HEINY - Heineken: Well Above Estimates

• Heineken delivered a volume rebound, higher selling prices to offset inflation, positive FX contribution, and a better product mix.
• We outline reasons to hold Heineken in your portfolio.
• The beer giant is delivering solid results - buy rating target confirmed.

In our initiation of coverage , we really deep-dived into Heineken ( HEINY ) and we also provided a comps analysis with AB InBev ( BUD ).

We were favoring the European brewer for the following consideration:

1. a cost-saving plan thanks to:
   1. the Creation of a B2B platform;
   2. new channels for premium product offerings;
   3. a new implementation of Heineken IoT systems ;
2. an fixed interest rate (in almost all its debt) coupled with a lower net debt to EBITDA compared to AB InBev (2.4x vs 4.08x).
3. even if AB InBev has better margins (due to higher economies of scale), we are confident in Heineken's operating leverage rebound (thanks to a higher volume forecast).

Today, we would like to include these three key takeaways:

1. in a period of inflation, consumers are looking for cheaper alternatives within the same categories. Over the last decade, craft beers have surged - and we believe this trend will now be reverted favoring Heineken and also AB InBev. We can also include the fact that clientele might switch from wines to beer products;
2. regarding AB InBev - 10% of its shares are in Altria's (MO) hands. The American tobacco company sees this equity stake as a strategic optionality. Following the recent development regarding PMI's IQOS, Altria could sell the shares to finance new acquisitions for smoke-free products. This is usually done through an accelerated bookbuild. AB InBev's stock price may suffer.
3. not great to say but looking at the past, alcohol has always been a recession-proof product.

Let's move on and comment on the Heineken Q2 performances.

Q2 Results

Compared to the first 2021 semester, Heineken achieved a very good set of numbers. Starting with the revenue line, the Dutch brewery recorded an increase of 34.7% reaching a higher number than the pre-COVID-19 level at almost €13.5 billion. This result was delivered thanks to higher selling prices, a better product mix, a volume recovery story and favorable FX development. The same positive trajectory was followed by the operating profit and net income result that recorded €2 billion and €1.26 billion respectively. The company numbers were well ahead of consensus expectations.

The negative points in the quarter were:

• higher marketing expenses than pre-pandemic-level;
• despite inflation, the cost-saving forecast has not been increased;
• Heineken was totally below the Wall Street consensus on Africa volumes.

Conclusion and Valuation

The Q&A call was pretty insightful. We understood that commodities and some raw materials are hedged in a 50-60% range for 2023. Some inputs are softening from the skyrocketed values, but are still above the average of 2021 and 2020. In particular, it highlights the record prices of natural gas which it uses in large quantities for industrial processes. The Dutch brewery expects " significant inflationary pressures on base costs " and high investments that will weigh on results in the second half and also next year. There is a contingency plan to use other alternative fuels for production. More importantly, the CEO emphasized that there will be another round of price increases in the second half of the year.

The company confirmed its profit forecasts for this year, explaining that it still expects a modest improvement in operating margins for 2023. However, it hints that this may not be the case next year, as it will focus on increasing operating profits overall. He previously stated that the operating margin would improve further.

Heineken is currently trading at a forward P/E multiple of 17x implying a 20% discount versus its historical average. The company is managing very well in this inflationary period and there are 3 MACRO and 3 MICRO upsides that further support our valuation. We reaffirm our price target at €120 per share.

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