Stock price: €37.1 ($49.47 USD)
Conclusion: We reconfirm our positive view on Heineken (OTC:HINKY). We see room for further rerating as Heineken demonstrates that it can grow double digit in adverse markets. We upgrade our valuation range to €44-€46 per share.
H1 results: Sales up 5.2% to €7.5bn (down 2% organic)-EBIT +14% reported-+5.7% organic-Net profit +29% reported (+17% organic). Guidance F10: organic increase in net profit should be at least in low double digit.
H1 confirmed a tough environment which might continue in H2
- Volume declined by 3.9%, with Eastern Europe down 11% due to Russia, Western Europe falling 2.6% and the US down 1.7%. Africa and Middle East (+6%) and Asia (+3.3%) to a lesser extent, partly compensated the negative trend in developed markets.
- Pricing remained positive (+1.9%) despite the absence of price increase in the US market.
- Management remained cautious expecting a similar trend in the second part of the year.
Bottom line resisted well
- Faster growth for Heineken premium brand (+4.1%) bodes well for gross margin.
- H2 is expected to benefit from lower input costs owing to hedging. Management expects barley prices to reflect some pressure on cereals, notably in Russia and to a lessser extent in Western Europe.
- Costs savings provided €104m in H1 (€259m as of the start off 2009) representing 140bp of sales. The bulk of savings were achieved in Europe, enabling to compensate for lower volumes. Total expenses decreased by 2.8% organically, faster than sales, despite higher marketing and selling expenses (+5.3% organic). As a result, EBIT grew 6% in Western Europe and fell by only 4% in Eastern Europe despite a sharp decline in volumes. Ebit grew also in Americas helped by positive hedging and costs savings.
- Financial costs reflect ongoing deleveraging. driven by increased free cash flow generation (€700m vs €383m last year).
- The geographic balance is moving following the acquisition of Femsa and the disposal of MBI and GBNC in Asia Pacific. Sales and profits in Americas will more than double. Femsa sales and profits could achieve €2.1bn and €250m on our estimates this year. Conversely, the weight of Asia Pacific in sales will come down following the tranfer of assets to APB, while UB in India is not consolidated. Nevertheless, the share of profits of associates and JVs could jump by 40%.
We expect EPS to achieve €2.41 in F10 and €2.72 in F11 respectively.
Heineken trades at 13.7xP/E and 7.7xEV/EBITDA based on our 2011 estimates, implying 10%+ discount to peers. We expect the stock to further rerate: short term, notwithstanding weak volume, we think Heineken offers relatively good visibility on the bottom line thanks to positive mix and cost cutting in Europe. Longer term, increased exposure to emerging markets will provide a new growth platform for the Heineken brand, notably in Latam and in India, while enabling a broader portfolio approach in the imported premium beer segment in the US. We upgrade our valuation range to €44-€46 per share.