EMs Lift Heineken In H1


Dutch brewer Heineken has seen a lift in its emerging market operations in H1 13 . T he world's third largest brewer saw group revenue increase 3% year-on-year (y-o-y) following the consolidation of the recently acquired Asia Pacific Breweries . The financial results will be a welcome development given the firm's overexposure to increasingly sluggish Western markets ; however, the company's full results continue to demonstrate the strain of weak developed market s. Indeed, group volumes slipp ed 3% y-o-y in H1 , and the company saw a 17% y-o-y decline in net profits. I n spite of these less - than - encouraging figures, improvements in the brewer's emerging market operations arguably point to a brighter future for the maker of Heineken, Sol and Tiger beers.

2013 Stronger
Heineken Daily Share Price (EUR)

Mature - Market Burden Continues

Unsurprisingly , volumes in Heineken's Western Europe operations (where the brewer has more exposure than rivals such as SABMiller and Anheuser-Busch InBev ) fell 8% y-o-y in H1 . This is a trend we do not expect to improve over our forecast period, with producers such as Heineken particularly at risk given their exposure to this stalling, mature market. However, despite flattening volumes, Heineken has achieved impressive cost reduction s of EUR139mn in the reported six months , easing some of the burden created by its primary market. Consequently, the brewer is likely to continue to focus on savings and revenue management while looking to tempt consumers with innovation in an effort to spur growth. The planned launch of its radler (lager mixed with soda) drink is a prime example of this .

Still Overexposed
Heineken S1 Sales Geography Breakdown (%)

Emerging Markets Encouraging

Despite the developed-market difficulties (in large part to blame for the group's less - than - dynamic overall performance in H1 ), a key takeaway is Heineken's increasing exposure to higher growth, emerging markets. We have for some time argued that Heineken needs to slash its European exposure to compete with global players such as SABMiller , which has been quick to capitalise on emerging market growth opportunities . For H1 13, Heineken has reported that operating profit in emerging markets rose by 7% on an equivalent basis and now makes up half of overall earnings ; demonstrating encouraging progress for the brewer as it continues to look for international growth

Mexico Matters

Heineken's operations in Mexico, established following its purchase of Fomento Economico Mexicano SAB (FEMSA) in 2011, will likely continue to provide a boost for the brewer. The duopoly it enjoys in the country with AB InBev - owned Grupo Modelo (although this has recently been challenged by government legislation concerning the two brewers ' dominance) is likely to continue to prove profitable. Heineken has not expressed concern about the new legislation and continues to look to the country's impressive demographic profile as a basis for sound growth. In BMI 's view , the country continues to offer dynamic opportunities for Heineken, with sales forecast to grow at a compound annual growth rate of 7% to 2017, reaching a value of MXN199,907mn. Given increasing disposable income s and a rising middle class, premiumisation is expected to be targeted, presenting further opportunities for returns on investment.

Impressive Growth Ahead
Mexico - Beer Sales, US$mn

Asia Acceleration Excites

Another facet of Heineken's improved emerging market profile is its presence in Asia following its purchase of a majority stake in Asia Pacific Breweries (the maker of Tiger beer) for US$6.4bn in 201 2 , principally by buying out its partner , Singapore - based Fraser & Neave . Again , we expect Heineken's asset development in key Asian markets to be a beneficial boost to volumes, with rising incomes a further catalyst for premiumisation. For example , we remain optimistic about China's developing beer story, and see it as a market that offers exciting potential for brewers such as Heineken that are looking to buffer stalling European sales. Asia Pacific Breweries reported impressive volume growth of 10% for H1, with an estimated 20% uptick in operating profits , according to Heineken.

Exciting Potential
China - Beer Sales, US$mn

EMs Key For Future Growth

Despite Heineken's unimpressive H113 results, which were weighed down by the brewer's persistently troublesome Western European operations, there are bright spots heading into the latter half of 2013. One of Heineken's greatest struggles relative to its industry peers has been its overexposure in markets such as France and Russia , which have continued to be hit with dipping consumption and tax spikes. However, as H1 figures demonstrate, the brewer has made encouraging progress in high growth markets. By pursuing assets in key Latin America and Asian markets, it is well positioned to continue to counter dwindling European prospects.

This article is tagged to:
Sector: Food & Drink
Geography: Global, China, France, Mexico, Russia, Singapore