Stock price: €35.4 ($48.21 US)
Conclusion: Reiterate our positive stance on Heineken (OTC:HINKY). Bottom line preserved thanks to pricing combined with tight cost control. Recent M&A initiatives lead to great medium term prospects in Latam, India and South Africa. Raising our valuation range to €42-€44 per share.
2009 results: 4% above forecasts. Sales up 2.7% to €14.7bn, broadly flat organic. EPS up 4%. Earnings up 18% organic. No guidance given for 2010.
Notwithstanding lower volume in 2010, the bottom line could grow to high single digits.
- Brewers expect another year of declining volume, notably in the US and in Europe. Nevertheless, comps will be easier and we expect Heineken volume to retreat around 2% vs -5.4% last year.
- Heineken will again increase pricing but less than last year (up 4.7%). Pricing will be raised in Central and Eastern Europe, Africa and the UK. Nothing is budgeted for the US for the time being and Spain is under review. We forecast around +2-3% pricing, leading to positive organic growth.
- Lower raw material costs should be offset by higher energy costs and marketing spending (expected to go back to 11.7% of sales up 40bp vs 2009).
- Margins will progress helped by continuing costs cutting (+60bp to 14% of sales before earnings from JV& associates). Heineken does not disclose its internal target but confirmed there is still more to come after €155m savings last year. We see no reason why savings in 2010 should be lower, following the closure of 5 new breweries this year (7 closed in Europe in 2009), the reorganisation taking place in the US and streamlining of wholesale. Heineken estimates that capacity in the UK could be optimised by the end of 2010.
- Heineken’s dollar exposure will benefit from positive hedging rates this year ($1.37).
- Femsa will be consolidated in the last six months of the year. South Africa will return to profit with its local brewery up and running.
- EPS growth (+8% to €2.33) will be held back by increased financial expenses related to the Femsa acquisition (net debt could increase to €8.4bn vs €7.7bn end of 2009) FCF could be similar to 2009 at €1.6bn.
Medium term, Heineken offers a double digit growth platform.
- Femsa acquisition should EPS accretive in 2 years, based on €150m costs savings generated by 2013, +2-3 growth of the Mexican market and superior growth for the Heineken brand.
- Heineken’s 37.5% stake into UB in India provides access to a market growing double digit at a price per hl which is twice higher than in China. According to Heineken, market growth should enable UB to get economies of scale and improve the return of its network of 19 breweries.
- South African operations will turn to profit thanks to local production of Amstel and Heineken in the Sedibeng brewery (3mhl ).
Heineken trades at 15.3-13.6xP/E and 7.7xEV/EBITDA based on 2010 and 2011 estimates. FCF yield (9.3%) looks attractive. DCF suggests around €44 per share, offering 20%+ upside potential.
Author's Disclosure: Long Heineken at time of writing.