Heineken’s recent updates
•Q3 results: Heineken NV results showed more resilience than expected. Organic consolidated beer volume declined by -1.9% (vs -5.9% from Vuma consensus), negatively impacted by Covid-19 crisis especially in Europe (-2.4%), in Asia (-12.3%). Sales in America demonstrated on the opposite moderate growth (+2.5%).
• Q3 Heineken reported net income reached €396 million, a sharp decrease compared to the €1.67 billion earned last year at the same period.
• Heineken announced that it will reduce personnel costs by 20% to face the economic crisis, meaning upcoming staff reduction.
Business description
• Heineken is a Dutch brewing company founded in 1864. It is the 2nd largest group within its sector, only behind AB Inbev and outshining Carlsberg and Tsingtao. Heineken distinguishes itself a lot compared to its peers thanks to its own brand, but also thanks to its extensive brand portfolio, composed of Sol®, Amstel®, Desperados®, among others. Heineken is implemented in more than 190 countries worldwide.
• The Market where Heineken is most visible is the European one, with 43% of their sales, followed by the Americas’ market with 30%.
• Even though the Asian market represents only 13%, it is the most dynamic growth.
• Africa/Middle East represents a segment where new trends are at stake, such as for example the non-alcoholic beer.
Impacts of Covid-19 on the business:
• The environment of brewing has changed a lot during the covid-19 crisis. Heineken suffered a lot of Covid-19. It is very dependent on restaurants and bars to sell its products (on-trade); this caused a difference in the off-trade/ on-trade historical breakdown regarding the beer market (see graph at the right). Consequently, the lockdown and the closures resulted in a 16,4% decline of their net revenues.
• A weakness of Heineken seems to be their cost compared to their rivals. The expected profit plunged far more for Heineken than for Carlsberg (52,5% of expected profit plunge for Heineken compared to the 8,9% of expected profit plunge for Carlsberg).
• The group especially suffered from Covid-19 is some countries like Mexico and South Africa, two countries that banned alcohol production during Lockdown, since it was considered as a non-vital product, and only vital products were authorized to be produced during this period.
• Heineken is to cut management jobs because of the lockdown, implied by the bars and restaurant closures. The company announced large-scale job cuts after a huge plunge of profit.
Market trend: the launch of non-alcoholic beers
• The company leads many innovations to stay competitive. The last big innovation in the market was alcohol-free beer, and Heineken responded by making the most sold alcohol-free beer. The company wants to gain a health-friendly reputation.
• This is also a way to address the consumers that do not drink alcohol, especially in Africa and Middle-East markets. Non-alcoholic beers have only one-third the calories of traditional beers, leading this to be a "healthy alternative" to beer adopters. The leading market in terms of non-alcoholic beverages is Saudi Arabia. Non-alcoholic beverages allow the companies to address a Muslim demand.
• It is also the case in the US where the beer sales growth has been falling in volume since 2016, and recently due to the hard-seltzers' boom.
• The two biggest brewers: Heineken and AnheuserBusch InBev have launched many non-alcoholic beverages. Leading to a brand portfolio expansion backed by different acquisitions to expand into this segment.
• This new type of product is nearly entirely devoted to Western Europe. It is the proof that this product is targeted to non-drinking populations. Many supermarkets in Paris and Amsterdam have entire shelves devoted to this new type of beer, as an example. We shall not forget that this innovation is more profitable as developed countries tax more than other alcoholic products.
A Wide Brand Portfolio
• A brand portfolio composed of many brands helps Heineken to compete with the likes of AB Inbev and being the 2 nd biggest market leader in the brewing industry. With over 300 brands in 190 different countries, the M&A strategy employed by Heineken gives a cohesive and international leadership to the brand. With the likes of Lagunitas, Desperados, Amstel, Sol, Tiger, just to cite some of the most important ones; covering different tastes (Desperados for a more fruity taste, sold in more than 85 countries) and different segments (Lagunitas for craft beer, available in 33 countries). Although, the importance of of the principal beer is high, since it represents 17% of the volume sold.
• The top four brewery groups represent 40% of the production., the 5 largest breweries have increased their market share from 25% to 46% in the 2000s decade.
• The big brewers saw the opportunities of the emergent markets, such as Brazil, China, Russia, or India. Many aggressive acquisitions were led to become leading global brewers. In the early 2000s, the beer market was fragmented with many local brewers. During this decade, many aggressive mergers and acquisitions changed the market. The four biggest brewers now have a presence in many local markets.
• Between 1997 and 2012, Heineken realized 15 acquisitions for a total of 10 billion euros, with the biggest deals in the Americas or the Middle East. For Heineken, M&A was a way to penetrate in emergent markets. In 2010, the company acquired the beer activities of FEMSA, the biggest beer producer in Mexico.
• In 2012, Heineken acquired parts of the Singaporean brewer for the Tiger beer. In 2017, Heineken acquired a Brazilian brewer who was part of the Japanese group Kirin. Their last big acquisition was in 2018. The company owns a minority stake in the China Resources Beer for an amount of bn3,1$. It allowed the company to penetrate in the Chinese market which is the biggest beer market in the world and one of the fastest growing one).
