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Heineken - growth supported by higher prices and Europe reopening

Heineken reported Q1 underlying net profit of €417m, compared to €168m in 2021...

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Heineken reported Q1 underlying net profit of €417m, compared to €168m in 2021. That was driven by a 24.9% increase in underlying net revenue, as bar and restaurant sales returned in Europe and higher pricing benefited all regions.

Beer volumes grew 5.2% to 56.4 million hectolitres (mhl). Growth was seen across all regions, especially Europe, where the group lapped a weak comparable period last year due to restrictions.

Despite warning on "significant additional inflationary headwinds", outlook for 2022 remains unchanged and the group expects to deliver modest improvements in underlying operating profit margin.

On the 28 March 2022, the group announced plans to cease operations in Russia and transfer ownership of its business. There's expected to be a non-cash exceptional charge of around €400m as a result.

The shares were up 3.5% in early trading.

View the latest Heineken share price and how to deal

Our view

With restaurants and bars in Europe back open for business, Q1 trading reaped the rewards. The group beat estimates on beer volume growth, which provided a welcome boost to profits. It's pleasing to see volume growth despite price rises, which were implemented to help offset rising costs. It's important to keep both moving forward if growth's going to be sustainable.

That's where the group's new EverGreen strategy comes into play, with a focus on more premium brands which are becoming ever more popular amongst consumers.

It's an area Heineken already 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 continued to perform well. As have their non-alcoholic offerings. Headlined by the leading Heineken 0.0 brand, they've made their way into over 100 markets and should be a genuine growth avenue for the business.

The group's focusing on these areas moving forward, a good move in our view.

Management gave a rather sombre outlook with respect to cost inflation, which is expected to remain a 'significant' headwind for the next year. But the group's strong branding in the premium product range should give them wiggle room on prices without hurting volumes too much, which is what we're seeing so far this year. That's unlikely to be the case for the more value-oriented economy portfolio.

Despite rising costs, the group's still expecting to deliver 'stable to modest' margin growth in the new financial year. That's testament to the strength of the brands and work done on the cost saving programme, which is on track to deliver $2bn in savings by 2023.

We're pleased to see that as profits are recovering, the ratio of net debt to cash profits has been coming down and stood at 2.6 times last we heard. That's only little over management's long-run target of 2.5 times which feels about ok to us, although we wouldn't mind seeing it a little lower still.

With Europe reopen, the worst should now be behind Heineken and with a portfolio of strong brands and focus on premium offerings the group's foundations look solid. But there are certainly some challenges coming in the year ahead. Rising costs and a consumer base that's trending away from beer make for a tricky backdrop. We should also note that Heineken is trading ahead of its longer-term valuation, putting pressure on the group to deliver.

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.

First Quarter Trading Update

Premium beer volume grew 6.3%, driven by strong performance from the flagship Heineken brand which grew 12.9% - volume grew double digits across all regions. Heineken 0.0 also performed well, growing in the twenties and the launch of Heineken Silver in Europe is now underway.

Africa, Middle East & Eastern Europe saw beer volume grow 5.7% and net revenue per hectolitre up 17.7%, resulting in underlying net revenue up 24.5% to €882m. South Africa and Ethiopia performed well, offsetting a drop in volumes from Nigeria. Premium beers were the standout product with volume growth in the low teens. Most markets in the region have fully recovered to pre-pandemic levels.

The Americas posted underlying net revenue up 10.7% to €1.9bn, largely driven by a 13.2% rise in net revenue per hectolitre, as Brazil and Mexico favoured more premium drinks. Beer volume grew 1.3%, broadly in line with pre-pandemic levels. Growth in Brazil and Mexico offset declines in the USA where supply chain disruptions and lower demand impacted performance.

The Asia Pacific region saw underlying net revenue up 9.2% to €1.0bn, as higher prices pushed net revenue per hectolitre up 6.3%. Beer volume grew 2.8%, led by a recovery in Cambodia and Malaysia. The consolidation of United Breweries Limited (UBL) in India positively impacted underlying net revenue (beia) by €200m.

Underlying net revenue in Europe grew 46.1% to €2.2bn. Beer volume grew 11.5% as the bar and restaurant trade reopened. Premium brands like Desperados performed well in the UK and France, which along with price increases, helped net revenue per hectolitre rise 29.3%.

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
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: 20th April 2022