Yahoo Finance Questor: good times are coming for this beer company
Last year, the world’s second-largest beer company, Heineken, celebrated its 150th anniversary. But festivities fell flat for shareholders in the company that founder Freddy Heineken described as selling not beer but good times – or “gezelligheid” in Dutch.
The company’s management says trading should now improve following the disappointments of 2023. However, the shares’ persistently low valuation, after five years of lacklustre returns, suggests many investors don’t believe it. Heineken’s shares are valued near a 10-year low based on forecast sales and in the bottom 10th of their 10-year range based on forecast earnings.
However, the smart money is betting gezelligheid is coming.
Financial publisher Citywire has found 14 of the world’s best fund managers – each among the top-performing 3pc of the 10,000 equity investors it tracks – hold shares in either operating company Heineken NV, or its majority shareholder, Heineken Holdings. This gives the two shares ratings of A and AAA respectively from Citywire Elite Companies, which rates companies based on their backing by the world’s best professional investors.
Several of these fund managers are “value” investors, who seek to buy shares when they are cheap and out of favour, and others have been buying more of the shares in recent months on the grounds of their cheapness.
The obstacles Heineken encountered last year, and the company’s plans to tackle them, go some way to explaining the shares’ low valuation.
A surge in input costs caused by the global inflation spike was the year’s biggest headache. The company pushed through major price increases, with the price of its drinks raised by 10.2pc on average.
This proved too much for many drinkers. Volumes dropped 4.7pc in the 12 months to the end of 2023, which limited the benefit of price increases and resulted in organic revenue growth of just 5.5pc.
Contributing to volume woes was terrible trading in Vietnam and Nigeria as their economies deteriorated. Nigeria’s slumping currency and a Vietnamese police crackdown on drink driving didn’t help matters.
The volume drop squeezed margins, reflecting a high proportion of fixed costs. Underlying earnings before interest and tax (Ebit) margins fell a full percentage point to 14.7pc. This held back operating profit growth to just 1.7pc. To put into context how disappointing that outcome was, until mid-2022, the company was targeting a 17pc Ebit margin in 2023.
Higher interest rates have also pushed up debt servicing costs, leaving underlying post-tax profit for 2023 down 4.3pc and underlying earnings per share (EPS) down 5.2pc. Increased finance costs will continue to weigh, which has contributed to analysts downgrading EPS forecasts for the current financial year by almost a fifth over the past 12 months. Estimates for 2025 and 2026 earnings have been cut by 15pc over the same period.
It’s at times like these that it becomes hard for investors to remember what there ever was to like about a company such as Heineken. However, the charms that have had investors raving about the business in the past remain largely intact.
Specifically, the company is a brand powerhouse. It sells over 350 types of beers, many of which boast strong local connections, while others have international pull, such as Tiger, Amstel and eponymous Heineken. It is also a leader in alcohol-free beer.
The company meanwhile boasts enviable international distribution. That includes 165 global breweries, sales in more than 190 countries and even an estate of over 2,300 pubs in the UK.
Recent trading aside, Heineken’s geographic footprint has historically been regarded as a major advantage – the growth from the 27pc of sales in Asian and emerging markets balancing the remainder made in the more mature Americas and European markets. In these slower-growth areas, Heineken aims to boost performance by increasing the sale of up-market brands.
This year should see some of the forces that have obscured Heineken’s long-term attractions start to abate. Volume trends began to improve in the second half of last year, although trading in Vietnam and Nigeria is still tough. Meanwhile, input costs aren’t rising as rapidly and interest rates are widely expected to fall.
As the headwinds ease, investors should begin to see the benefits of a €2.5bn cost cutting drive since 2020, which was intended to help the company towards that 17pc margin target. Increased marketing spending and capital investment aimed at driving growth and “premiumisation” could also bear fruit. So too could a raft of digital initiatives.
That leaves plenty of scope for the shares to rise from their current levels. Some of the world’s best fund managers think so, and this column agrees.
Questor says: buy
Ticker: AMS:HEIA
Share price at close: €89.34
Algy Hall is investment editor of Citywire Elite Companies
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