Kenanga Research & Investment

Heineken Malaysia - On-trade Sales Boost Earnings

Publish date: Wed, 09 Nov 2022, 10:20 AM

HEIM’s 9MFY22 profit came in above expectations on a major rebound in sales volume. Earnings more than doubled on increased volume while margins benefitted from better economies of scale. We raise our FY22F earnings by 8.6% to account for the higher sales volume while keeping our FY23 forecast relatively unchanged as we believe the pent-up demand will taper off going into 2023. Maintain MARKET PERFORM with a higher TP of RM25.80.

Beat forecasts. HEIM’s 9MFY22 earnings beat expectations, at 85% of our, and 89% of consensus, full-year forecast. The positive deviation came largely from a major rebound in sales volume. While the group did not disclose the exact quantum, a statement by its parent company revealed that beer volume in Malaysia grew in the 70% range during 3QFY22. No dividend was declared, as expected.

YoY, revenue grew 60.3%, driven by the increased volume as well as improved product mix. The group attributes the increase in revenue to the recovery of the on-trade segment as well as the price hikes they implemented on 1 Aug 2022. We also believe that sales volume was driven up by forward purchasing from on-trade channels in preparation of both the World Cup and Chinese New Year, especially ahead of the price hikes. EBITDA (+98.4% YoY) and EBIT (+122.2% YoY) both benefitted substantially from greater access to economies of scale as the increase in revenue resulted in improvements in both margins.

Overall, earnings doubled from the improved sales volume and product mix. While the increased taxation from Cukai Makmur slightly ate into the bottom line, core net profit (CNP) margins still saw improvements driven mainly by the increased sales volume.

QoQ, revenue grew 11.8%, driven mainly by improvements in on-trade channels, better product mix, and the price hike. EBITDA grew 21.3% due to better economies of scale and improved performance from their higher margin premium products. Overall, CNP grew 26.3% as the group saw margin improvements across the board.

Outlook. Following the 9MFY22 results, we believe the group will continue to prioritise defending margins amidst rising cost pressures. The group has already increased inventory levels by 28% during 3QFY22 to RM182.2m compared to the RM150m level they maintained since 4QFY21. We believe the group has begun to reduce their net cash position built up during 1HFY22 to increase inventory levels in preparation of increased raw material prices. While there may still be some impacts, this could partially offset the rising cost of raw materials in 4QFY22. Conversely, while the 4Q has been historically strong due to holiday sales and forward buying for Chinese New Year, some of those impacts may have been front-loaded into 3QFY22 given the price hike on 1 Aug 2022. Thus, while 4QFY22 is still expected to be strong, QoQ growth may be lower than expected.

Looking to FY23, we largely expect YoY growth to remain flat based on macroeconomic indicators. Pent-up demand for on-trade channels is expected to ease as the economy fully reopens while global economic growth is expected to slow following widespread interest rate hikes eating into consumer spending power.

Forecasts. We raise our FY22F earnings by 8.6% largely to reflect the increased sales volume. However, we mostly maintain our FY23 forecasts due to the above stated macroeconomic factors.

We continue to like HEIM for: (i) its resilient demand amidst rising inflation and dampening consumer sentiment, (ii) its more premium product mix and margin defensiveness in spite of rising cost pressures, and (iii) its generous dividend policy and expected yields of 5.5%. However, we remain wary of sustained inflation eating into the premium segment’s performance and generally slower growth in FY24.

Maintain MARKET PERFORM. We raise our TP marginally to RM25.80 from RM25.60 based on an unchanged FY23F PER of 21x. We also impute a 5% discount based on a 2-star ESG rating as appraised by us. While 9MFY22 results have been encouraging, we expect FY23 performance to be in line with FY22 on market-wide indicators. The expected dividend yield of 5.5% is also less enticing in the current rising interest rate environment.

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 - 9 Nov 2022

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