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Heineken remains refreshing

Heineken remains refreshing

Heineken is the world’s third largest brewer by volume with it coming in behind AB InBEV and SAB Miller.   The group is benefiting from its exposure to developing markets, a strong innovation rate and premium beer brands.  A large family shareholding in Heineken has led to a focus on the long-term.

Adriann Heineken founded Heineken in Amsterdam in 1864 and as such it is a European company with a long pedigree.  Tourists to Amsterdam can visit the Heineken Experience where Heineken was brewed for over a hundred years.

Heineken’s global brands

Source: Heineken investor presentation

The longevity of the business illustrates the attraction of consumer staple groups for investors.  They are generally able to withstand the test of time and therefore compound value over the long-term.

In terms of the brewing industry and volumes have been fairly subdued in Western countries given the shift towards healthier lifestyles.  However, companies with premium brands and new products have fared well.

Developing countries are seeing volume growth and have attracted significant investment from the industry.  Heineken is well positioned with 64% of beer volume and profits generated from developing markets in the first half of 2015.

Heineken’s developed & development market split

Source: Heineken investor presentation 

In the first half of 2015 beer volumes in developing markets rose by 3% in the while they declined by 2.3% in developed markets.  The weakness in developed countries reflected the tough comparatives given the football World Cup last year. 

Among the developing markets the Asia Pacific region was a key area of strength with beer volumes 6.1% higher in the first half.  Africa Middle East saw 2.8% volume growth in the period and Central & Eastern Europe saw a 2% decline.

Total revenue in H1 2015 came in at €10.9bn with the largest contributor Western Europe at €3.7bn.  The Americas generated €2.98bn, Africa Middle East €1.6bn, Central & Eastern Europe €1.58bn and Asia Pacific €1.35bn. 

As such Heineken has a diversified position in developing markets and should be able to offset weakness in any one region.  By contrast the world’s fourth largest brewer, Carlsberg, is heavily exposed to Eastern Europe and in particular Russia.

Heineken’s offering: premium & innovation

Turning to the product and premium brands and product innovation have underpinned sales momentum and margins.  In the first half of 2015 the group’s premium brands saw 4.7% volume growth versus Total volume growth at 1%.

Premium brands include the namesake beer Heineken and are benefiting as consumers in developing markets trade up.  The group also saw double-digit volume growth in the global brands Sol, Affligem and Desperados in the period.     

Product innovation has also supported growth so far this year with innovation in areas like cider and alcohol free beers.  The proportion of revenue generated from recently launched products therefore increased to 8.6% in the first half.

Heineken innovation: Draught Heineken in the home

Source: Heineken investor presentation

First half financial performance

The relatively tepid first half volume growth of 1% was due to the decline in developed markets offsetting much of the developing market growth.  However, the growth of premium brands helped lift organic revenue by 2%.

The weakness of the euro meant that reported revenue increased by 7.2% to €10.9bn.  Heineken has continued to improve its margins with the operating margin increasing by 0.2% to 15.5%.  

The combination of higher margins and organic revenue growth saw organic net profit increase 14% to €0.915bn.  Earnings per share rose by 19% to €1.59 with the main driver organic growth but the weak euro also helping.

H1 2015 earnings per share growth

Source: Heineken investor presentation

 

Valuations across the whole consumer staples space have increased in recent years as investors latch on to the sector’s attractions.  On face value the P/E ratio valuation for Heineken looks full with a 21X forecast P/E ratio for 2015.

However, this falls to 19.3X for 2016, 17.6X for 2017 and then a more modest 16.3X in 2018. The exposure to emerging markets offers a long-term growth story and by 2019 the P/E is expected to fall to 13X.

Heineken is less expensive than the world’s largest brewer AB Inbev, which is on a forecast P/E of 20.5X for 2016 and 19X for 2017.  SAB Miller is roughly in-line with Heineken at a forecast 19.5X P/E for 2016 and then 17.9X for 2017. 

Summary

Heineken’s operational performance has been impressive with strong premium brand volume growth and a pickup in the pace of innovation.  Draught Heineken in the home and new alcohol propositions are some recently launched products.

The group’s main market by revenue is Western Europe and so Heineken should benefit as the Eurozone continues to recover.  The company has a diversified emerging market position and is set to benefit as volumes grow in these markets.

In terms of the outlook for the remainder of 2015 and the recent currency weakness in emerging markets is likely to be a headwind.  However, the euro has also depreciated significantly since the start of 2015.

On balance the shares appear to be fully valued but meaningful price weakness below €70 is likely to offer a long-term buying opportunity.  Heineken is a well-run business and is focused on the long-term opportunity in developing countries.

This report was produced by Fat Prophets Senior Research Analyst, Andrew Latto

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