Malaysia: Heineken Malaysia MD expects external environment to remain challenging this year

The absence of major events like last year’s World Cup that are often celebrated with rounds of beers and any fresh catalysts to accelerate earnings growth has given brewers less to cheer about this year, The Edge Markets MY reported on January 28.

This is on the back of a persistent problem of illicit alcohol sales.

Compounding the situation, Heineken Malaysia Bhd managing director Roland Bala said, is currency market volatility and uncertainty in global commodity markets.

He is expecting the external environment for 2019 to remain challenging due to an expected moderation of consumer demand on the back of global macro instability.

On its part, the Dutch brewer is adopting a cautious approach to cost management as Bala notes that the trend of consumers being more value-conscious and selective is expected to continue.

“We remain committed to winning in the marketplace with a consumer-inspired approach to innovation, which allows us to cater to evolving consumer needs,” Bala told The Edge Financial Daily.

His counterpart at Carlsberg Brewery Malaysia Bhd, Lars Lehmann, said on top of a saturated beer market, Malaysia is also sensitive and heavily regulated.

While the reintroduction of the sales and services tax (SST) in September last year posed pressure on business cost, Lehmann said

The impact on Carlsberg was mitigated by the strong performance of its brands and enhanced enforcement against contraband beer.

Hence, barring any legislative or regulatory changes in 2019, Lehmann said Carlsberg is confident that it will continue to see growth in its volume and earnings, especially through product innovations, strengthened customer relationships and consumer promotions.

For the cumulative nine months ended Sept 30, 2018 (9MFY18), Heineken saw its net profit grow 3.3% to RM182.52 million from RM176.42 million a year ago, while revenue stood at RM1.37 billion, a 6.4% increase from RM1.28 billion in 9MFY17.

For Carlsberg, its net profit for 9MFY18 rose 22.5% to RM209.70 million versus RM171.16 million a year ago, as its revenue rose 8.9% to RM1.46 billion from RM1.34 billion.

The brewers have been given a reprieve from an excise duty hike in the past two years. The last hike came in March 2016, when the excise duty structure for beers changed to RM175 per 100% volume per litre, from the previous RM7.40 per litre and 15% ad valorem tax.

However, Heineken Malaysia’s Bala warns against any plans to hike alcohol taxes as the illicit sale of alcohol remains prevalent.

“Any further increase in excise duties on beer will widen the gap between legitimate duty-paid beers and illicit alcohol, and potentially fuel demand for illicit products, thus having a negative effect on improving tax collections,” he said.

Bala added that the illicit alcohol trade is still an issue that merits concern as it leads to a loss of economic value from excise duties and taxes.

According to him, the beer industry contributed RM2 billion in taxes and salaries to the Malaysian economy. However, illicit trade accounts for some 80% of alcohol sales in Sabah and Sarawak and about 20% in Peninsular Malaysia.

“While the illicit market continues to pose a significant threat to legitimate brewers, we are encouraged by the government’s commitment to address the situation,” said Bala, adding that the recent increase in penalties against the illicit trade is a step in the right direction.

Lehmann concurred, noting that the high tax on beer is a significant factor for the proliferation of contraband beer in Malaysia.

“The elimination of the contraband market can translate to increased duty collection from legitimate sales and we hope that it will be a persuasive reason to waive any proposal to increase taxes on beer,” Lehmann added.

Kenanga Investment Bank Bhd analyst Clement Chua expects a softer 2019 for the local brewery industry due to the lack of World Cup seasonalities and the SST fully impacting consumer spending.

However, he is hopeful that there will be no hike in alcohol taxes as he believes that the government would evaluate its SST collections from brewers and non-trade businesses before considering higher duties “as alcoholic beverages are also facing the same illicit trade concerns as tobacco players.

According to an analyst from UOB Kay Hian Malaysia, one of the main challenges it foresees is further regulation for the industry, which is demonstrated through the recent move to shorten operating hours of entertainment outlets in the city centre.

However, the research house is not expecting any hike in alcohol duties, noting that it would worsen the illicit alcohol situation.

In fact, the analyst sees upside for the brewery sector this year, driven by structurally favourable alcohol consumption and an inelastic demand.

“This underlines our mid-single digit top line growth assumption for the sector in FY19,” the analyst told The Edge Financial Daily.

Meanwhile, Affin Hwang Capital Research analyst Lester Siew expects 2019 to remain “encouraging” for brewers, as measures put in place by the government to enhance income and support average consumer spending power, combined with improved consumer sentiments, will keep demand going.

“There could be a further upside surprise to earnings for Carlsberg, driven by a strong uptick in local demand for both its flagship and premium brands, as well as potentially stronger recovery from its overseas businesses,” he said.

Siew also said despite manufacturer price increases of between 5% and 8% following the reintroduction of the SST, the “quantum of price hikes is reasonable and would have a negligible impact on sales volume given the inelastic demand for beer”.

He cited previous price increases subsequent to the goods and services tax implementation in April 2015 and the excise duty hike in 2016 which then saw the brewers raising their prices by 2% to 5% and by 2% to 2.5% respectively. The impact was short-lived, with sales growth rebounding from the second half of 2017 onwards, he added.

While the risk of tax hikes are remote, Siew noted that even in the event of a duty hike, it is expected to be reasonable.

Bloomberg data showed that out of the nine analysts covering Heineken Malaysia, three have a “buy” call, five a “hold” rating and one is recommending a “sell”.

And among the 10 analysts covering Carlsberg, two have a “buy” call, six a “hold” rating and the remaining two are calling a “sell”.

Heineken Malaysia shares closed six sen or 0.29% higher at RM20.90 on Friday, January 25, bringing a market capitalisation of RM6.31 billion. Over the past year, the stock price has risen by 8.6% from RM19.10.

Carlsberg shares, meanwhile, have jumped 26.7% over the past year to close at RM20.14 on January 25, valuing it at RM6.16 billion.

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