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Heineken - robust demand keeps targets intact

Heineken reported half year revenue of €16.4bn, reflecting organic growth of 24.3%. That was driven by increases in both volume and pricing...

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Heineken reported half year revenue of €16.4bn, reflecting organic growth of 24.3%. That was driven by increases in both volume and pricing, 7.7% and 15.6% respectively. Beer volume grew 7.6%, driven by premium brands which saw sales rise over 10%.

Underlying operating profit rose 24.6% to €2.2bn, benefiting from volume recovery and higher prices which more than offset "significant inflationary pressures".

For 2022, underlying operating margin is expected to post a modest improvement - in line with previous guidance. For 2023, the group's targeting mid-high single digit improvement in underlying operation profit.

An interim dividend of €0.50 has been announced, up from €0.28 last year.

The shares were down 1.0% following the announcement.

View the latest Heineken share price and how to deal

Our view

Beers remain as much of a staple as ever, with demand showing little sign of slowing despite mounting pressures on disposable income. Sales and profit jumped at the half year mark, breezing past company-compiled consensus as consumers drank more beer at higher prices.

It's particularly 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 namesake flagship brand. 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 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, which is expected to remain a 'significant' headwind for this year and next. 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 have seen so far this year. That's unlikely to be the case for the more value-oriented economy portfolio.

The tough conditions mean guidance for next year has been tweaked. The previous target of a 17% operating margin has been 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 are 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 partly reflected in a valuation which is broadly in line with the longer-term average.

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.

Half Year Results (underlying and organic)

In the Africa, Middle East and Eastern Europe region, net revenue grew 24.4% to €1.9bn. That reflected a 4.1% rise in volumes and a 19.5% benefit from higher net revenue per hectolitre. Beer volume grew 3.5% organically with double-digit growth in several countries, partially offset by declines in Nigeria and Ivory Coast. Operating profit rose 44.4% to €279m, helped by a good handle on costs.

In the Americas, revenue increased 15.8% to €4.3bn, with volumes up 3.1% and higher net revenue per hectolitre contributing 12.8%. Beer volume grew 6.2%, driven by the strong results in Brazil and Mexico. The premium portfolio grew in the mid-teens, led by Heineken. Operating profit fell 16.3% to €582m, as higher costs weighed on margins.

Asia Pacific revenue of €2.2bn reflected organic growth of 23.4%. Volume increased by 16.4%, whilst net revenue per hectolitre increased by 6.3%. Operating profit rose 18.9% to €637m, with strong profit recovery in Vietnam, Cambodia, Indonesia and Malaysia.

Revenue in Heineken's largest territory, Europe grew 30.0% to €5.5bn, with volumes and higher net revenue per hectolitre contributing 11.4% and 18.2% respectively. Beer volume rose 7.9%, driven by premium brands like Birra Moretti and a recovery in bar & restaurant sales as the industry reopened. Operating profit increased 63.4%to €625m, rising input costs were offset by price increases and savings elsewhere.

Free operating cash flow was almost double, at €1.1bn, driven by higher profits. Net debt decreased only slightly to €13,6bn, as the positive free operating cash flow was mostly offset by the dividend and a negative foreign currency impact.

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: 1st August 2022