Heineken’s Ebit margin expected to be sustained

This article first appeared in The Edge Financial Daily, on November 23, 2017.
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Heineken (M) Bhd
(Nov 22, RM17.80)
Upgrade to buy recommendation with a target price (TP) of RM19.14:
Heineken (M) Bhd’s nine months of financial year 2017 (9MFY17) net profit of RM176.4 million came in within expectations at 73.3% of our full-year forecast but below consensus estimates at 63.3%.

Year-on-year (y-o-y), 9MFY17 profit before tax grew 6.8% thanks to effective cost management. 9MFY17 revenue grew by a marginal 1.1% caused by an earlier Chinese New Year in FY17, resulted in higher deliveries in end-FY16. Meanwhile, earnings before interest and taxes (Ebit) margin expanded by 1% on the back of continuous efforts in trimming costs.

Quarter-on-quarter (q-o-q), third quarter of FY17 (3QFY17) revenue and net profit grew robustly by 25.3% (to RM509.6 million) and 17% (to RM94.7 million) respectively mostly due to high volume growth, new product launches like Apple Fox and locally brewed Strongbow Apple Ciders.

Note that the taxation went up by 48.8% mainly due to one-off prior year taxation (FY16 tax filing done in 3QFY16). No dividend was proposed for the quarter under review.

We expect Ebit margin to sustain at above 18% this year and 18.6% the following year. We view that the change in legal purchasing age from 18 to 21 years, effective Dec 1, 2017, may drive youngsters to easily obtain contraband beer. Also, we believe the continuous threat from contraband is likely to continue even with concerted efforts by the Royal Malaysian Customs Department to curb illicit trades.

We keep Heineken’s TP unchanged at RM19.14 per share based on discounted cash flow valuation. Given the recent sell-down in the stock, we upgrade the stock to “buy” from “hold”.

At current levels, it offers decent dividend yield of 4.1% and 4.4% in FY17 and FY18 respectively. Downside risks to our call are an increase in excise duty and unfavourable outcome from the unresolved bills of demands. — TA Research, Nov 22