Heineken reported fourth-quarter earnings that were a whisker below our above-consensus forecasts, with organic revenue growth of 3,5% and 46 basis points of EBIT margin improvement. The results show that Heineken is performing in line with expectations, with a rebound in volumes in Western Europe mitigating the continued contraction in Russia.
Any change in our EUR 77 fair value estimate is likely to reflect the time value of money, rather than any material changes to our cash flow assumptions. Our narrow moat rating also remains intact, as Heineken’s brand strength was visible in the quarter. Nevertheless, Heineken will soon face a mammoth competitor when Anheuser-Busch completes its acquisition of SABMiller, and given this heightened risk, we would wait for a steeper pullback before building a position in the stock.
Organic consolidated revenue increased by 3.5%, driven by volume growth of 2.2% and pricing of 1.3%. As expected, this was a sequential slowdown from the 7.5% organic growth achieved in the abnormally strong third quarter. It lags the 5% organic growth achieved by SABMiller in in the first nine months of the year, as Heineken’s exposure to oil-exporting countries weighed on its growth rate. For the first time, Heineken reported Africa, the Middle East, and Eastern Europe as a single segment, clouding our visibility into the 3.8% fourth-quarter organic decline in regional revenue. However, in light of Carlsberg’s double-digit drop in volumes in Russia, we suspect that the bulk of the weakness was driven by Eastern Europe. Western Europe continues to rebound, however, with a 1.3% increase in beer volumes and flat price/mix.
We are further encouraged by Heineken’s reiteration that it expects to be in line with medium-term guidance in 2016, despite the deflationary pressures in Europe and slowing developing markets. This implies modest margin expansion of around 40 basis points, in line with 2015 and with our forecasts.
Our thesis on Heineken is clearly still intact after fourth-quarter results. Consolidated organic volume growth of 2.3% during 2015 was solid, and was driven by the premium portfolio, particularly in the Americas (up 6.4% in 2015). This is comfortably above the global rate of growth in the beer industry (which we estimate to be 1%-2% annually). In our December 2014 report “Premiumisation Can Widen Moats in Alcoholic Beverages”, we noted that Heineken’s exposure to premiumising markets gives it a platform for superior growth in the medium to long term, driven by premium brands such as Heineken, Affligem, and Sol, with Red Stripe and Lagunitas added to that portfolio during the second half of last year. As Heineken’s volumes increase at a faster rate than those of competitors, we believe greater scale can increase the company’s cost advantage over time, thereby widening the firm’s narrow moat.
The looming threat to Heineken’s positive moat trend, however, is the proposed combination of Anheuser-Busch InBev and SABMiller. If the transaction goes ahead, it will create a beer behemoth three times the size of Heineken and with a significant global cost advantage. We expect Heineken to make bolt-on acquisitions of its own over time, but we think the firm may have to pay close attention to lowering its cost structure in order to sustain its profitability as it competes against the new brewing giant.