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Heineken - Europe shrinks but growth surges elsewhere

Sophie Lund-Yates, Equity Analyst | 12 February 2020 | A A A
Heineken - Europe shrinks but growth surges elsewhere

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Heineken NV Eur1.60

Sell: 79.20 | Buy: 79.50 | Change 1.38 (1.77%)
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Heineken reported full year organic revenue growth of 5.2% to EUR28.4bn. That reflects a 3.1% increase in consolidated beer volumes, with Heineken branded beer volumes growing 8.3% - the best in over a decade.

Operating profit grew 3.9% to EUR4.0bn, as increased revenue was partially offset by increased costs and higher investments in sponsorships, e-commerce and technology.

A final dividend of EUR1.04 per share has been proposed, which would take the total full year payment to EUR1.68 per share, representing a 5% increase on last year.

The shares were up 5.5% following the announcement.

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Our View

Heinken's longstanding CEO, Jean-Francois van Boxmeer, is leaving after 15 years. The board has nominated Dolf van den Brink, president of the group's Asia Pacific division, as a replacement. It remains to be seen whether the new man will depart substantially from the track set by his predecessor, but for now, here's how things stand.

Heineken sold 241m hectolitres of beer in the last twelve months, so 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. But on the other hand, alcohol consumption is growing in emerging markets.

These trends are accompanied by increased demand for more premium brands. That's somewhere Heineken has something of an advantage - boasting a stable of brands that includes Amstel and Moretti - as well as the obvious one. The group's been able to deliver fairly healthy operating margins, rising from 13% in 2011 to 16.8% in 2019.

However, Heineken's margins are still some way behind its 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 close the gap over time. That said, it won't be an overnight fix, and the group's most recent results have been a step backwards.

The group's balance sheet is stronger than some of its rivals. Management wants to improve it further, and lower debt 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 20.6 , some way 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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Full year results (organic growth rates and underlying figures)

In Europe full year revenue grew 2% to EUR10.6bn despite volumes falling 0.4%. Volumes fell in every major European market expect for Italy, offset by a favourable performance from Heineken ®, Desperados and Birra Moretti. The group's premium and Low or No Alcohol (LONO) portfolios volume grew by mid-single digits. Operating profit for the region fell 0.8% to EUR1.4bn, reflecting increased investment in digital and technology platforms.

On the other hand, revenue in the Americas grew 7.5% to EUR7.4bn and operating profit rose 4.6% to EUR1.2bn, with growth in Mexico and Brazil partly offset by the USA. Volumes increased 1%, and the premium portfolio was up by double digits, led by Heineken® in Brazil. In the USA volumes declined, partly due to shortages of 24oz cans.

Africa Middle East & Eastern Europe saw 8.9% revenue growth to EUR3.4bn. However, operating profit fell 0.2% to EUR408m. Overall volumes grew 4.2%, although the premium portfolio was up by double digits.

Asia Pacific saw revenue rise 10.9% to EUR3.2bn and operating profit 12.1% to EUR1.1bn, driven by Vietnam and Cambodia. Volumes were up 11.8%, and the premium portfolio was up high-single digits thanks to Tiger and Heineken.

Heineken's net debt increased from EUR12.1bn to EUR15.3bn following accounting changes and transactions in China. Net debt is currently 2.6x cash profits, and the group continues to target a ratio of less than 2.5x.

Management expects "superior top-line growth driven by volume, price and premiumisation", and mid-single digit operating profit growth in 2020, barring major economic or political shocks.

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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.

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