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AnalysisBursa

10 things I learned from the 2022 Heineken Malaysia AGM

Listed on Bursa Malaysia in 1965, Heineken Malaysia Berhad manufactures and sells beers and ciders such as Heineken, Tiger Beer, Guinness, and Strongbow Apple Ciders in Malaysia. On-trade businesses such as coffee shops, food courts, pubs, and clubs used to contribute to about two-thirds of the company’s revenue before COVID-19. These businesses were the last to be given the green light to reopen their doors to consumers in Malaysia after more than two years of closure.

In the past two years, Heineken Malaysia relocated more of its marketing spend to the off-trade (convenience stores, sundry stores, and supermarkets) and e-commerce channels as people consumed more beer in the comfort of their homes during the pandemic. Will consumer spending now return to on-trade channels post-pandemic?

Here are 10 things I learned from the 2022 Heineken Malaysia AGM.

1. Revenue increased 12.3% year-on-year to RM2.0 billion in 2021 despite the company’s brewery operations being suspended for 11 weeks in 2021, compared to seven weeks in 2020. In Q4 2021, the management adjusted the prices of certain products to compensate for rising input costs. Net profit excluding extraordinary items surged 63.2% year-on-year to RM238.3 million in 2021 due to cost savings initiatives including the rightsizing of its organisation. Dividend per share increased from 51 sen in 2020 to 81 sen in 2021 while dividend payout ratio (excluding extraordinary items) stayed slightly above 100%. Overall, the company’s 2021 performance is still under recovery.

2. Heineken Malaysia’s Q1 2022 revenue rose 27.5% and 33.0% year-on-year to RM698.3 million when compared to Q1 2021 and Q1 2019 respectively. The improved revenue in Q1 was a result of effective advertising campaigns during Chinese New Year amid the backdrop of easing COVID-19 restrictions.

3. The impact of rising raw material prices that were caused by supply chain disruptions might not be fully captured in Q1 2022. The Russia-Ukraine war further fuelled the commodity price rally as the two countries are major exporters of wheat and barley. In 2021, raw materials and packaging costs made up of only 7% of the company’s revenue. The risk should be manageable to the company as it can always resort to price increments to pass on cost increases to customers as beer is the cheapest form of alcohol and is unlikely to be readily replaced.

4. Managing director Roland Bala believes that the pandemic was the worst crisis since World War II as companies literally could not operate. He believes the escalating input costs amid the current inflationary environment are less severe of a problem for the company. The management will also leverage on its parent group’s procurement capability to negotiate for better prices for raw materials.

5. Heineken Malaysia will continue to strengthen its premiumisation agenda and focus on scalability to drive growth in the future. According to Bala, the management will ensure that any new product releases will be scalable such as the launch of the premium wheat beer Edelweiss, Heineken BLADE (eight-litre dispenser), and Tiger Soju. The opening of bars and nightclubs since 15 May also bodes well alongside the gradual return of tourists to Malaysia and the subsequent demand for beer. The company also collaborated with a third party to open its first Edelweiss Flagship outlet – The Alps Bar in Genting Highlands. It does not own the on-trade outlet and only funded the branding.

6. Heineken Malaysia is not directly impacted by the recent implementation of the RM1,500 minimum wage policy by the government since it offers its employees salaries above the minimum wage. Nevertheless, its suppliers and customers will most likely be impacted by the 25% jump in the minimum wage, which aggravates inflationary pressure.

7. Several shareholders pointed out that certain Heineken products like Anglia Shandy were out of stock lately during Chinese New Year in 2022. Bala responded that the stock-out was due to the mandatory brewery closure in 2021. The company was not able to build up its inventory ahead of the festive seasons. Further, the company faced additional logistics issues to ship its products to East Malaysia such as port congestion and low container availability. The management is currently ramping up brewery production to replenish its inventory.

8. The managing director runs the company pragmatically. He cleaned up the company’s product portfolio by discontinuing non-performing beers based on internal insights and changing consumer trends. The off-trade and e-commerce channels will continue to be relevant.

9. A shareholder also brought up the issue of potential restrictions imposed by local councils to sell alcohol. The Kuala Lumpur City Hall restricted the sale of liquor to consumers at convenience stores, sundry stores, and Chinese medicine stores in the capital. This restriction does not affect Heineken Malaysia for now as beers and ciders are not considered liquor.

The management shared that they engage with the government regularly to emphasise on the legitimacy of the beer industry and their contribution to the nation in terms of employment and taxes. In 2021, the company paid RM1.1 billion in taxes to the government. Chairman Dato’ Sri Idris Jala believes that polarity has to be managed and communication is key. He believes in the silent majority although some in society tend to be more vocal about setting more restrictions on selling alcohol.

10. Provisions for restructuring costs totalled RM14.4 million in 2020. The number of employees dropped from 596 in 2020 to 510 in 2021. The company ensures that all outgoing employees are given adequate support to pursue their careers elsewhere. This resulted in stronger employee trust among existing employees as shown in its employee engagement survey.

The fifth perspective

Heineken Malaysia’s resilience was demonstrated by only recording one quarterly loss in the past two years during the pandemic. Amid the reopening of the economy and the resumption of business activities, the company is on track to recover to pre-pandemic levels. However, investors have to be aware of potential risks including a possible excise duty hike on alcohol in the future.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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