Morning Note: Market News and an update from Heineken.
Market News
Donald Trump’s political maneuvering continues to shake global markets and rattle US consumers. The President says both reciprocal and sectoral tariffs are coming on 2 April and would be placed on foreign goods imported to the US, with additional tariffs on autos, steel, and aluminium. Trump said he will speak with Vladimir Putin tomorrow as the US continues to push for a deal in Ukraine. Asked what concessions he’d seek, the President said much of the discussion will be about land. Earlier, Keir Starmer said 25 allied leaders will tighten restrictions on Russia to draw Putin in to talks.
US equities closed the week on a positive note – S&P 500 (+2.1%); Nasdaq (+2.6%) – despite ongoing political uncertainty. However, futures dropped this morning after Treasury Secretary Scott Bessent dismissed the market’s recent decline as ‘healthy’.
In Asia, markets moved higher after China unveiled fresh measures to boost consumption: Nikkei 225 (+0.9%); Hang Seng (+0.8%); Shanghai Composite (+0.2%). China will take steps to revive spending by boosting incomes, stabilising markets, and offering incentives to raise the birth rate, Xinhua reported. Economic data was mixed: retail sales quickened, but joblessness jumped, and factory output slipped. Berkshire Hathaway increased its stakes in Japan’s largest trading houses.
The FTSE 100 is currently little changed at 8,639. Rachel Reeves will summon some regulators to Downing Street today to discuss her plan to cut red tape costs for business by a quarter. Work and Pensions Secretary Liz Kendall is expected to unveil plans tomorrow to reduce the welfare bill by up to £6bn. Sterling trades at $1.2935 and €1.1890. The Bank of England is expected to keep rates on hold on Thursday.
Yields on German bonds moved higher as government leaders agreed on a massive defence spending package. Gold trades at $2,990 an ounce, having topped $3,000 at the end of last week. Brent Crude moved back up to $71 a barrel on optimism that demand from top importer China will rise.
Source: Bloomberg
Company News
Last week, we attended a conference at which the management team of Heineken gave an upbeat presentation
on the business and set out what needs to happen to achieve the lower and upper end of its 2025 operating profit guidance. The company enjoyed a positive finish to 2024, and the shares have made a good start to the year, helped in part by the share buyback. Although they remain on a depressed valuation, given mixed execution over the last couple of years, the market will want to see more consistency in order to further re-rate the shares. We believe the company is well placed to achieve this.
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. It has also exited several businesses to refine the portfolio, with disposals in Sri Lanka, Nigeria, South Africa, and Slovakia.
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 macro environment with multiple headwinds including Covid-19, higher input costs, and specific country challenges.
Volume remains below pre-covid levels. This a partly explained by the lack of a full recovery in the on-trade business (i.e. pubs, bars, and restaurants), especially in Europe where there are 10% less outlets. Volumes have also been held back by the intentional removal of low margin business. Looking forward, the group is focused on generating a healthy balance between volume and price growth.
On the subject of tariffs, the company highlighted that in most of its markets, input materials are largely (upwards of 80%) locally sourced. The main exception is the US into which the group imports from Mexico and The Netherlands. However, given the US accounts for less than 5% of group revenue, the impact of tariffs, if imposed, won’t be material.
Outside of the core beer business, the group is keen to leverage its asset base with other products. This ‘Beyond Beer’ strategy varies between markets and includes spirits, water, and hard seltzers.
The Evergreen strategy continues to generate benefits. The company is only halfway through its productivity improvements in Europe and there is much more to do in the digital space. Productivity savings are expected to be at least €400m in 2025. Rather surprisingly, the company highlighted that macro risk management is now central to the business, in particular outlier events.
For 2025, the company is guiding to operating profit organic growth of between 4% and 8%, with the range a reflection of the current macro-economic, geopolitical uncertainty, and other factors. The lower end (+4%) is more likely if tariffs are imposed and there is continued volatility in Africa with inflation in Nigeria and Ethiopia. For the upper-end (+8%) to be achieved requires good momentum in APAC markets of Vietnam and India needs to continue.
Heineken has a strong balance sheet. At the end of 2024, financial gearing was 2.2x net debt to EBITDA, versus 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 the 2024 payment up 7.5% to €1.86 (2.5% yield).
The priority for capital allocation remains organic investment, the dividend, and bolt-on M&A. However, in 2024, the company achieved significant deleveraging, supported by strong free operating cash flow exceeding €3bn. Consequently, the company is well positioned to return additional capital to shareholders and has launched a two-year €1.5bn share buyback programme, a move that will be supportive for the share price.
In the near term, the company faces a tough year-on-year comparison in the current quarter given the late timing of Easter and fewer selling days. The Q1 results on 16 April will provide further detail on current trading.
Source: Bloomberg