Heineken NV (AMS: HEIA)
Last Price: EUR 91.78| Fair Value: EUR 90.00
Business Strategy & Outlook
Heineken’s “green diamond” strategy, its new approach to long-term value creation, focuses on four metrics: growth, profitability, capital efficiency, and sustainability and responsibility. The newly announced Evergreen strategy targets growth and profitability. Growth targets are vague and noncommittal, but the Heineken has structural growth drivers that will allow it to generate above-average net revenue growth. Volume growth in early-stage emerging markets such as central and southern Africa, premiumization in its late-stage developing markets such as Brazil, and a limited amount of pricing should combine to drive mid-single-digit growth in the medium term. Heineken plans to extract EUR 2 billion gross in costs by 2023, primarily from reducing headcount by around 9%, at a cost of EUR 900 million in operating and capital expenditure, and it targets an EBIT margin of 17% by 2023, which is achievable and probably beatable. The 18% as a reasonable medium-term margin expectation, driven by product mix and operating leverage as volume grows in some of Heineken’s greenfield emerging markets. Some organizational change will be required, however, and embedding a culture of cost control, especially given the size of the headcount reduction, without affecting the productivity of employees as being the biggest challenge new CEO Dolf van den Brink will face. Still, there are opportunities to expand margins through footprint optimization, and process standardization and digitalization. Heineken’s returns on invested capital are structurally lower than those of Anheuser-Busch InBev, for example. The ownership of pubs in the U.K. is an example of the heavy investments Heineken has made in its growth and competitive advantages. While it’s notable that return on assets has been dropped as a performance metric in the green diamond strategy, this is mostly related to the drop in demand during COVID-19 lockdowns, and if Heineken delivers on its volume growth and margin expansion opportunities, higher returns on invested capital should follow. The mid teens ROICs in the medium term, up from about 10% now on a normalized basis.
Financial Strengths
Heineken is in solid financial health. The company increased the gearing on its balance sheet in 2012 to acquire the remaining shares of Asia Pacific Breweries. Following the acquisition, Heineken’s adjusted net debt/EBITDA ended 2012 at 3.4 times, and the firm has committed to reducing that ratio to maintain its credit ratings. Despite a spike in the net debt/EBITDA ratio caused by the COVID-19 disruptions in 2020, by 2021, despite the U.K. pubs acquisition, the company had deleverage to levels below most of its peer group, with adjusted net debt/EBITDA at 2.6 times. Even if it increases the dividend at a high-single-digit rate and initiates a share-repurchase program in the outer years, Heineken’s roughly EUR 2 billion in annual free cash flow should allow it to deleverage to net debt/EBITDA of under 2 times by 2023, which would still be well below AB InBev’s current level of roughly 4 times and in line with the 2 times is the normalized durable level in the brewing industry. Given the limited options for transformative mergers and acquisitions, Heineken is unlikely to be involved in any major transactions in the near term, but the bolt-on acquisitions of small and midsize breweries are still possible, particularly in Asia. Equity swaps and the use of stock are possibilities, as was the case in the 2010 merger with Femsa. The stated target payout ratio is 30%-35%. The firm also reduced the dividend significantly during the financial crisis in 2009. This level of payout gives the firm plenty of flexibility to make organic or acquisition investments to expand the business.
Bulls Say
Company Description
Heineken is Western Europe’s largest beer producer, selling 231 million hectoliters in 2021, and following the Anheuser-Busch InBev acquisition of SABMiller, it is the world’s second-largest brewer. It has the leading position in many European markets, including the Netherlands, Austria, Greece, and Italy. Its flagship brand, Heineken, is the world’s leading international premium lager and has spawned several brand extensions. Its brand portfolio spans nonalcoholic, Belgian, and craft beer. Heineken is the world’s biggest cider producer.
(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.
Laverne Securities Pty Ltd, ACN 629 216 477, T/As Investor Desk, is a Corporate Authorised Representative of Laverne Capital Pty Ltd (AFSL 482937). This service is administered by OpenInvest Limited ACN 614 587 183 via the OpenInvest Portfolio Service ARSN 628 156 052. This website provides factual information about the service, and any general advice contained does not take into account your objectives, financial situation or needs. Before making any investment decision, please review the PDS and Target Market Determination available at https://www.investordesk.com.au/key-documents/. Should you require assistance in determining whether an investment in the service is right for you, you may wish to seek personal advice from an appropriately licensed financial adviser.