RAM Ratings reaffirms Heineken Malaysia Berhad’s ratings

RAM Ratings reaffirms Heineken Malaysia Berhad’s ratings

Published on 30 September 2016

RAM Ratings has reaffirmed Heineken Malaysia Berhad’s (HMB or the Group) global and ASEAN-scale corporate credit ratings of gA2/Stable/gP1 and seaAAA/Stable/seaP1, respectively. Concurrently, we have reaffirmed the AAA/Stable/P1 ratings of HMB’s RM500 million CP/MTN Programme (2011/2018).

The reaffirmation of the ratings is based on HMB’s key financial metrics coming in within our expectations, supported by a strong operating performance within the domestic malt-liquor market (MLM). HMB had extended its market share lead in this segment to 62.7% (based on revenue) in FY Jun 2016 from 59.5% a year earlier. Meanwhile, HMB is anticipated to preserve its lead as well as its superior financial profile, backed by a low debt level and robust cashflow-generating ability.

“In fiscal 2016, revenue was lifted 5.7% y-o-y to RM1.85 billion driven by a 6.5% spike in sales volume. Apart from a strong performance from its core brands, sales were also supported by the launch of new line extensions, such as Tiger White and Tiger Radler,” said Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. “The higher top line is also attributed to continued multiple raids by the Royal Malaysian Customs to combat trade in illicit malt liquor,” he added. Another contributor may have been the stronger USD, which increases the risk-to-reward ratio for contraband trade. Meanwhile, better cost efficiencies further boosted HMB’s operating profit before depreciation, interest and tax margin y-o-y to 21.6% as at end-June 2016 (as at end-June 2015: 19.0%). 

The Group’s cashflow generation remains very robust. In line with stronger sales, HMB generated increased funds from operations (FFO) of RM376.39 million and an operating cashflow (OCF) of RM331.02 million in FY Jun 2016 (FY Jun 2015: RM300.35 million and RM300.61 million). Coupled with reduced debt, these figures translated into superior FFO and OCF debt cover ratios of 6.84 and 6.02 times, respectively. “Going forward, we envisage the Group’s cashflow-protection metrics remaining impressive,” Lim remarked.

In tandem with a lower debt level, HMB’s gearing ratio eased to 0.16 times from 0.20 times a year earlier. Its net gearing, however, rose to 0.15 times from 0.06 times as its cash balance had thinned to RM4.54 million after a hefty dividend payout of RM305.12 million (end-June 2015: 194.85 million). Nevertheless, looking ahead, the Group’s balance sheet is envisaged to continue to be conservative.

HMB, nonetheless, faces several challenges. Malt-liquor industry volumes remain vulnerable to any escalation in illicit trade and are also susceptible to tax increases in the short term. In year 2016, HMB had raised the prices of its products to reflect cost increases, including taxes. As a result, taking into account the softer consumer sentiment, we expect MLM volume to decline 1%-3% over the next year, before recovering thereafter. The Group’s cost structure is exposed to volatility in raw material prices and packaging costs. HMB further faces regulatory risk, given the sensitive nature of the alcohol industry in Malaysia, a Muslim-majority country. Elsewhere, about 20% of the Group’s sales consist of non-Heineken-owned brands. They are exposed to license non-renewal risk stemming from licensing agreements for some of the brands of HMB’s former co-parent (Diageo Plc). However, mutual benefits derived from such arrangements are likely to encourage their extension.

HMB is primarily involved in the brewing, marketing and distribution of malt liquor.

Analytical contact                                        Media contact
Ben Inn                                                          Padthma Subbiah
(603) 7628 1024                                            (603) 7628 1162
ben@ram.com.my                                         padthma@ram.com.my