EUR 850.00 For Business Accounts Only

Morningstar | Mixed Quarter for Heineken in 3Q: Miss in Asia Is a Concern but Looks Priced In. See Updated Analyst Note from 24 Oct 2018

Heineken reported third-quarter volumes that were bang in line with our forecast for the second half of the year, but volumes skewed more to the Americas segment and less to Asia than we had anticipated. We are making no material changes to our forecasts, and we retain our narrow moat rating and EUR 85 fair value estimate for Heineken. The stock is down by 10% year-to-date and by over 16% from the peak in July, and we think the market valuation now offers modest upside.

Third-quarter consolidated volume growth of 3.1% is in line with our forecast for the second half of the year. We were surprised at the 8.1% growth in the Americas segment, however, and the double-digit growth achieved in Brazil in particular. Nevertheless, this confirms our thesis that Heineken may be a threat to Anheuser-Busch InBev over the long term in Brazil, although we suspect that the timing of shipment phasing exaggerated the underlying performance of the business in the third quarter. On the other hand, Asia has slowed down amid increasing competition. Volume in Cambodia declined in the mid-single-digit range, contributing to divisional volume growth of 4.8%, down from 13% in the first half of the year. This is significant because Asia has been a growth engine for Heineken for several years, and the slowdown is likely due to competitive pressure from Carlsberg. Cambodia is essentially a three-way oligopoly, with Khmer Brewery holding more than one third of the market, Heineken another 25%, and Cambrew another 20%. Carlsberg has targeted southeast Asia as a growth engine of its own, and in August increased its stake in Cambrew to 75% from 50%. Given the balance power between the three major operators, it seems unlikely that price competition will be sustained in the longer term, but the current environment shows that no player has enough share to dominate the market and that Vietnam is not as attractive in the long term as Latin America from a price/mix perspective.

Heineken has not released any margin data for the third quarter, but net profit of EUR 1.6 billion for the nine months to September indicates that the firm is on track for modest margin expansion, even if Asia continues to slow.