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CASTLE MALTING NEWS in partnership with www.e-malt.com Italian
26 July, 2022



Brewing news Malaysia: Heineken Malaysia to raise some of its products prices from August 1

Brewer Heineken Malaysia Bhd will be raising some of its product prices from August 1 in the light of rising costs, following in the footsteps of rival Carlsberg Brewery Malaysia Bhd, which did so July 1, The Edge Markets reported on July 26.

The move, coupled with the rising inflation pinch felt by consumers, increases the likelihood of the brewers facing poorer demand in the second half of the year.

Nevertheless, analysts say their respective full-year earnings are on track to recover to, or even beat, levels of the pre-Covid-19 year of 2019. They also expect the brewers’ dividends — typically higher than what is generally paid out in the market — to remain intact.

However, with the national budget set to be tabled in parliament on Oct 28 and the government needing to grow income, investors will also be keeping a close eye on whether the brewers will be hit with an excise duty hike. The last effective excise hike was in 2006. In 2016, there was a “rebasing”, with brewers seeing a change from “excise per litre of beverage” to “excise per litre of alcohol in beverage”.

Analysts were not surprised by Heineken’s upcoming price hike.

“Although beer consumption demand enjoys a certain degree of price stickiness, food inflation has risen significantly this year and, consequently, Heineken could experience softer sales volume in 2H2022. Hence, we lower our FY2022-FY2024 earnings estimates [for Heineken] by 7% a year,” consumer analyst Jade Tam of Maybank Investment Bank (MIB) Research says in a July 11 report on Heineken.

The research house maintained its “buy” on the stock but cut its target price to RM27.70 from RM29.30.

Based on its channel checks, Heineken will be raising product prices by 6% to 8%.

“We understand that price adjustments will be made to both on-trade and off-trade channels and its core brands (that is, Guinness Stout, Tiger, Tiger Crystal, Heineken and Strongbow) will be affected,” MIB Research’s Tam says.

“Heineken’s price adjustment announcement does not come as a surprise given that its competitor [Carlsberg] has also lifted product prices in July (by a similar 6%-8%, we suspect). Historically, industry price adjustments have led to softer volume sales in the following two to three months,” she adds.

She cut her projection for the industry’s sales volume growth this year to 13% year on year (y-o-y), from 20% previously.

“Although Heineken’s price hikes will aid in defending group margins, we believe this may slow its pace of volume recovery to pre-pandemic levels,” she says.

MIB Research expects Heineken’s net profit to rise 42.4% to RM349.9 million in FY2022 — higher than the pre-pandemic FY2019’s RM312.9 million — and then to RM370.9 million in FY2023.

Heineken had a strong 1QFY2022, and analysts expect the second quarter to remain robust before more muted earnings kick in during the second half of the year as product prices are raised.

As for Carlsberg, MIB Research expects its net profit to improve 59.9% y-o-y to RM321.4 million in FY2022, which is higher than the RM291.02 million it made in FY2019.

Heineken confirmed with The Edge that it is raising prices, but declined to state the extent of the price increase.

“These extraordinary times require exceptional measures. As our product materials are largely imported, the global inflation in prices of raw and packaging materials, increased costs of transportation and logistics, coupled with volatility in foreign exchange rates, have created substantial pressure on our input cost,” its finance director Karsten Folkerts tells The Edge.

“We have done everything possible to mitigate price increases as our industry recovers. However, it is simply not possible to absorb all the cost increases. We concluded that effective Aug 1, a price adjustment on selected products is necessary to maintain our current level of quality and service,” he says.

Compared against 2021, Heineken’s input costs have risen “significantly”, driven by price increases in raw and packaging materials as well as transportation and logistics, with some in the double digits, he says, pointing out that this is similar to the situation faced by other food and beverage producers in the country.

Asked about the extent to which demand and sales volume might be affected as a result of this price increase, Folkerts says: “We are mindful of the impact of a price adjustment on sales, and we have done our best to keep the adjustment as minimal and least disruptive as possible. We are unable to share sales forecasts.”

In 1QFY2022, Heineken reported a record net profit of RM113.4 million — up 54.2% y-o-y and 18.3% quarter on quarter — which accounted for 42% of an analyst consensus forecast for the full year. The strong performance came on the back of a sharper-than-expected recovery in consumption. Its quarterly revenue also surged 27.5% y-o-y to an all-time high of RM698 million, helped by the easing in movement restriction and an average-selling-price hike, notes RHB Research. In FY2021, it declared an 81 sen dividend, with a 12-month dividend yield of 3.61%.

“Our performance in 1QFY2022 improved against pre-pandemic levels, with group revenue growing by 33% versus the same period in 2019. Since April 1, 2022, Malaysia has transitioned to the endemic phase. With the gradual reopening of international borders and revival of international tourism, the hospitality and food and beverage sector is expected to further recover after two challenging years,” Folkerts says, when asked how soon the group anticipates a recovery to 2019 levels.

As for excise duty and whether he thinks a hike is imminent, Folkerts points out that Malaysia already has one of the highest excise duties on beer in the world. There is a direct correlation between higher excise duties and the proliferation of illicit alcohol or duty-not-paid products, he says, adding that further increases in excise duties on beer will fuel illicit trade.

Brewers contribute more than RM2.2 billion in taxes annually.

“Illicit trade is one of the main challenges facing the industry and represents a significant revenue leakage for the government. We are supportive of the government’s decision not to increase excise duties on beers in its Budget 2022 and into the future,” he says.

Bloomberg data shows that of 12 analysts that track Heineken’s stock, 10 have “buy” calls while one each has a “hold” and “sell”. It is the same for Carlsberg.

The average 12-month target price for Heineken was RM27.17, while for Carlsberg, it was RM26.26, which suggest further upside for both the stocks.

Heineken, which has gained 11.5% year to date (YTD), closed at RM22.60 last Thursday, July 21. Carlsberg closed at RM21.94, having gained 12.7% YTD.





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