Review

Heineken (M) Berhad (Heineken) reported 1QFY17 net profit of RM48.9mn (-3.7% YoY), accounting for 17.4% of our full-year forecast and 17.0% of consensus estimates. We consider this within expectations as FY17 earnings are expected to be back-end loaded. No dividend was declared for the quarter under review.

YoY, revenue declined by 12.6% to RM401.1mn due to 1) early Chinese New Year in 2017 as consumers had stocked up beers in the previous quarter, 2) soft consumer sentiment. The Consumer Sentiments Index fell to 69.8 from 78.5 in second quarter 2016, and 3) contraband beers continued to rise as it is a cheaper alternative. The drop in revenue has filtered down to the bottomline, where earnings declined by 3.7%

QoQ, PBT contracted by 47.3% to RM57.9mn owning to the cyclical demand for Chinese New Year sell-in.

Impact

We leave our earnings forecast unchanged at this juncture.

Outlook

We think that the next 2 quarters will continue to be slow due to lack of major sports events. Nonetheless, we think that the final quarter results will be strong due to year-end festivities.

With regards to the Bills of Demands amounting to RM56.3mn (20% of FY17 net profit) handed by Royal Malaysia Custom to the group on 28 August 2015, the group remains firm on its stance that a retrospective application of the new excise duty valuation method implemented on 1 November 2013 is unjustifiable.

Valuation

We reiterate our Buy call recommendation and maintain our target price of RM21.08 per share based on DCF valuation (COE: 7.2%, g: 2.5%). At current price levels, the stock offers decent dividend yield of 4.6% and 5.0% in FY17 and FY18 respectively. We like Heineken for its market leading position and diversified product portfolio. Downside risks to our call are 1) increase in excise duty, and 2) increase in contrabands 3) unfavourable outcome from the unresolved bills of demands.

Source: TA Research - 13 Apr 2017