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Heineken - a tough year under lockdown

Nicholas Hyett, Equity Analyst | 10 February 2021 | A A A
Heineken - a tough year under lockdown

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Heineken NV Eur1.60

Sell: 93.48 | Buy: 94.92 | Change 0.70 (0.75%)
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Heineken's underlying full year net revenue fell 11.9% to €19.7bn. This represents an improvement on the first half, thanks to a good summer and eased constraints on bars and restaurants.

Underlying net profit fell 49.4% to €1.2bn, although Heineken made a net loss of €204m on a reported basis.

The board will recommend dividend of €0.70 per share, a 58.3% decline on last year, representing 34.9% of underlying net profit. Heineken's policy is to pay out between 30% and 40% of underlying net profits each year.

The shares fell 1.3% following the announcement.

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Our View

Repeated lockdowns around the world have not been great for Heineken's sales. A global presence means the policies of any one region matter less than the overall trend, and management will hope that overall trend is improving.

The fall in profit was greater than the decline in revenue in 2020 - an example of "operational gearing" (when a small change in revenue causes a larger change in profits). Large fixed costs mean brewers are naturally operationally geared, since they must sell a certain number of pints just to cover those costs. The variable costs associated with each extra pint are relatively small so each pint adds greatly to the bottom line. Unfortunately - as we've seen this year - the reverse is also true and when the number sales fall, profits quickly drain away.

Coronavirus has come at a time when Heineken was already 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 had been 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. Encouragingly, the premium portfolio has done well over the last quarter, indicating that customers aren't trading down too much amid tough economic conditions. The group's historically been able to deliver fairly healthy operating margins, rising from 13% in 2011 to 16.8% in 2019, although these were still some way behind its bigger rival, AB InBev.

Heineken's responded to the recent disruption with a raft of cost saving measures, which will be key to helping it weather the storm. While finding these savings are important for all businesses, they're particularly important for companies with high operational gearing.

We should note, net debt was 3.4 times cash profits at the end of the year. This level of debt is far higher than either we or management would like. Part of the problem is that although net debt has fallen slightly year-on-year cash profits have fallen far more heavily. Heineken has enough cash on hand for the time being, but unless profits rebound quickly the group will need to put a lot of effort into bringing debt down.

We had hoped that the worst was behind Heineken, and that's probably still true despite the challenges of the second wave. The group should recover alongside the economy thanks to the strength of its brands, though the balance sheet may force some difficult decisions if the vaccine rollout fails to live up to its billing.

Heineken key facts

  • Forward Price/Earnings ratio: 25.6
  • 10 year average forward Price/Earnings ratio: 18.3
  • Prospective dividend yield (next 12 months): 1.6%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full year results

Full year beer volumes fell 8.1% to 221.6m hectolitres, and premium products outperformed the broader market.

Heineken branded beer volumes fell just 0.4%, reflecting 18.7% growth in the Americas which was offset by a 23.0% fall in Africa, the Middle East and Europe.

Heineken 0.0 grew by double digits in all markets, although the low and no alcohol portfolio still declined slightly despite beating the overall market.

Underlying operating profit fell 35.6% organically to €2.4bn, reflecting declines in all regions. Reported operating profit fell 78.6% to €778m thanks to €1.6bn impairments and restructuring costs.

Over 90% of the underlying decline occurred in Europe, Mexico, South Africa and Indonesia. In Europe volume in bars and restaurants fell by 40% following government restrictions, while the decline in Mexico was in the mid-teens as operations were suspended in the second quarter and heavily restricted for much of the rest of the year. South Africa was similarly affected in the second quarter, and by a ban on alcohol sales in July and August, leading to a volume decline in the mid-thirties. Indonesian volumes declined by mid-forties, in part due to a lack of tourists in Bali.

The group engaged in a cost mitigation programme during the year which realised an €800m saving. The programme involved pausing projects, reducing discretionary expenses and cancelling senior management bonuses. Nonetheless, underlying expenses fell just 7.2% to €17.3bn, resulting in higher costs per hectolitre as sales shifted to lower margin channels. Heineken has reduced its workforce by around 8,000 people at a cost of €420m, which is expected to generate annual savings of around €350m.

Capital expenditure fell from €2.1bn last year to €1.6bn and free operating cash flow fell from €2.2bn to €1.5bn. Net debt fell from €15.3bn to €14.2bn over the course of the year due to positive operating cashflow, asset sales and positive foreign exchange movements.

Heineken did not give detailed guidance but expects the pandemic to continue to impact the business in the first half of 2021, especially in the first half. Revenue and operating profit are expected to stay below 2019 levels.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.

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