KUALA LUMPUR (Nov 27): Hong Leong Investment Bank (HLIB) Research and CGS-CIMB Reseach have both kept their "hold" rating of Heineken Malaysia Bhd after the brewery returned to profitability in the third quarter ended Sept 30, 2020 (3QFY20) following the previous loss-making quarter.
HLIB's Gan Huan Wen said Heineken's core profit for the cumulative first nine months ended Sept 30, 2020 (9MFY20) of RM107.2 million was in line with his expectations as well as the consensus forecast, making up 62.7% and 59.5% of the respective full-year estimates, as the fourth quarter is a seasonally strong quarter.
"Going forward, Heineken’s earnings are greatly reliant on Malaysia’s ability to keep the spread of Covid-19 under control, which would result in a return to normal drinking behaviour. For the time being, we expect Heineken to continue investing in e-commerce platform Drinkies and off-trade sales channels," he wrote in a note today.
Keeping his forecasts unchanged, he nevertheless raised his target price (TP) to RM20.45, from RM18.70 previously, due to stronger quarterly earnings and easing of movement restrictions, as well as encouraging vaccine news that may promote consumption recovery plays.
"While we reckon the worst is over for Heineken, with the reimplementation of the CMCO (conditional movement control order) and therefore continued closures of certain drinking venues (clubs and karaoke venues), we expect volumes to remain below FY19 (pre-Covid-19 levels) in the near term," he added.
Meanwhile, CGS-CIMB's Walter Aw said Heineken's 9MFY20 results did not meet his expectations, owing to a slower recovery in beer sales in 3QFY20 and lower on-trade sales with higher margins arising from the Covid-19 pandemic.
He also deemed the 3QFY20 results as weaker than expected due to poorer sales, the closure of its brewery in the first half of the year (1H20) and lower economies of scale.
To recap, Heineken reported a net profit of RM61.25 million for 3QFY20, compared to a net loss of RM18.19 million it recorded for 2QFY20. Revenue jumped 86.7% quarter-on-quarter (q-o-q) to RM473.75 million from RM253.74 million on the back of a sequential sales improvement as its on-trade channel gradually recovered during the recovery MCO (RMCO) period.
"We still expect [Heineken to] record stronger q-o-q results for 4QFY20 despite our view that on-trade beer sales are likely to be affected by the recent extension of the CMCO. This is premised on our view that HEIM (Heineken Malaysia) should still benefit from seasonality factors (historically higher 4Q sales due to Christmas festivities and trade loading prior to Chinese New Year festivities), ongoing cost control initiatives, as well as lower marketing and promotional activities," he said.
As the 9MFY20 results did not meet his expectations, he cut his earnings per share (EPS) outlook for FY20 to FY22 by 5% to 14.1% for Heineken on expectations that sales volume will be weaker, with a less favourable sales mix. He lowered his TP to RM22.40 from RM23.
"Despite its weak near-term earnings outlook, we retain our 'hold' call as we expect valuations to be supported by: i) the defensive nature of its business (inelastic beer demand); ii) a captive market; and iii) [it being a] cheaper proxy for the consumer sector (a 17% discount to CGS-CIMB’s consumer staples sector target of 30 times)," he said.
At the time of writing today, Heineken was traded unchanged at RM21, giving it a market capitalisation of RM6.34 billion.