• Maintain BUY and MYR33.80 TP, 20% upside and c.5% yield. 1Q23 results met expectations with the higher marketing expenses more than offsetting the healthy topline growth. Notwithstanding the challenging environment, we believe the breweries will offer a higher degree of defensiveness. We continue to like Heineken Malaysia for its robust sales growth momentum on the back of quality product offerings and effective marketing strategies. Current valuation is undemanding, trading at below its 5-year mean while the dividend payout is relatively more generous.

• Heineken’s 1Q23 results were within expectations. Net profit of MYR110m (-3% YoY) accounted for 24-25% of our and consensus forecasts. Post results, we make no material changes to our earnings forecasts and DDM-derived TP of MYR33.80 (inclusive of a 6% ESG premium). Our TP implies 22x FY23F P/E, at a slight premium over peer Carlsberg (CAB MK, NEUTRAL, TP: MYR22.70).

• Results review. YoY, 1Q23 revenue grew 6% to MYR740m, largely driven by a better product mix and price hikes implemented last year. Notwithstanding, 1Q23 operating profit fell 6% to MYR146m with margin eroding by 2.5ppts to 19.8%. This is as the group increased its marketing expenses to spur consumer spending whilst 1Q22 was a low base due to the lockdown restrictions. QoQ, 1Q23 revenue was 7% lower with more of the Lunar New Year sell-in captured in 4Q22 due to the earlier timing of the festival. That said, a favourable swing in marketing expenses more than offset the lower sales and led to a 5% net earnings growth QoQ.

• Outlook. Whilst we do not expect the volume to grow significantly from the high FY22 base, we believe FY23F earnings growth of 11% will be achievable, driven by the full effect of price hikes, continuous premiumisation of the product mix, and the normalised effective tax rate or ETR post Cukai Makmur. Notwithstanding the challenging outlook considering the elevated inflationary pressure, rising interest rates and uncertain global economy outlook, we expect the sticky and less elastic demand for beer to render it a higher degree of defensiveness. On top of that, Heineken’s quality product offerings and engaging marketing initiatives should also help to consolidate its solid market position in Malaysia.

• Risks to our recommendation include unfavourable regulatory changes and major loss in market share.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 12 May 2023