Review

• Heineken (M) Berhad (Heineken) reported 18MFY16 net profit of RM427.3mn (16.1% YoY). This was above our estimates at 109% of our full year earnings projections. For this quarter, an interim dividend of 60sen was declared, bringing total dividend paid out for 18 months to 145sen. This translates to a payout ratio of 96.2%.

• On cumulative basis, the group’s 18M16 revenue expanded by 4.9% YoY to RM2.8bn attributable to 1) resilient volume growth, 2) strong portfolio of brands, and 3) increase in average selling prices. The group’s PBT expanded by 11.1% YoY to RM549.2.mn due to the greater cost efficiency, increase in revenue and savings from global procurement initiatives. The group has also benefitted from improved route to market execution following the transition to a fully integrated IT system, which allows the group to effectively manage its value chain.

• QoQ, revenue and net profit grew robustly at 50.1% to RM577.5mn and 83.9% to RM104.7mn respectively, mostly due to growth in the off trade segment, driven by early Chinese New Year in 2017 as well as growth in premium brands.

Impact

• We increase our FY17-18 earnings projections by 3.3% and 7.2% respectively after factoring in higher average selling price.

Outlook

• We think that next quarter results will not be as strong as this as Chinese New Year sales are expected to be lower than same period last year. Note that there was an increase of excise duty of locally-produced hard liquor tax by 150% in Dec-16. Thus, we think some consumers could have shifted to liquor as a substitute product.

• With the rising commodity prices, management share that only 20% of Heineken’s raw materials are imported, which account for less than 10% of its cost. On the Price Control and Anti-Profiteering Act 2017, the clarity given by the ministry is still not out yet. However, they are always in discussion with them.

• Looking forward, despite weak consumer sentiment and global economic outlook, the group should be able to weather the storm as it would continue realising effective commercial strategies and cost proficiency programmes.

Valuation

• Given the change in earnings, we revise our TP for the group higher to RM21.08 (BUY) per share based on DCF valuation (COE: 7.2%, g: 2.5%). At current price levels, the stock offers decent dividend yield of 5.3% and 5.8% in FY17 and FY18, respectively. Downside risks to our call are 1) increase in excise duty, and 2) increase in contrabands.

Source: TA Research - 16 Feb 2017