Set up in 1964 and listed in 1965, Heineken Malaysia Berhad is one of two brewers still active in Malaysia. It owns a number of well-known alcohol brands such as Heineken, Tiger, and Guinness.
The stock has been delivered good returns to shareholders, gaining approximately 10% every year since 2011. According to the management, the recent 10-year shareholder annual return of the stock was 17%. The decent record was disrupted by the unprecedented COVID-19 virus outbreak. As Malaysia fell into perpetual lockdowns or various forms of movement control orders, the company’s business was affected and looks likely to suffer in the short term.
Here are eight things I learned from the 2021 Heineken Malaysia AGM.
1. Revenue decreased by 24.0% year-on-year to RM1.8 billion in 2020 due to lower sales and the seven-week suspension of its brewery operations during the year. As a result, inventories written off surged from RM2.7 million in 2019 to RM7.3 million in 2020. The management will work with its distributors to keep inventory at the right levels after learning their lesson during the initial lockdown. Managing Director Roland Bala shared that the company is a improving its digital business-to-business platform to better engage with customers such as distributors, bars, and pubs.
2. Net profit excluding non-operating income dropped by more than 50% year-on-year to RM146.0 million in 2020 primarily because of lower sales. Likewise, dividend per share dropped from 108 sen in 2019 to 51 sen in 2020 while the dividend payout stood at 100%. There were several one-off expenses in 2020 including a settlement of the Royal Malaysian Customs’ bills of demand totalling RM7.2 million and a provision for organisational restructuring cost amounting to RM14 million.
Total borrowings increased from RM98.0 in 2019 to RM249.2 million in 2020 as the company drew down short-term revolving credit to boost working capital and ensure liquidity was available during the crisis. The company aims to cut down its capital expenditure and commercial spending to preserve cash.
3. Heineken Malaysia will continue to deepen its e-commerce presence through Drinkies.my, a business-to-consumer platform. Bala did not disclose the percentage of revenue contribution from this platform in 2020 due to confidentiality issues but it remains small. He only mentioned that revenue and orders from Drinkies.my grew by 93% and 208% year-on-year respectively in the latest financial year.
He describes Drinkies.my as a one-stop place for consumers to get everything they need for a party even including snacks, liquor, and champagne from third parties except Carlsberg Malaysia. A mobile application version has also been released while the coverage area was expanded recently.
4. Minority Shareholder Watch Group (MSWG) pointed out that the total compensation for key management personnel had increased by 27.6% from RM9.8 million in 2019 to RM12.5 million in 2020 despite the drop in revenue and net profit over the same period. Chairman Dato’ Sri Idris Jala attributed the increase in Bala’s performance bonus given the good results the company recorded in 2019. A digital and technology director was also appointed in 2020. This position was vacant in 2019.
A shareholder asked if the board would take a pay cut. The chairman explained that the salary has been stagnant since 2015 and is benchmarked against the industry. The directors and management’s salary and bonus will remain the same in 2020 given the tough operating environment. To be fair to Heineken Malaysia, key management personnel remunerations made up 3.4% of net profit compared to Carlsberg Malaysia’s 7.2% in 2019.
The chairman also responded to MSWG that the company has passed on cost increases to customers through price increases in the past three years. A company’s ability to pass on price increases is usually a sign of an economic moat.
5. On-trade channels (coffee shops, hawker centres, pubs, and clubs) used to contribute to about two-thirds of the company’s revenue before COVID-19. Some pubs and clubs that operated with liquor licences remain closed more than a year after the government introduced the movement control order. The restrictions imposed on on-trade channels such as dine-in capacity have shifted consumer consumption towards the off-trade channels (supermarkets, sundry stores, and convenience stores) as well as e-commerce.
Heineken Malaysia also worked with financial institutions to provide financial support to customers and restructure payables in order to help them maintain healthy cash flow. The company also donated RM1.5 million to restaurants, coffee shops, and street food vendors as part of its Tiger Save Our Street Food campaign to help them tide through the crisis.
6. To manage costs prudently, the company has resorted to rightsizing its organisation. Approximately 20% of the workforce may be furloughed or retrenched. The situation is inevitable given the new norm according to Bala although the parent company has made a commitment not to furlough staff. The management managed to increase its quarterly revenue and net profit by 6.2% and 29.1% year-on-year respectively in Q1 2021.
7. Heineken Malaysia achieved water balancing as of 2021. For every one litre of water that it uses, it returns 1.5 litre to the environment through a series of water protection and saving initiatives. It also aims to achieve carbon neutral production by 2030.
8. The company will continue to optimise its portfolio by investing in core brands and slashing non-performing brands. It introduced Edelweiss wheat beer during the pandemic. The beer was founded in 1646 in Austria and is believed to have growth opportunities in the local market. Heineken also launched a draught machine for those who take their beers seriously.
The fifth perspective
Despite the government’s attempt to speed up the daily vaccination rate, the country is still not out of the woods yet. Heineken Malaysia’s brewery was instructed to shut for the second time as it is regarded as not providing essential products or services. Its short-term future remains gloomy. However, if you take a long-term view on the stock, it will most likely be able to recover once the pandemic subsides given its duopoly in the market and strong brand equity.
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