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Heineken - Asia Pacific recovery drives growth, signs of slowing

Third quarter net revenue saw organic growth of 19.8%, to EUR7.8bn, driven by a sharp recovery in the Asia Pacific...

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Third quarter net revenue saw organic growth of 19.8%, to €7.8bn, driven by a sharp recovery in the Asia Pacific region as restrictions eased from last year. Total volumes grew 7.6%, while net revenue per hectolitre was up 11.1% as Heineken raised prices to mitigate rising costs.

Beer volume grew 8.9% organically, 1.4% ahead of pre-pandemic levels. Again, the Asia Pacific recovery was the main contributor though all regions showed growth.

Heineken expects to deliver €1.7bn in cost savings by the year end.

Dolf Van Den Brink, Chairman and CEO said: ''Our premium portfolio outperformed, led by Tiger and Heineken, including the roll-out of Heineken Silver.'' But warned ''We increasingly see reasons to be cautious on the macroeconomic outlook, including some signs of softness in consumer demand.''

Heineken has reiterated its full year guidance.

The shares fell 7.4% following the announcement.

View the latest Heineken share price and how to deal

Our view

Markets reacted poorly to third quarter trading details, which signalled weakness creeping into consumer demand. Up to this point, demand looked to be as resilient as ever but mounting pressure on wallets looks set to take its toll.

It's not all bad news though, price hikes to offset rising costs are pushing sales in the right direction. For now, at least, volumes are holding relatively firm.

The main concern is if any real deterioration of beer demand comes to pass, given Heineken's 'EverGreen' strategy relies heavily on premium brands continuing to grow, it'll be particularly exposed to any major downtrading.

We're not there yet, so for now, Heineken's cohort of exceptional brands, from Amstel to Moretti as well as the namesake flagship brand, are a real strength. Encouragingly, the premium portfolio has continued to perform well. As have their non-alcoholic offerings. Headlined by the leading Heineken 0.0 brand, which grew sales in the low-teens at the half year mark and is set to be introduced on draught in pubs across the UK - a genuine milestone for non-alcoholic beer.

Management gave a rather sombre outlook with respect to cost inflation at the half year mark, which is expected to remain a 'significant' headwind for this year and next. That likely fed into the decision to tweak guidance earlier in the year. The earlier target of a 17% operating margin was replaced with one based on underlying operating profit growth in the mid-high single digit range. Not the end of the world, but it highlights quite how challenging the current environment is.

Work done on the cost saving programme will help in this regard. The programme remains on track to deliver $2bn in savings by 2023.

We're pleased to see that as profits have been recovering, the ratio of net debt to cash profits has been coming down and stood at 2.4 at the half year mark. That's now within management's long-run target of 2.5 times which feels reasonable to us, given the quality of earnings. Heineken generates more operating cash flow than net profit, a sign of good cash generation and quality earnings.

Rising costs and a consumer with less disposable income make for a tricky backdrop right now. Longer term though, Heineken's portfolio of strong brands, quality earnings and focus on premium offerings are clear benefits. That's not been enough to stop the valuation taking a hit this year, now below the longer-term average. This could prove to be an attractive entry point for long-term investing, though as always there are no guarantees.

Heineken key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 26th October 2022