Heineken: Eventual Margin Improvement Can Drive Attractive Returns

seekingalpha09-04

Shares of Dutch brewer Heineken have been fairly flat since my last piece, with the market underwhelmed by first half results.The company missed consensus on most key lines, while fresh full-year ...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2464821943?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/502057475/image_502057475.jpg","is_english":true,"pubTime":"2024-09-04 00:23","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2464821943","market":"hk","top_or_hot":-1,"title":"Heineken: Eventual Margin Improvement Can Drive Attractive Returns","media":"seekingalpha","content":"<div>\n<p>Shares of Dutch brewer Heineken have been fairly flat since my last piece, with the market underwhelmed by first half results.The company missed consensus on most key lines, while fresh full-year ...</p>\n\n<a href=\"https://seekingalpha.com/article/4718712-heineken-eventual-margin-improvement-can-drive-attractive-returns\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Heineken: Eventual Margin Improvement Can Drive Attractive Returns</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nHeineken: Eventual Margin Improvement Can Drive Attractive Returns\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-09-04 00:23 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4718712-heineken-eventual-margin-improvement-can-drive-attractive-returns><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Shares of Dutch brewer Heineken have been fairly flat since my last piece, with the market underwhelmed by first half results.The company missed consensus on most key lines, while fresh full-year ...</p>\n\n<a href=\"https://seekingalpha.com/article/4718712-heineken-eventual-margin-improvement-can-drive-attractive-returns\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"KXI","symbol_name":"iShares S&P Global Consumer Stap","start_time":0,"source_url":"https://seekingalpha.com/article/4718712-heineken-eventual-margin-improvement-can-drive-attractive-returns","article_id":"2464821943","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/502057475/image_502057475.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2464821943","pubTimestamp":1725380637,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Shares of Dutch brewer Heineken have been fairly flat since my last piece, with the market underwhelmed by first half results.The company missed consensus on most key lines, while fresh full-year guid","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"KXI":"iShares S&P Global Consumer Stap","HINKF":"Heineken N.V.","BK4158":"啤酒酿造商","HEINY":"Heineken N.V."},"translate_title":"喜力：最终利润率的提高可以带来有吸引力的回报","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"HEINY":1,"HINKF":1,"KXI":1},"content_text":"Shares of Dutch brewer Heineken have been fairly flat since my last piece, with the market underwhelmed by first half results.The company missed consensus on most key lines, while fresh full-year guidance was also somewhat lackluster relative to analyst expectations.Heineken still has an attractive beverage portfolio, and its geographic exposure skews to developing markets. This should support reasonable long-term revenue growth.Margins remain quite soft here relative to pre-COVID marks. Progress on this front would provide a tailwind to earnings growth.Heineken only trades for around 17x EPS, with sell-side growth expectations and the stock's modest dividend able to power double-digit annualized returns for investors.   wallix/iStock Editorial via Getty ImagesDespite reporting softer volumes in some of its key emerging markets, I thought global brewer Heineken (OTCQX:HEINY)(OTCQX:HINKF) was good value when I covered it last October. Granted, the global beer market doesn't have the best growth prospects out there - low single-digits per annum is as good as it gets - but with Heineken well-positioned towards pockets of higher long-term growth, a then-multiple of around 17x EPS looked like a reasonable deal. The stock's performance since then has been disappointingly flat. The ADSs had been moving up nicely alongside broader global staples (KXI), but a poor reaction to H1 2024 results have ultimately driven around 16 points of underperformance in that time, with the company missing consensus on key lines and delivering full-year guidance that fell short of analysts' expectations. Data by YChartsHeineken being the mature consumer staple that it is, short-term share price developments are unlikely to bother many of its investors, especially since earnings are actually growing here. While H1 results were admittedly a little soft, the stock only trades for around 17x EPS, and that remains a reasonable discount to its historical average. Capital structure-neutral measures show something similar, and I would note that leverage is currently at the low-end of the company's historical range. Heineken should have more than enough growth potential to make this work for long-term investors, with eventual margin improvement able to supplement a reasonable top-line outlook. I keep my 'Buy' rating in place. H1 Results Underwhelm Being a mature global brewer, Heineken's organic revenue growth algorithm should be fairly straightforward: grow volumes at a low single-digit clip and realize something similar from price/mix, with that ultimately resulting in a roughly mid-single-digit sales CAGR. COVID and the related bout of inflation disrupted this, with annual volumes falling double-digits in 2020 before staging a staggered recovery over the