HEIM’s 1QFY23 results met expectations as revenue rose 6% YoY  though earnings fell as increased marketing expenses hit margins.  We fine-tune up our FY23-24F earnings by 4-2%, raise our TP by 3%  to RM28.60 (from RM27.70) as we roll over our valuation base year to  FY24F. Maintain MARKET PERFORM.

Within expectations. The 1QFY23 results met expectations, accounting  for 26% and 25% of our full-year forecast and the full-year consensus estimate, respectively. No dividend was declared during 1QFY23.

YoY, 1QFY23 revenue grew 6% following a minor jump in sales volume as  well as the price hike implemented in Aug 2022. In a statement, parent  company Heineken N.V. announced that beer volume in Malaysia  “increased by low-single-digit versus last year”. However, EBITDA and  EBIT contracted YoY by 3% and 6%, respectively, following a 9% increase  in operating expenses due to the full resumption of marketing campaigns.  Overall, 1QFY23 core net profit fell 3% YoY as the increased expenses ate  into margins, negating the slightly improved sales volume, impact from the  price hike and the absence of Cukai Makmur.

QoQ, revenue fell 7% as an early Chinese New Year led to slightly stronger  sales in the preceding quarter. EBITDA (-6%) and EBIT (-6%) fell in  sympathy but core net profit actually increased 5% in the absence of Cukai Makmur.

Outlook. The group’s FY23 outlook continues to be mixed as broader  macroeconomic headwinds continue to cloud its immediate prospects. On  one hand, the group has managed to sustain its sales volume going into  FY23, even managing a minor growth. On the other, the group’s headline  and namesake product, Heineken, could be at risk amidst the sustained  inflationary pressure given its skew towards the premium segment.  Coupled with the group’s guidance that marketing spending will be higher  in FY23, we could see margins squeezed as the defensiveness afforded  by the group’s more premium portfolio deteriorates slightly.

Post results, we raise our FY23F and FY24F earnings by 4% and 2%, respectively, as we impute slightly higher sales volume, offset partially by  the increased marketing costs.

Maintain MARKET PERFORM. We increase our TP by 3% to RM28.60 as  we roll over our valuation basis to FY24, applying a slightly lower PER  multiple of 20x (vs. 21x previously), in-line with the sector’s historical 1- year forward average. We also impute a 5% discount based on a 2-star  ESG rating as appraised by us (see Page 4).

We continue to like HEIM for: (i) resilient market demand despite sustained  high inflation, (ii) its ability to defend margins with a product mix that is  skewed more toward premium brands, and (iii) a decent dividend yield of  >5%. However, we remain wary of the stigma of its products being socially  undesirable amidst a rising ESG trend.

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 - 12 May 2023