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Heineken - Asia Pacific leads volumes up

Nicholas Hyett | 23 October 2019 | A A A
Heineken - Asia Pacific leads volumes up

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Heineken NV Eur1.60

Sell: 92.36 | Buy: 92.40 | Change -0.22 (-0.24%)
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Heineken's been selling more beer this year than last, recording 2.3% organic volume growth across the business. Rapid growth in the relatively small Asia Pacific market offset a small decline in the Americas, and all other markets recorded modest gains.

Reported net profits for the first three quarters of the year were EUR1.7bn, up 4% on last year.

The shares slid almost 1% in early trading.

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Our View

Given Heineken sold 239m hectolitres of beer in the last twelve months, reports of slowing alcohol consumption in the developed world might reasonably concern investors. It's a trend being driven by the twin challenges of lower consumption among younger people and ageing populations.

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 of an advantage - with a stable of brands that includes Amstel and Moretti - as well as the obvious one. The group's been able to deliver fairly healthy profit margins, rising from 13% in 2011 to 17.2% in 2018.

However, Heineken's margins are still some way behind their bigger rival, AB InBev. While this isn't really a good thing, it does mean there's still room for improvement, and we don't see why Heineken shouldn't be able to catch up over time. That said, it won't be an overnight fix.

Additionally, the group's balance sheet is stronger than some of their rivals. This gives management the flexibility to take on extra debt if needed, and could provide some relative stability should things take a turn for the worse.

In the long run we think Heineken's got what it takes to balance the equation and keep growing profits. However, the challenges in developed markets are real and might see growth stall in the immediate future. Given the shares currently trade on a PE ratio of 20.5 , some 19% above the 10 year average, the shares could be volatile in the years ahead.

Still, progress should be enough to keep the dividend bubbling up from the 1.9% yield on offer over the next year- remember though there are no guarantees.

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Third Quarter Trading Update

Asia Pacific saw organic volume rise 13.9%. That's despite the Heineken brand itself actually losing ground, with volumes down 1%, but local favourites like Tiger more than made up for it. Vietnam and Cambodia were areas of particular strength.

Conversely the Americas saw total beer volume fall 0.5% despite a 12.5% increase in Heineken brand sales. The USA saw sales fall by a high-single digit percentage, with social unrest in Haiti also denting performance. That was partially offset by low single digit growth in Mexico.

Overall organic growth was more moderate in Africa, Middle East & Eastern Europe and in Europe, both recording just 1.6%. Europe is also the only market in which volumes have shrunk year-to-date, falling -0.3%.

The group expects to grow organic full year operating profits by around 4%.

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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.