next two years, while revenue per hectoliter increased by a similar amount in inflation-hit 2022 and 2023. Heineken's top line is now settling back down into trend, albeit with figures for the first half of 2024 landing below sell-side expectations. With that, total consolidated volume was 133.4 million hectoliters in H1, missing consensus by ~2.5%. Beer volume represents close to 90% of the figure, with beer volume organic growth of 2.1% missing by around 130bps. Asia Pacific (\"APAC\") - a soft spot last time out due to weakness in Vietnam - drove a chunk of that, with APAC organic beer volume growth of 6.9% missing consensus by ~140bps. Source: Heineken H1 2024 Results PresentationRevenue and operating income likewise came in light. Net revenue (i.e. revenue after excise taxes) was €14.81 billion, up ~2% year-on-year, but missing consensus by around €380 million. Organic net revenue growth was more like 6% after stripping out currency impacts and so on, and as I mentioned above this was more broadly balanced between volume and price/mix than in recent periods. Still, 6% organic revenue growth was around 170bps shy of expectations, while underlying operating profit was €2.08 billion, with year-on-year growth of ~12.5% missing consensus by around 70bps. Guidance was also a tad disappointing to analysts. With a full two quarters under its belt, management has slightly tightened its outlook for the full year. It now sees organic EBIT growth landing somewhere between 4% and 8% in 2024 versus a vaguer \"low to high single digits\" previously. While not a downgrade as such, analysts were clearly looking for more upside to the high-end of that range. Some Way To Go On Margins All that said, I still think Heineken has the right ingredients to generate decent long-term growth. It has a nice premium beer portfolio, with growth in that segment of the broader beer market historically outpacing the market average. This continues to be the case here, with premium volumes up a little over 5% in H1 and branded Heineken volumes specifically up over 9%. Furthermore, close to two-thirds of the company's beer volume and EBIT came from developing markets in H1, with those likewise offering above-average growth potential. Margins are something of a double-edged sword. Like many staples, Heineken was more concerned with defending euro-level earnings during the recent bout of inflation rather than getting hung up on margins. At 14%, the company's underlying operating margin was still around 160bps below pre-COVID levels in H1, albeit this was up around 60bps year-on-year. There are various puts and takes here. Firstly, marketing and selling expenses have actually been a support, with Heineken spending around 10% of revenue on this compared to ~11.5% pre-COVID. While this will rise as the firm invests behind its growth, the company has a cost savings program in place (which will help fund higher marketing), while it probably still has meaningful improvement to realize in its gross margin following the recent bout of high inflation. For more color on this, we have to look at the 2023 numbers (Heineken only provides a detailed breakdown of expenses in its annual report). Packaging costs, for example, were running around 320bps ahead of pre-COVID 2019 levels as a percentage of sales last year, with raw materials, energy & water and transport costs also ahead of immediate pre-COVID marks. All of this is weighing on the company's margins. Data Source: Heineken Annual ReportsAs I calculate it, Heineken's gross margin was 53.5% last year, down ~670bps on 2019. Granted, there are some structural issues in play as well - for example, stricter drunk-driving laws in Vietnam are a headwind to its structurally more profitable on-trade business - but over time I expect the firm to realize some improvement here, providing a tailwind to earnings growth. Valuation Given all that, Heineken shares continue to look inexpensive. The ADSs currently trade for a shade over $45 each, equal to ~17x consensus underlying EPS based on the current USD/EUR rate. Sell-side analysts have EPS growing at a double-digit CAGR through 2027, aided by roughly 5% annualized revenue growth and the margin dynamics outlined above. Throw in ~2.1% from the current dividend, and these shares would offer investors low-teens annualized returns even on a flat multiple of EPS, and I would note that the current P/E is around 20% below the pre-COVID average. Data Source: Yahoo Finance; Heineken Annual ReportsDebt-neutral metrics show something similar. Consensus has 2024 EBIT at around €4.6 billion, with the implied multiple (~13.5x) also representing a good-sized discount to the pre-COVID average (~16x). Finally, I would add that leverage of ~2.3x EBITDA is currently at the low-end of the company's historical range, with the potential for buybacks and/or bolt-on M&A a possible source of upside to medium-term EPS. Summing It Up Heineken's growth is finally settling down into trend after a relatively tumultuous period for the industry. While the company served up a set of underwhelming first-half figures relative to market expectations, it still has the right ingredients to drive reasonable long-term revenue growth, and improvement on margins should leverage that into even better earnings growth. Throw in the modest dividend, and these shares should be good for solid double-digit returns for investors given their relatively unassuming P/E.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.26.4","shortVersion":"4.26.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2464821943"}