• BUY, new MYR30 TP from MYR31.80, 29% upside with 6% FY24F yield.9M23 results missed forecasts due to softer-than-expected sales and higher-than-expected marketing expenses. That said, we believe its current valuation is inexpensive, considering the dissipating regulatory risks stemming from political stability. In a challenging business environment, the brewery sector will provide earnings visibility on relatively sticky demand, further supported by the effective clampdown on contraband. Generous dividend payouts offer yield-seekers a defensive shelter.

• 9M23 results are below expectations. Heineken Malaysia’s net profit of MYR288m (-7% YoY) accounts for 67-69% of our and consensus full-year forecasts. The negative deviation could be due to softer-than-expected sales and higher-than-expected marketing expenses. Post-results, we trim FY23-35F earnings by 5-6%. Correspondingly, our DDM-derived TP drops to MYR30 (inclusive of a 6% ESG premium), which implies 21x FY24F P/E,or at a slight premium to its peer Carlsberg Brewery (CAB MK, BUY, TP: MYR22.7) to account for HEIM’s market leadership in Malaysia.

• Results review. YoY, 9M23 revenue dropped by 8% to MYR1.9bn (+16%vs pre-pandemic 9M19 sales), dragged by cautious consumer spending on the back of inflationary pressures and normalisation from the strong 9M22base that was spurred by the economy reopening. Meanwhile, 9M23 PBTtumbled 14% to MYR379m, in line with the volume decline and rising marketing expenses to stimulate consumer spending. 9M23 net profit fell by a more moderate pace, thanks to the lower effective tax rate (-5.9ppt) post Cukai Makmur expiry. QoQ, 3Q23 revenue grew 5% to MYR600m but net profit slipped 4% to MYR87m due to higher repair and maintenance costs incurred.

• Outlook. 4Q23F should see a QoQ earnings uptick on better seasonality whilst the YoY comparison could be aided by the later timing of the Lunar New Year in 2024 (in mid-February vs mid-January in 2023). This could lead to a relatively lower loading of marketing expenses, if a part of these were to be charged or spread out to 1Q24F. Beyond the immediate term, we expect steady FY24F topline growth, supported by a more premium product mix. Meanwhile the overall consumption environment and consumer sentiment could improve, in view of the moderating inflation, pick-up in tourist arrivals and stable legal TIV, thanks to the effective clampdown on contraband goods. Notwithstanding the 2% YoY projected earnings decline for FY23, we highlight that it will still represent a healthy growth of 29% vs the base of FY19.

• Downside risks to our recommendation include weaker-than-expected consumer sentiment and a major loss in its market share.

Source: RHB Securities Research - 28 Nov 2023