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Heineken - volumes up, but questions over margins remain

Nicholas Hyett | 24 April 2019 | A A A
Heineken - volumes up, but questions over margins remain

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Heineken NV Eur1.60

Sell: 92.00 | Buy: 93.50 | Change 0.74 (0.81%)
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Heineken delivered positive volume growth across all its markets in the first quarter of the year, with total organic volumes up 4.3%. However, that growth has been concentrated in lower margin emerging markets.

The group remains on track to deliver mid-single digit growth in operating profits for the full year.

The shares were broadly flat 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. But so far the company's been able to weather the storm better than you might expect.

Lower alcohol consumption in Europe and the US is being accompanied by increased demand for 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's meant the group's been able to deliver fairly healthy profit margins, rising from 13% in 2011 to 17.2% in 2018.

Management's also invested heavily in 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.

Unfortunately it feels like the recipe that's been so successful in recent years is losing its sparkle. Margins are expected to slip backwards from here, and growth expectations have been cut back.

Lower volume growth in areas like Western Europe has seen competition heat up, putting pressure on pricing even among Heineken's more premium brands. Lower margin developing countries are keeping volumes moving forwards, but are also less profitable.

While we think the group's got what it takes to balance the equation and keep growing profits, increases might not come at the impressive rate of 7.2% a year it's hauled in over the last decade.

Still, progress should be enough to keep the dividend bubbling up from the 1.8% yield on offer this year- remember though there are no guarantees.

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First Quarter Trading Update

Volume growth was led by emerging markets, with organic growth of 7.8% in Africa, Middle East & Eastern Europe (AMEEE) region and 8.2% in Asia Pacific - reaching 10.1mhl and 7.5mhl respectively.

The Heineken brand also performed well, with global sales up 8.3% to 8.9mhl, helped by double digit growth in AMEEE and the Americas.

However total volumes in the Americas and Europe were lower than some analyst had hoped, up just 3.2% and 1.7% respectively. The US actually saw mid-single digit declines in total volume in the quarter.

Reported net profit was EUR299m, 15% ahead of last year.

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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 for more information.