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Heineken - COVID-19 having a significant impact

Emilie Stevens, Equity Analyst | 8 April 2020 | A A A
Heineken - COVID-19 having a significant impact

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Heineken NV Eur1.60

Sell: 91.60 | Buy: 92.60 | Change -0.04 (-0.04%)
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Heineken says COVID-19 is having a significant impact on its markets and business. Government containment measures in multiple countries are seeing both outlets and sometimes production facilities closed.

For the first quarter, total organic volumes are expected to fall by around 4%, with beer volumes dropping by around 2%. The impact is expected to worsen in the second quarter.

Heineken reiterated its strong balance sheet, access to undrawn credit facilities and that it had secured additional debt financing in recent weeks.

In light of uncertainty, Heineken has withdrawn all guidance for this financial year. Further updates will be provided in the first quarter trading update on 22 April.

The shares were down 1.5 % following the announcement.

View the latest Heineken share price and how to deal

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 we expect any long term strategising might be on the backburner as the group tackles the more pressing challenges of COVID-19.

We haven't had much detail but we know Heineken have been impacted and expect to see organic sales volumes decline over the next two quarters at least. From the sounds of things, the groups been hit by a bit of a double whammy in some places - with government restrictions not only closing pubs and bars but productions facilities too.

We've been promised more detail, including the group's mitigating actions, on 22 April. Like other businesses facing a hit to earnings, we expect cost savings measures will be at the centre. Whether they be achieved through personnel, slashing non-essential spending or even shareholder returns we'll have to wait and see. It's worth noting the final dividend for 2019 year could be at risk but nothing's been mentioned yet.

Coronavirus has come at a time when Heineken was reporting slowing beer consumption in developed markets. 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, although these are still some way behind its bigger rival, AB InBev.

With earnings now far from certain, both Heineken and its investors will be looking to the balance sheet as the key place of resilience. That's somewhere the group is stronger than some of its rivals, which is somewhat reassuring.

As at 12 February, net debt was 2.6 times cash profits, with under 2.5 times the target. The group has access to undrawn credit and recently secured additional debt financing - both essential sources of cash if earnings take a hit.

Heineken expects to have a tough few months ahead. But the true extent of the challenges won't become clear until we get more information on the group's mitigating actions. Over the long term we think Heineken's got what it takes to grow profits but the near term challenges are likely to be significant.

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Full year results (12 February 2020)

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.

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.

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.