoholic products; (iii) illicit trade eating into legalised market; and (iv) rising input costs.

Source: Kenanga Research - 15 Aug 2022