KUALA LUMPUR (May 20): Heineken Malaysia Bhd warned that it is likely to face tight cash flows for the rest of the year due to the outbreak of COVID-19. Some quarters take it as a hint of the likelihood of lower dividends to conserve cash.
Furthermore, this could be the emerging trend among companies as many have seen very minimum, if not zero, sales during the Movement Control Order period (MCO).
When contacted Areca Capital chief executive director Danny Wong said that dividend-paying companies may have to resort to temporarily restrict their dividend policies during a business environment where there is limited cash.
“Due to the COVID-19 pandemic, I think we will generally see dividend-paying companies facing liquidity issues. But it is not a solvency problem as it is not an issue of profits. These companies may just have to forego their current dividend policy in the short term due to cash issues,” he told theedgemarkets.com, although not referring specifically to Heineken Malaysia.
However, Wong pointed out that investors may have already factored in the dividend issue given the prolonged lackadaisical business environment as a result of the movement restrictions to contain the coronavirus outbreak.
“I think investors already have this (dividend cut) possibility in mind. I think they wouldn’t mind if there is a dividend cut provided that the company can keep itself afloat during these times,” he added.
As such, Wong said that it would be best if companies can give guidance on their dividend policy moving forward.
Affin Hwang Capital equity research analyst Chow Wei Nien believes that Heineken Malaysia may continue its 100% dividend payout ratio in financial year 2020 (FY20), in line with the previous years’ payout.
“Having said that, there may be some downside given the potentially tighter cash flow in the upcoming quarters,” he told theedgemarkets.com.
If operating cash flow declines and dividends continue to be paid out, there may be a shortfall in cash to meet other obligations like capital expenditure and interest payment, he added.
For FY20, Chow is expecting an earnings contraction of 9% year-on-year on the base assumption that the full impact of COVID-19 will be confined within the first half of 2020, assuming there is no major second wave in the rest of the year.
“Post CMCO (Conditional Movement Control Order), we foresee alcohol consumption to remain subdued for 2020, as social gatherings/events will likely be discouraged while lower tourist arrivals would further weigh on demand.
“In view of the lingering uncertainties amid the COVID-19 crisis, we remain doubtful of a swift recovery post CMCO in alcohol consumption,” he added.
Meanwhile, RHB Investment Bank Bhd equity research analyst Soong Wei Siang also pointed out that the MCO’s impact on Heineken Malaysia’s operations and on-trade channel volumes will undermine the company’s earnings this year.
“We believe investors should position for a recovery in FY21, for which we project earnings to grow 15%. Apart from the low base effect, the growth should also be underpinned by inelastic demand for beer and the brewery’s strong pricing power. Heineken Malaysia, as Malaysia’s market leader, is well placed to capitalise on the resurgence, thanks to its established brands portfolio and innovative product launches,” he wrote in his note earlier today.
In announcing Heineken Malaysia’s quarterly financial results yesterday, the brewery’s managing director Roland Bala warned that the COVID-19 pandemic will continue to pose major challenges to the company's business, despite reporting a satisfactory first quarter performance on the back of a successful Chinese New Year campaign.
As such, Bala noted that the top three priorities of Heineken Malaysia right now are ensuring the health, safety and well-being of its people, ensuring business continuity, and preserving cash.
"Notwithstanding the strong balance sheet at the end of 1Q, the group’s operating cash flow is expected to be significantly impacted in the second quarter and over the rest of the financial year given slower cash collection from the trade and weak demand, particularly from on-trade and tourism channels," Heineken Malaysia said.
As it stands, net cash from operating activities as at March 31, 2020 has already dropped significantly, and reduced 44% to approximately RM53 million compared with RM94 million as at the first quarter of 2019, following the suspension of business operations to comply with the MCO.
Besides the liquidity issue, Heineken Malaysia also pointed out that the ongoing COVID-19 pandemic, along with containment measures such as mandatory closures of non-essential business activities as well as the closure of its brewery from March 18 to May 3, will result in a material decline in revenue.
Furthermore, it said the disruption is expected to persist and continue to have a significant adverse impact on the overall business performance of the group for FY20.