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Heineken - Volume and price pump profits

Nicholas Hyett | 13 February 2019 | A A A
Heineken - Volume and price pump profits

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Heineken NV Eur1.60

Sell: 89.28 | Buy: 89.32 | Change -0.56 (-0.62%)
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Heineken posted 6.1% organic revenue growth in 2018, reaching EUR22.5bn. That reflects a 4% increase in total volumes, with 2% price growth.

Underlying operating profits rose 6.4%, to EUR3.9bn, as higher revenues and cost savings more than offset input cost inflation elsewhere.

The full year dividend will be set at EUR1.60, up 8.8% on last year, with a final dividend of EUR1.01 due to be paid in May.

The shares rose 4% in early trading.

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Our View

Last year Heineken sold 234m hectolitres of beer, that's roughly enough to fill 936 million Olympic sized swimming pools. That still leaves it some way off the world's largest brewer, a title which goes to AB-Inbev, but Heineken is a global giant nonetheless.

That might make reports of slowing alcohol consumption in the developed world a concern for Heineken investors. It's a trend being driven by the twin challenges of lower consumption among younger people and ageing populations.

However, lower alcohol consumption is being accompanied by increased spending on more premium brands. That's somewhere Heineken has something an advantage - with a stable of brands that includes Amstel and Moretti - as well as the obvious one.

Historically that meant the group's been better able to weather that storm than most and drives some fairly healthy profit margins, rising from 13% in 2011 to 17% in 2017. We think that should be sustainable.

Heineken's not escaped slower growth in areas like Western Europe completely unscathed though, and the region's delivered disappointing results lately. Lower volume growth means competition is likely to heat up, potentially making margin growth more challenging going forwards.

Management's response to the slowdown has been to look for growth in emerging markets. Recent investments have seen the group bolster its position in China and Latin America. And while these markets (particularly Brazil) may be lower margin than more established regions, they also have attractive growth potential.

Historically the combination of margin and volume growth has helped Heineken deliver a steady flow of dividends. The shares currently offer a prospective yield of 2.1%, and analysts expect dividends to bubble up further in the year ahead.

We think Heineken is a long term winner. But it's worth bearing in mind that profit growth of 7.2% a year over the last decade is unlikely to be repeated - especially given the current headwinds.

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Full Year Results

Volume growth reflects strong results across the board, partly offset by weaker 1.3% growth in Europe. The group saw double digit volume growth from its International Brands, Cider and Craft portfolios.

Heineken brand sales rose 7.7%, as a very strong results from Africa, the Middle East & Eastern Europe offset weakness in Asia Pacific.

All regions delivered revenue growth across both the year and the final quarter. That includes the crucial European markets, which account for 46.1% of the group total, and grew 3% in 2018. The strong showing from Heineken in Africa, the Middle East & Eastern Europe, meant revenues in the region rose 11.1% to EUR3.1bn.

Total operating margins fell 0.17 percentage points to 17.2%, following the acquisition of new Brazilian assets and some unfavourable currency movements.

Net debt of EUR12.1bn represents 2.3 times EBITDA (earnings before interest, tax, depreciation and amortisation). That's down slightly on the previous year.

Management expect profit growth in 2019 to be broadly in line with that achieved in 2018, with capital expenditure also broadly in line.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.