Review

• Heineken Malaysia Berhad’s (HEIM) 9MFY23 core earnings of RM287.7mn (-6.6% YoY) missed expectations at only 70% and 69% of ours and market’s full year estimates, respectively. The negative variance against our anticipation primarily attributed to softened consumer spending and high base effect in FY22.

• No dividend was declared for the quarter under review.

• YoY, 9MFY23’s sales declined 7.5% to RM1.9bn, largely attributed to weaker consumer sentiment as a result of macroeconomic uncertainties and substantial uptick in consumption for CY22. The group’s EBIT logged at RM382.7mn (-13.2% YoY) in tandem with topline contraction coupled with escalating marketing costs.

• QoQ, 3QFY23 registered a revenue of RM599.7mn (+5.3% QoQ), driven by better sales performance which we believed contributed by premium graded brewery products. However, its EBIT softened marginally by 3% to RM115.3mn (vs RM118.9mn in 2QFY23) due to additional maintenance cost, i.e. repair and fixed maintenance expenses to keep its facilities running at optimum level.

Impact

• We trim our FY23/24/25’s earnings forecasts by 7.4%/7.3%/7.2%, respectively, as reflective of lower sales volume due to persist market correction from high base effect in FY22.

Outlook

• HEIM maintain its cautious stance on the recovery speed of global economy, and weakened Malaysian Ringgit currency could further dampen the consumer sentiment too. Instead, the company will continue its effort in cost-optimisation within its operation environment to improve the EBIT margin amidst the easing effective tax rate in the absence of Prosperity Tax this year.

• We believe that the prospects of breweries’ sales performance should be brighter in FY24 on the back of escalating demand driven by major sporting season in CY24, namely the Paris Olympic Games and Euro 2024, which take place in 2QCY24.

• That said, on the cost front, it is likely that the key input cost, namely the barley will remain elevated in the 1HFY24, given that the El Nino weather condition is expected to cloud the top barley countries until April 2024. Furthermore, the alleviated cost pressure could be exacerbated by the expiry of black sea treaty, which restricted safe export from Ukraine to ease the supply tension.

Valuation

• Reiterate Buy on Heineken with a lower target price of RM29.60/share (from RM31.90/share) based on unchanged DCF valuation (k: 7.7%, g: 3.0%).

Source: TA Research - 28 Nov 2023