• Marketing strategy within the company is very high, since there is not a lot of possible differentiation within this sector. Marketing expenses represent around 10.7% of their Sales, which is a lot compared to AB Inbev that amounts for 5.8% or even Carlsberg at 7.7%. They sponsor some events such as the UEFA Champions League, Formula 1, The Heineken Cup, among many other events, and even concerts.
• Supply chain : Heineken’s policy consists on having many factories (165 within 70 different countries), leading to more proximity between the production site and the end consumer.
Financial analysis and estimates
• Heineken being in the consumer staples industry have been hard hit by the pandemic. Its half yearly report shows that revenue was €11,156 million, a decline of 18.0% (2019: €13,597 million). It had a net loss of 293 million in the same period. Also, its FCF were in the negative ( €-791 million ).
• The EBITDA margin is in an increasing dynamic, it is related to the efficient cost policy regarding personnel expenses, and other maintenance costs.
• Heineken maintained its CAPEX levels in the past 5 years (even though CAPEX/Sales suffered a slight decrease), and for FY19 it is maintained at a level of € 1,915 million, and we forecast this number to be slightly slower in FY20 because of Covid-19 lower-investment trends.
• Heineken has experienced stable growth in its Cash Flows. FCF has increased by 28 percent over the last 5 years, which translates to roughly a growth of 5.1 percent.
• Heineken’s CAPEX is segmented into 2 types of investments: increasing efficiency of the principal plants, and new factories (especially in Brazil, Vietman, and South Africa) → confirming its supply chain efficiency (already stated before) of having proximity between the production site and the end consumer.
• Heineken’s capital structure is very healthy, providing strong guarantees for liquidity and solvency. Net debt to EBITDA ratio for FY19 is worth 2.69x. We estimate that this ratio will ultimately increase due to Covid-19. However we are confident that the company will increase its FCFs in the future to deleverage the ratio.
Competitors’ landscape
Anheuser-Busch InBev :
BUSINESS
− Net revenue = 34,260 Billion US Dollar
− Operating profit =5,691
− (Normalized EBIT): 16,421 Million US Dollar
SIZE (SALES AND MARKET CAP)
− Total Volumes: 561.4 million hL
− Employees: 170,000
− Market Cap: 108.986 Billion US Dollar
GROWTH AND MARGINS
− Growth Revenue: 4,3%
− Growth consolidated Revenue: 1,1%
− Net margin:17,53%
− Operating profit margin 31,38%
Carlsberg :
BUSINESS
− Global Revenue: 65.9 Billion (DKK)
− Operating profit : 10.5 Billion (DKK)
− Net profit: 6.6 Billion (DKK)
SIZE (SALES AND MARKET CAP)
− Volume: 133.1 million hL
− Market Cap: 19.735 Billion US Dollar
GEOGRAPHY
− Growing in Asia: volume growth of 12.3%
− Eastern Europe: 17% Share of Group Revenue
− Western Europe: 55% Share of Group Revenue
− Asia: 28% Share of Group Revenue
Molson-Coors :
GEOGRAPHY
− North America: 79,8 % share of the group
− Europe: 18,8% share of the group
− Rest of the world: 1,4% share of the group
SIZE (SALES AND MARKET CAP)
− Net sales: 2486 Million US Dollar
− Volume: 88.9 million hL
− Market Cap: 38,34 $ Billion US Dollar
GROWTH AND MARGINS
− Net sales: increased by 2.8% and 3.0%
− Net Income: Decreased 78.4%
− Underlying EBITDA: $2.4 Billion US Dollar
− Net Margin: 2,28%
Valuation
• Our 12-month €89.98 price target is based on a 50:50 DCF:Comps. €104.05/shr (DCF based on discount rate 5.76%, terminal growth 1.50%). €75.90/shr from Comps.
• We adopted a conservative approach for DCF valuation, betting on stable growth and margins. Our capex and change in WCR projections for Heineken are based on the evolution of its revenues, taking constant ratios.
• Comparable companies analysis shows that Heineken’s peers are trading lower than Heineken. EV/EBITDA ratio is line with its competitors. Heineken has the best growth outlook as it’s the 2nd biggest market share of the market. We choose those comparables because they are the only global actors operating in the brewing market.
• We used EV/EBITDA ratios to evaluate Heineken (its median), to erase the discrepancies between Molson Coors and the other two competitors, therefore not taking the PER.
Investment thesis
• We set an overweight recommendation for Heineken stock, with a 12-month target price of €89.98 vs €81.32 (as of close 06/11/2020 trading day).
• The beer industry is changing a lot since the segments of craft beer and non-alcoholic beer are exponentially growing, and Heineken is the main group compared to its peers that has the best positioning.
• We think the group will keep recovering slowly, alcohol consumption going back gradually to precrisis level with relaxation of measures in public points of consumption. Heineken’s strategic positioning, competitive advantage through its diversified portfolio of famous brands and worldwide implantation are trusted by investors, who should support the stock over the long term.
• Governance: we estimate that the company’s governance will keep the business on track, and is key for the financial management and health of Heineken.