Heineken: Unchanged Guidance, Buy Confirmed

seekingalpha10-24

Heineken reiterated its fiscal year 2024 outlook with a core operating margin growth between 4% and 8%.There is a key area of delivery: price mix supported by beer premiumization.After reviewing our ...

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In other regions, there was a material step-up in market share. We see this positive evolution in Brazil and India. The former was a surprise, given the aggressive beer price competition. In India, the company delivered mid-single-digit growth following route-to-market resets. Also, the South Africa region is returning to growth as Distell integration is progressing; We continue to see support from","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"HEINY":"Heineken N.V.","BK4158":"啤酒酿造商","HINKF":"Heineken N.V."},"translate_title":"喜力：指引不变，确认买入","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"HEINY":0.9,"HINKF":0.9},"content_text":"Heineken reiterated its fiscal year 2024 outlook with a core operating margin growth between 4% and 8%.There is a key area of delivery: price mix supported by beer premiumization.After reviewing our estimates due to FX, we still believe HEINY stock is a solid buy. Additionally, there is a valuation gap within its Consumer Staples sector.   DutchSceneryFollowing the just-released Q3 printout, our team is back to analyze Heineken (OTCQX:HEINY). In our last assessment, we reported how we were Preferring Fundamentals Over Short-Term Miss. The company reiterated its outlook today, but Heineken’s stock price is still not correctly priced. Before reporting our positive forward-thinking view, it is critical to assess the ongoing challenges. The brewer's segment has volume downside risks, and this weaker trend will likely persist. This is due to 1) lower US discretionary spending, 2) a weaker-than-anticipated European consumer recovery impacted by unfavorable weather conditions, and 3) unsupportive trends in Mexico and China. Related to China, the Brewers and Spirits segment was significantly impacted by destocking activities. Although the segment should perform well in a low interest rate cycle environment, the company's valuation remains weak. For this reason, our team decided to invest in the leading industry players, Heineken and Diageo (DEO). Since our last update, Diageo has performed positively, while Heineken is still lagging (Fig 1).   Mare Ev. Lab previous rating updateFig 1 Q3 Results Looking at the results, the company reported Q3 organic sales of +3.3%. This was also aligned with the compiled consensus expectation of +3.2%. On a positive note, we report volumes and price MIX up by +0.7% and +2.6%, respectively. On the Heineken results, we have no visibility on the margin. Therefore, it is vital to report that Heineken confirmed its Fiscal Year 2024 guidance (Fig 2). The company reiterated its operating profit guidance at +4-8%, despite an announcement of stepping up marketing spend in the 2024 second semester. This was also pending on the normal summer weather in Q3, which has not materialized. For this reason, an outlook reiteration is a piece of solid news.   Heineken 2024 GuidanceSource: Heineken Q3 results presentation - Fig 2 Why are we positive?  Starting with the CEO comment, Heineken’s “business continues to deliver in line with our plan in the aggregate, despite some markets navigating challenging consumer and industry trends.” Considering the EU summer weather, Europe's modest volume growth at +0.8% was supportive on a geographical basis. In other regions, there was a material step-up in market share. We see this positive evolution in Brazil and India. The former was a surprise, given the aggressive beer price competition. In India, the company delivered mid-single-digit growth following route-to-market resets. Also, the South Africa region is returning to growth as Distell integration is progressing; We continue to see support from the EverGreen strategic plan (beer premiumization and cost savings initiatives). The company has a clear line of sight in the €500 million cost-cutting achievement in 2024, and in Q3, the premium beer volume accelerated by 4.5% (Fig 3); Given the ongoing de-rating, no negative news should be taken as a positive sign for the stock. After a period of stock price volatility, Wall Street sell-side consensus is troughing. Heineken's consistency of delivery increases our supportive investment equity story. Our team believes the company might deliver profitable growth and capital efficiency. The company trades on a 2025 P/E of 15.2x, compared to an average Consumer Staple industry of >20x. Unfortunately, this isn't justified.    Heineken Premium beer growth Fig 3 Earnings Changes and Valuation Despite our positive stance on Heineken, we should also report two key facts. We report the following from Heineken's press release: “Currency translation reduced net revenue by €471 million (YTD: €1,097 million), mainly from the devaluation of the Nigerian Naira, Mexican Peso, Brazilian Real, and Ethiopian Birr.” Considering the Q4 expectation, we now estimate lower sales, and as a consequence, this translational FX is now guided to be a core operating profit headwind. After the Q3 results, our sales decreased the company’s sales from €32.56 billion to €32.08 billion. As already reported, there was no visibility on Heineken's Q3 operating profit; however, the beer giant previously guided a 15% increase in marketing expenses in H2. There is no change in SG&A, but related to FX, we decided to lower our EBIT profit forecast from €4.9 billion to €4.69 billion. This implied a yearly EBIT FX impact of €220 million. During the Q&A analyst call, there was no change in the company’s technical guidance, so our net income projections came in at €2.7 billion with an EPS of €4.8 (from a previous estimate of €5.04). Our EPS revisions reflect lower EBIT growth due to FX mark-to-market impact and more conservative assumptions on financial charges (from our Q2 update). On our lowered earnings per share, the company trades on 15.2x 12-month forward P/E. Heineken's story remains attractive due to a midterm EBIT and EPS growth. Even without pricing favorable 2025 results, the company trades at a significant discount versus the Consumer Staples sector (P/E projected 21.77x - Fig 4) and its five-year historical average (P/E of 21.99x). We value Heineken with an unchanged P/E target at 20x (also aligned with peers) for consistency reasons. After lowering our estimates following the Q3 print, we confirmed our buy rating with a new target price of €96 per share ($51.75 in ADR). Additionally, we report that the S&P 500 Consumer Staples is up by 15.73% on a YTD basis, while Heineken stocks are down by 14.31%.   Consumer Staple FWD P/E Fig 4 Risks Our team has extensive coverage in Heineken. We report our previous risks:  Higher corporate tax from local governments with higher excise duty increase; Advertising restrictions; Unfavourable weather conditions, which impact consumption; Consumer preference in non-alcoholic products; Persistent inflation and consumer slowdown; Unfavourable currency development (Ethiopia currency was particularly devaluated in Q3); The cost-saving strategy and the Distell integration have execution risks; Value-disruptive M&A and sector multiple deteriorations might pressure Heineken's stock price.  Conclusion In Q3, despite an adverse FX development, the company was positively impacted by its price/mix evolution. Our team reiterates Heineken's buy rating, backing its supportive fundamentals, consistent delivery quarter by quarter, and an ongoing discount to peers.  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":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"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":"4.29.2","shortVersion":"4.29.2","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/2477357059"}