This article first appeared in The Edge Financial Daily on April 13, 2020

Heineken Malaysia Bhd
(April 10, RM21.76)
Maintain buy with a lower target price (TP) of RM25.90: The near-term outlook will be challenging due to the disruption to consumption caused by Covid-19 and the resultant movement control order (MCO). However, we believe volume and demand growth will resume in financial year 2021 (FY21) as economic conditions improve following the containment of the pandemic by mid-2020. Heineken Malaysia Bhd remains our top pick in the brewery sector given its market leadership in Malaysia and its about 20% valuation discount versus Carlsberg Brewery Malaysia Bhd.

The company has adhered to the MCO by shutting down operations since March 18. Indirectly, we believe the MCO will disrupt sales from trade channels including pubs, bars and restaurants. As a result, off-trade channels such as hypermarkets, grocery stores and convenience stores could see higher volume.

Post-MCO, sales volume may take time to normalise as we foresee consumers taking more precautions in the immediate aftermath of the pandemic.

We trim our FY20 net profit forecast by 7% but keep our FY21 to FY22 forecasts largely unchanged. The immediate-term outlook will be challenging as the Covid-19 pandemic and MCO should dampen consumer spending and sentiment for the next couple of months on slower economic and disposable income growth. Assuming that the Covid-19 pandemic is contained by the end of the second quarter of 2020 (2Q20), we foresee a gradual recovery in economic and consumption growth from 3Q20 onwards. Note that pent-up demand immediately post-containment may not be sharp as the stigma related to Covid-19 could persist. That said, 4Q20 numbers should reflect a more palpable recovery.

Looking further ahead, demand and volume growth could resume in 2021 from a low base as the macroeconomic environment improves, with a positive effect from government stimulus packages and interest rate cut measures feeding through.

Correspondingly with the earnings revision, our dividend discount model-derived TP drops to RM25.90 as we also take the opportunity to impute a higher risk premium. This factors in higher regulatory risks following the formation of the new government. Our TP implies 22 times FY21 forecasted price-earnings ratio on a par with its peer Carlsberg’s valuation (“neutral”; TP: RM23.50) to justify Heineken’s market leadership in Malaysia, but balanced by Carlsberg’s inclusion into the MSCI Global Standard Index.

Risks include a sharp loss in market share and an unexpected excise duty hike. — RHB Research Institute, April 10