Morning Note: Market news and an update from Heineken.

Market News

The stock market got a boost at the end of a wild week after key economic data bolstered speculation the Federal Reserve will set up the stage for an interest-rate cut in September. The S&P 500 rose by 1.1% and is currently expected to rise by a further 0.3% at the open this afternoon. 10-year Treasury yields drifted down below 4.20%. Central banks meet in the US, Japan, and the UK this week.

The rotation out of Big Tech has dragged the Nasdaq 100 Index down 8% in just over two weeks, leaving it on the cusp of a correction. Whether it can avoid that milestone will likely come down to earnings from the tech giants including Meta, Microsoft, Amazon, and Apple.

In Asia this morning, equities were generally firm: Nikkei 225 (+2.1%); Hang Seng (+1.7%). The exception was China – Shanghai Composite was flat – where it was reported the country may cut its RRR by 25-50 basis points this year. Chinese industrial profits rose 3.6% year-on-year in June. The yen continued to recover and now trades at 153 versus the dollar as hedge funds slash short positions ahead of the Bank of Japan decision.

The FTSE 100 is currently trading 0.6% higher at 8,336. Rachel Reeves is expected to delay a number of ‘unfunded’ road and hospital projects on Monday as part of the Treasury’s anticipated plans to plug an apparent £20bn hole in spending left by the Conservatives, while committing to an above-inflation public sector pay rise. Sterling currently trades at $1.2873 and €1.1852.

Gold ticked back up to $2,394 an ounce. The yellow metal is seen as the best Trump trade, according to the latest MLIV survey. Brent Crude trades at $80.60 a barrel following heightened Israel-Hezbollah tensions.

Source: Bloomberg

Company News

Heineken has this morning released its first-half results which highlight a ‘solid’ performance with operating profit growth slightly below market expectations. The group nudged up its guidance for the full year, albeit to a level below current market forecasts which had clearly got ahead of themselves. The company also wrote down its investment in China. Ahead of this afternoon’s analysts’ meeting, the shares are trading 6% lower.

Heineken is the world’s second largest brewer, generating net revenue of €30bn from a portfolio of iconic brands, many of which have been quenching the thirst of consumers for decades. In addition to the core Heineken brand, the company owns several well-known beers and ciders, including Sol, Tiger, Amstel, and Strongbow, as well as 300 or so local brews. The company also owns around 3,000 pubs in the UK, runs a wholesaling operation in Europe, and has a strong global distribution capability. Over time, the group has expanded and developed its global footprint through investment in new breweries, partnerships, and acquisitions.

We believe the company is well placed to benefit from long-term growth opportunities in emerging markets (which generate more than 50% of revenue), where young and growing populations, low per-capita beer consumption, and increased wealth are expected to drive growth. The company believes the biggest opportunity is in India, with strong prospects also seen in Mexico, Brazil, China, Vietnam, and South Africa.

The group generates more than 40% of its revenue from premium brands, where volume is growing twice as fast as mainstream beer because consumers turn to better brands as they grow older and wealthier. Finally, the group is benefiting from the growth of low and no-alcohol products and increased digital revenue.

We believe the shareholding structure, supported by family ownership, ensures the company is run for the long term and in the best interests of all shareholders.

Over the medium term, the group has faced a challenging environment with multiple headwinds from Covid-19, higher input costs, and specific market challenges. However, the group has made an encouraging start to 2024 despite experiencing economic volatility in certain markets, with signs of consumer demand stabilising.

Net revenue grew by 6.0% on an organic basis to €14.8bn. Growth was driven by a 4.3% increase in net revenue per hectolitre as pricing was used to mitigate inflationary pressure. Total consolidated volume grew by 1.7%. The underlying price-mix was up 4.9%, mainly driven by pricing. Beer volume grew by 2.1% in organic terms with the group gaining or holding market share in more than half of its markets.

By region, The Americas region stood out as portfolio mix and major ongoing saving initiatives resulted in a strong operating profit improvement (+37.2%), notably in Brazil and Mexico. Asia Pacific returned to growth (revenue +7.9%, profit +6.8%), led by India and with the Vietnamese beer market stabilising. Africa, Middle East and Eastern Europe grew revenue by 27.5% as the group actively navigated volatility in Africa. In Europe, revenue slipped by 1.1% despite market share gains in the majority of markets and beer volume up 3.6% despite poor weather in June.

The group continues to benefit from an ongoing shift towards product premiumisation, with volume up 5.1% organically. The Heineken brand itself grew volume by 9.2%, with more than 27 markets growing double-digit, most notably Brazil, China, and Vietnam. In the low & no-alcohol category, the company consolidated its market leadership, with Heineken 0.0 up 14%. The group’s e-commerce platforms continued to grow, with gross merchandise value captured via B2B digital platforms up 22% to €6.1bn.

The group has recorded a non-cash impairment related to its investment in CR Beer in China of €874m. This relates to a decline in the share price of the listed component of CR Beer, reflecting concerns on the macroeconomic environment in China and its impact on consumer demand. The share price trajectory has deviated from the strong operational results of CR Beer which has grown turnover by 17% and net profit by 293% in the period 2019 to 2023.

Operating profit rose by 12.5% in organic terms to €2,079m, slightly below the market forecast for growth of 13.5%. Pricing and productivity more than offset inflationary pressures in the group’s cost base and funded incremental brand investment. The margin rose from 13.4% to 14.0%. Diluted EPS rose by 5.9% to €2.15.

Heineken has a strong balance sheet and generated free operating cash flow of €655m. At the end of June, financial gearing was 2.4x net debt to EBITDA, in line with the long-term target to be below 2.5x. The dividend policy is to pay a ratio of 30% to 40% of full-year net profit, with half-year interim payment fixed at 40% of the total dividend of the previous year. As a result, the group has today declared an interim dividend of €0.69 per share, in line with last year.

The group still expects the second half of the year to grow at a slower pace than the first half as it ‘materially’ steps-up investment in market and sales expenditures, with notable increases in key markets. This also reflects the easier year-on-year comparatives faced in the first half.

Guidance for the full-year has been updated reflecting management’s confidence in delivery and commitment to invest behind growth and to future-proof the business. Operating profit is now expected to grow by 4%-8% in organic terms versus previous guidance for low- to high-single-digit growth.

The group continues to expect variable costs to increase organically by a low-single-digit on a per-hectolitre basis. While the company expects to benefit from lower commodity and energy prices compared to 2023, this is more than offset by local input cost inflation and currency devaluations, particularly in Africa. The group also expects higher than historical average wage inflation. However, the productivity programme is firmly on-track to deliver at least €500m of gross savings in 2024 – €300m was delivered in H1 – ahead of the medium-term commitment of €400m. This will enable the company to invest in growth and in building strong brands.

Source: Bloomberg