Heineken Malaysia Bhd
(Feb 16, RM16.58)
Maintain add with a lower target price (TP) of RM18.38: Heineken Malaysia Bhd’s net profit for the 18-month (18M) period ended December 2016 beat expectations, at 104% of our estimate. 

On a cumulative basis, revenue and net profit rose to RM2.8 billion and RM427 million. For comparison purposes, this was a growth of 4.9% and 16% respectively over the 18M period ended December 2015.

The stronger performance was due to higher sales volume, especially in off-trade markets, better overall cost efficiencies and a premiumisation strategy that led to stronger volume growth in the premium segment.

The 18M outperformance was mainly due to a fantastic October to December 2016 quarter. While revenue grew by 10.1% quarter-on-quarter (q-o-q), net profit rose to RM104.7 million (84% q-o-q). 

Besides stronger sales volume (inclusive of the impact from an earlier timing of Chinese New Year), net profit was boosted by higher operating efficiencies and a more profitable product mix. The December 2016 quarter’s earnings before interest and tax margin also showed an q-o-q improvement by 1.8% percentage points to 21.3%. 

The group continued to reap the benefits of low-hanging fruits in the form of growing efficiency. We note that the group’s implementation of an integrated system — “Project Breakout” — in various stages since the second quarter of financial year 2015 has begun to show positive results, with better efficiencies derived from the entire process value chain. 

Furthermore, the group is also benefiting in terms of cost savings by leveraging on global procurement initiatives as a member of the Heineken group.

Despite weak consumer sentiment, Heineken has been able to grow sales volume in the mid-single digits, we estimate. Besides higher sales volume in the value-for-money segment (Anchor), the group also recorded sales growth for its premium products like Guinness and Heineken. 

The group’s efforts in widening its product portfolio by rolling out more innovative products to appeal to a bigger drinking crowd appear to be paying dividends.

Our dividend discount model-based TP is cut to RM18.38 on a higher risk-free rate of 4.2% versus 4% previously. Although Malaysia’s malt liquor market volumes are likely to stay flattish in the near term, we think Heineken Malaysia can continue to gain market share via product offering growth. — CIMB Research, Feb 16