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Heineken - fermenting a recovery

William Ryder, Equity Analyst | 21 April 2021 | A A A
Heineken - fermenting a recovery

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Heineken NV Eur1.60

Sell: 92.40 | Buy: 92.42 | Change -0.20 (-0.22%)
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Heineken's first quarter net profit was €168m, compared to €94m in 2020 and €299m in 2019. The effect of bar and restaurant closures in Europe were more than offset by stronger performances elsewhere as well as cost savings.

Heineken's underlying beer volume was flat at 50.3 million hectolitres (mhl) after lapping the start of the pandemic in March. Volumes were down 2.1% on the first quarter of 2019. Volumes for the flagship Heineken brand grew 12.1% to 10.5mhl after growing double digits in more than 40 markets. The alcohol-free version, Heineken 0.0, also delivered double digit growth.

Heineken expects market conditions to gradually improve into the second half of the year.

The shares rose 3.8% following the announcement.

View the latest Heineken share price and how to deal

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 it now looks like conditions are improving despite the risk of further Covid waves in some countries.

In 2020 the fall in profit was greater than the decline in revenue - 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 and the added efficiency should help during the recovery too.

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. The most recent quarter shows some progress, but now this needs to be sustained.

We hope the worst is behind Heineken, and that's likely to be the case despite the potential for future waves of infection. 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.

It's worth noting Heineken's current forward Price/Earnings (PE) ratio is above the long run average - but this may be somewhat misleading. In part, the PE ratio may be unusually high because profits are expected to be unusually low in the near future. But analysts expect profits to recover over the next few years, and if these forecasts are correct the PE ratio should come down in due course, all else held equal. That said, the PE ratio has been above its long run average for some time now.

Heineken key facts

  • Forward Price/Earnings ratio: 26.8
  • 10 year average forward Price/Earnings ratio: 18.6
  • Prospective dividend yield (next 12 months): 1.4%

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.

Q1 Trading update

In the Africa, Middle East and Eastern Europe region volumes grew 9.9% to 9.4mhl. Volumes grew strongly in Nigeria, South Africa and Russia, but fell in Egypt due to significantly lower international tourism.

In the Americas volumes rose 0.8% to 19.4mhl. This reflects low-single digit growth in Mexico, a mid-single digit decline in Brazil due to weakness in the cheaper portfolio, and low-single digit growth in the USA.

In the Asia Pacific region volumes grow 5.4% to 7.7mhl, driven by double-digit growth in Vietnam, Singapore, Laos, Taiwan and South Korea. However, growth was held back by declines in Cambodia and the restructuring of the business in the Philippines. In China the flagship Heineken brand grew "strong double-digits".

In Europe beer volume fell 9.7% to 13.8mhl. Sales in bars and restaurants fell by two thirds due to ongoing trading restrictions, while retail sales grew in the low-teens. At the start of April less than 30% of European bars and restaurants were operating. The direct to consumer Beerwulf platform more than doubled sales.

Find out more about Heineken shares including how to invest

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.