Heineken Malaysia Berhad is one of the only two breweries in Malaysia. Since my last post on this company on June 2020, many things have changed. However, Heineken’s share price has remained muted, hovering above RM20 per share. If you have not read my previous post, you can take a look at it here.
This is mainly due to Malaysia’s current covid-19 condition which is worsening. We have gone from “Recovery Movement Control Order” on 10 June 2020 to “National Recovery Plan” on 15 June 2021. Below is a timeline I extract from Wikipedia:
How have this affected Heineken Malaysia? Here are the 4 key updates that you should know about this company before investing:
#1: REDUCTION IN EARNINGS
For the financial year ended December 2020, the company’s revenue and profit has reduced by 24% and 51% respectively. This is the first time Heineken suffered a reduction in earnings in the past 12 years.
Although in its recent 1Q21 and 2Q21 result shows signs of recovery, but it seems short-lived. The on-going closure of its manufacturing plant will lead to few concerns. The main ones are depletion of existing inventories. Heineken may not be able to sell further if current inventory level depletes.
On 4 June 2021, the management has warned that there will be significant impact on its business due to this on-going MCO 3.0. Moving forward, I think the earnings will remain poor for Heineken. This is especially true from 2H21 onwards.
#2: INCREASED COST CONTROL MEASURES
To navigate the current position, Heineken has embarked on several cost control measures. According to its 57th AGM presentation, the following initiatives will be undertaken in 2021:
| Initiatives | Explanation |
|---|---|
| Right sizing of cost base | This means looking into its supply chain management |
| Right sizing of organisation | This could include retrenchment of employees |
| Reducing credit exposure | This includes reduction in undertaking borrowings |
| Reducing capex spending | This includes maintenance of its manufacturing plant |
Apparently, increase pricing of product was not an option for the Company. In its answers to MSWG’s questions, the Management has said they will reduce the discount given instead. In my opinion, this is because the company has to ensure it adheres to Malaysia’s Price Control & Anti Profiteering Act.
Nevertheless, the Management is stepping up their game in e-commerce aside from this cost control measures. This brings me to my next point.
#3: GROWING DEMANDS IN DRINKIES
While there are still no exact numbers yet from this segment, the Management has said that Drinkies.my demand is increasing. For year 2020, the number of orders increased by approx. 93% as compared to previous year. This has led to its revenue growing at approx. 208% in 2020.
The management has made efforts in this area. As of 1Q21, they have introduced new Edelweiss wheat beer. There is also draught machine for rent and this can be found in its Drinkies.my platform.
For now, this segment is still pretty small despite getting a boost from the lockdowns. Investors will have to wait-and-see how this segment pan out in future.
#4: REDUCED DIVIDEND PAYMENT
For the year 2020, Heineken Malaysia has announced a dividend per share of only RM0.51. Comparing this against prior year, it is a reduction by approx. 52.8%. This is somewhat expected in-line with the company’s poor financial performance in year 2020.
But on the bright side, the payout ratio is actually at 100%. Which company still pays out 100% of its earnings? Very few indeed.
MY INSIGHTS
The mandatory suspension of Heineken’s manufacturing operations will continue to have a negative impact to its business performance. The greatest concern is whether the company’s existing inventory levels able to sustain the current demand.
Another concern is the likelihood of inventory being written-off. This is because of the on-going closure of pubs and clubs. Many of Heineken’s on-trade channel inventories may need to write-off as they expire. In year 2020, there is already a write-off of RM7.3 mil in inventories. If the on-going closure continues, the possibility of larger write-off value is high.
In my opinion, it is without a doubt that brewery companies’ business performance will continue to underperform in the 2H21 onwards.
But on the bright side, Carlsberg Brewery Malaysia is currently appealing to the National Security Council for breweries to operate in Phase 2 of the “National Recovery Plan”. If this is successful, then it will be good news for Heineken and Carlsberg. For now, it’s a wait-and-see approach.
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DISCLAIMER: The above-mentioned stock is NOT a recommendation to buy or sell but merely for education purpose. You should do your own due diligence on this company before making any investment decision. The author is not liable for your profit or losses made out of your decision to buy or sell.
The author has vested interest in the abovementioned stock. As such, his view might be biased.
