Today I want to share a wonderful Malaysian company that are in temporary trouble. In my opinion, this company has fulfilled whatever Warren Buffett has described in terms of the criteria of a great business to invest in. This company is none other than Heineken Malaysia (“Heineken”).
Warren Buffett once quote that “the best thing that happens to us is when a great company gets into temporary trouble… we want to buy them when they’re on the operating table”.
Since the start of Covid-19 pandemic and the political unrest in Malaysia, Heineken’s share price have crashed from RM31.04 per share to RM21.82 per share, at the time of writing. To make matter worst, Movement Control Order (“MCO”) were implemented by our Malaysian Government leading to a temporary closure of its brewery factory from 18 March to 3 May 2020.
What makes this company attractive right now? Here’s 5 reasons that you should know before invest:
#1: RECURRING BUSINESS MODEL
For the non-muslim working adults, the first thing that comes to their mind when it comes to this word “TGIF” is beer. There is a joke saying that when in good times, people drink to celebrate. When in bad times, people drink more to suppress their worries away.
This is what makes Heineken business so stable because people will keep drinking beer. According to the Star Online (23 May 2011), Malaysia was ranked the world’s 10th largest consumer of alcohol by the World Health Organisation.
Since 2009 to 2019, Heineken’s net profit after tax has been growing steadily at CAGR of 8.22%. However, the Management states that its second quarterly result would be affected negatively since its factory has been ordered to closed due to MCO.
The good news is they have since reopened from 4th May 2020 onwards. As such, I believe its financials will be back to normal by next year.
#2: DUOPOLISTIC POSITION
There are only 2 key players when it comes to brewery in Malaysia: Carlsberg and Heineken. Both of them captured 90% of the beer and stout market. It is a highly regulated industry which makes it so stable because the competition is only between these two companies.
Of course, there are bad sides in a highly regulated industry. According to the Confederation of Malaysia Brewers Berhad (“CMBB”), production capacity of both the brewers is limited to 1.8 million hectoliters each. This means the supply for beer and stout will always be lower than the demand.
In addition, Malaysia’s excise duty on alcohol is one of the highest in the world. This eats up both the brewers’ profit margin. Neverthess, Heineken still able to achieve a double digit net profit margin over the past 9 years. Thanks to its duopolistic position.
#3: CONSISTENT FREE CASH FLOW
We all know that companies can generate huge profit and still gone bust if the business is unable to generate cash inflows. For Heineken, the company not just generate cash flow from its operation but it also retain a large amount of free cash flows.
This is because they are not allowed to increase production capacity. As such, its capital expenditure is small and mainly on maintenance expenditure. As at 2019, it has RM309.5 million in free cash flows.
Accordingly, the company payout increasing dividend per share over the past 10 years. Happy investor!
#4: E-COMMERCE TO THE RESCUE
During the MCO period, people have been relying on e-commerce to purchase their essential goods. As the saying goes, it takes 21 days to form a new habit. It is without a doubt that people have been getting used to the e-commerce platform like Lazada or Shopee.
Heineken, in the year 2018 launched its own online store selling beers (known as Drinkies.my). The key thing about this is its on-demand delivery service – delivering chilled beers and ciders to consumers’ house within 60 minutes.
In its recent quarter result – Media & Analyst briefing presentation, the management stated there is a significant growth in its Drinkies.my online platform. However, the revenue from this segment is still small as it was not reported. We will have to wait and see how this segment’s growth will pan out in the future.
#5: FAIR VALUATION
The most attractive valuation for Heineken is when KLCI crashed on 16 March 2020. However, since then it has recovered some loss ground. Recently, its value have emerge once again. The average 10 year PE of Heineken is 21.4x and its current PE ratio at the time of writing stood at 20.8x. As such, I think it is currently trade at fair valued.
At current price, it gives a dividend yield of 4.95%. However, this yield is expected to be lower due to the current covid-19 situation that the company have to deal with.
To provide a more conservative view on this, an average 5 year dividend per share (RM0.956) is used. This gives a dividend yield of 4.38% based on its latest closing price at the time of writing this article.
In my view, it is pretty decent considering the FD rate is way lower than this and you should also note that its dividend per share will increase eventually after the covid-19 outbreak has been resolved. This means higher yield based on the entry price.
So, what’s the risk? Many people have concerns with the current government (PAS to be specific) that will impose further restrictions towards the already stringent industry. If this is true, then company may incur higher costs to comply with their rulings.
However, the current government will not retract both the brewers’ operating license. According to CMBB, the beer industry annually contributes approximately RM3.7 billion to the Malaysian economy and this accounts for 36% of GDP for the Malaysian beverage market.
It also employs close to 61,000 Malaysians. Retracting the brewery license could create certain negative domino effect to the country. As such, it is highly unlikely for the current government to do so.
Another risk to take note would be the possibility of another Covid-19 wave coming in leading to re-implementation of MCO by our government. Heineken would need to shut down its factory again if this happens.
Why Heineken and not Carlsberg? In terms of its valuation, Carlsberg is currently trading at PE of 27.7x and gives a dividend yield of 4%. Both of this valuation metric suggest that it is currently overvalued.
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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 above mentioned stock. As such, his view might be biased.