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Friday, May 24, 2019

Heineken Malaysia - Brewed Just Right

Reported 1Q19 core PAT of RM52.8m was in line, accounting for 17.4% and 17.6% of ours and consensus expectations. We deem this in line as 1Q usually makes up 16-19% of full year earnings. We expect the government’s planned crackdown on illicit trade to drive volumes back to the legal market. Despite this, we understand there are significant hurdles to this and as such, will take time to bear fruit. In the near term, the potential of an alcohol excise duty hike is unlikely as it would only serve to encourage illicit trade, which is being targeted by government authorities at the moment. Our TP of RM21.00 based on a DCF valuation methodology (WACC: 8.0%; TG: 2.5%) and HOLD call is maintained.

In line. Reported 1Q19 core PAT of RM52.8m was in line, accounting for 17.4% and 17.6% of ours and consensus expectations. We deem this in line as 1Q usually makes up 16-19% of full year earnings.

Dividend. None Declared. (1Q18: None)

QoQ. Lower sales (-20.7%) was due to heightened sales during year end festive seasons (4Q18) and slightly earlier CNY in 2019, which resulted some earlier sales related CNY stocking up in 4Q18. Diminished bottom line (-47.2%) was due to seasonality, as mentioned above.

YoY. Sales grew 21.1% from RM433.8m to RM525.1m mainly due to higher sales prices from SST (September 2018), increased sales volumes from effective commercial campaigns during CNY and stocking up prior to price adjustment on 1 April 2019 (which was attributed to higher packaging and raw material costs). Excluding SST impact, organic sales growth was 13.3%. Core PAT grew 8.3% to RM52.8m in tandem.

Outlook: Heineken expects to grow sales with commercial campaigns, particularly with premium brands such as Apple Fox cider. We foresee the government’s planned crackdown on illicit trade to drive volumes back to the legal market. Despite this, we understand there are significant hurdles to this and as such, we expect this endeavour to take time to bear fruit. In the near term, we opine the potential of an alcohol excise duty hike is unlikely as it would only serve to encourage illicit trade, which is being targeted by government authorities at the moment. Additionally, the governments’ decision to postpone soda tax to July 2019 is not expected to have a significant impact on Heineken, given the majority of brands under Heineken’s portfolio are not impacted.

Forecast. After adjustments post annual report release, our FY20 forecasts rises by 1.3%

Maintain HOLD. Our TP of RM21.00 based on a DCF valuation methodology (WACC: 8.0%; TG: 2.5%) and HOLD call is maintained. While we like Heineken for its strong brand portfolio (Tiger, Heineken, Guinness, Strongbow) and leading market share position in Malaysia (of approximately 60%), we reckon it is fairly valued at current price levels.

Source: Hong Leong Investment Bank Research - 24 May 2019

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