Heineken NV (HEIA) Eur1.60 (CDI)
HL comment (2 August 2021)
Heineken's first half net revenue rose 14.1% organically to €10.0bn, driven by an 8.2% increase in total volumes and a 5.5% increase in revenue per hectolitre. Consolidated beer volume rose 9.6%. Underlying operating profit rose 109.3% to €1.6bn as the group recovered after a difficult first half in 2020. Compared to 2019 operating profit is still down 9%.
Heineken expects costs to increase in the second half of 2021 and in 2022, partly due to increased commodity prices. Management plans to be ''assertive on pricing'' to meet this challenge, but expects a lower operating profit margin the second half and results will remain behind 2019.
Heineken is restoring the interim dividend at €0.28 per share.
The shares were broadly flat following the announcement.
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 we're broadly moving in the right direction.
Over the last year or so, changes in profit have been far greater than changes in revenue, which is an example of ''operational gearing''. Brewery costs are relatively fixed regardless of how many pints you sell, so brewers are naturally operationally geared. Once running costs are covered, every extra pint adds greatly to profits, which is what we've seen over the last half. Unfortunately, as we saw last year, the reverse is also true and when sales fall profits quickly drain away.
Coronavirus came 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 have been 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 recently, 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 3.0 times cash profits at the end of the half year. This level of debt is higher than either we or management would like, but is partly a function of lower profits during the pandemic. Management is targeting a ratio of 2.5 times in the long run, which feels about ok to us although we wouldn't mind seeing it a little lower still.
We hope the worst is behind Heineken, and we think 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 there's always the potential for more disruption if the economy fails to recover smoothly and there are no guarantees.
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: 26.3
- 10 year average forward Price/Earnings ratio: 19.0
- 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.
First Half Results (underlying and organic)
In the Africa, Middle East and Eastern Europe region consolidated beer volumes grew 16.8% and are now slightly ahead of 2019. Net revenue rose 30.4% to €1.5bn, reflecting volume growth and strong price/product mix gains, reflecting ''assertive'' pricing in Nigeria, Russia and Ethiopia. Operating profit rose 190.2% to €209m.
In the Americas volumes rose 16.7%, thanks to a strong recovery in Mexico, and have nearly reached 2019 levels. Net revenue rose 25.7% to €3.3bn, reflecting volume growth and strong pricing in Brazil, offset by promotional activity in Mexico. In the USA volumes grew ahead of the market and were up by high-single digits. Operating profit in the region rose 85.7% to €639m.
In the Asia Pacific region volumes fell 1.0% as lockdowns were imposed to combat a severe wave of the virus. Net revenue rose 5.4% to €1.3bn and operating profit rose 15.9% to €452m.
In Europe beer volume rose 3.2% as a decline in the first quarter was offset by a recovery in the second. However, bar and restaurant volumes were at around half of 2019 levels. Net revenue rose 3.0% to €4.2bn, but operating profit rose 359.1% to €380m, albeit from a low base. In the UK volumes were down by low-single digits, but rose in the twenties during the second quarter as pubs reopened. Heineken is currently experiencing disruption from a lack of drivers.
Capital expenditure in the first half fell from €1.1bn to €909m. Free operating cash flow was €650m, compared with an €809m outflow last year. Net debt rose from €14.2bn to €15.1bn as dividends, acquisitions and currency movements offset positive cash flow.
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.
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Previous Heineken NV updates
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