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Riding on HORECA recovery

  • 9M21 core net profit of RM152m (+35.3% yoy) was above our expectations, due to stronger-than-expected sales volume in 3Q21.
  • We expect HEIM to record stronger quarters ahead, due to: i) higher price increases, ii) increase in HORECA sales, and iii) better economies of scale.
  • Reiterate Add, with a higher DDM-based TP of RM26.70.

3Q21 core net profit rose 103% qoq, beating our expectations

Heineken Malaysia’s (HEIM) 3Q21 revenue rose 11.6% qoq to RM390m, while core net profit rose to RM52.1m (+103% qoq), thanks to higher-than-expected sales volume from: i) strong off-trade sales during the enhanced movement control order (EMCO), and ii) higher on-trade sales, as dine-in restrictions were eased towards end-3Q21. 9M21 core net profit of RM152m was above our (88%) but within Bloomberg consensus’ (69%) FY21 estimates. We earlier expected weaker qoq results in 3Q21 due to the EMCO impact, as HEIM’s brewery operations were suspended for 11 weeks (2 Jun to 15 Aug). HEIM did not declare any dividend for 3Q21, as expected.

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9M21: Better yoy from more off-trade sales and better cost control

On a cumulative basis, 9M21 revenue and core net profit rose yoy by 3.5% and 49.8%, respectively. This was mainly attributed to: i) higher off-trade sales, which aided in offsetting lower on-trade sales, ii) better cost control with ongoing cost-saving initiatives
(including more effective marketing investment), and iii) higher economies of scale. Expecting better quarters ahead, mainly from higher on-trade sales We expect HEIM to continue recording stronger results in the quarters ahead, with higher sales volume especially from the on-trade segment (mainly hospitality sector). This is on the back of relaxation of lockdown measures (thanks to high Covid-19 vaccination rates) post various lockdowns for the past 1.5 years. On top of that, HEIM has stated that it has
raised its selling prices (we estimate 5% to 10%) for its products, especially in the off trade segment, since Sep 21.

Not expecting margin compression from higher raw material prices

Despite rising commodity prices, we do not expect major negative impact on margins. In addition to better economies of scale (expected improvement in sales volume going forward and price increases), this should be aided by: i) effective cost-control initiatives, ii) digitalization activities, and iii) active hedging policies to mitigate rising material prices.

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Reiterate Add, with a higher TP of RM26.70

Given the 3Q21 earnings beat, we raise our FY21F EPS to account for higher sales volume. However, we lower FY22-23F EPS to account for impact of: i) Makmur tax, and iii) rise in raw material prices. Our DDM-based TP rises to RM26.70 (Rf: 2.8%, g: 2.8%
and beta: 0.67x) as we roll over our valuation to end-2022F. We continue to like HEIM for: i) its attractive valuation (CY22F P/E is at an 11% discount to its 5-year mean of 27x, and ii) benefits from economic activity recovery, especially on-trade.