1H11 results were below our and consensus forecasts except for volumes, which grew by +3.9% organically in 1H11 to 79.8m hl (KBCS 78.8m, css 77.8m). 1H11 revenue grew by +11% (+3.3% organically) to € 8,358m (KBCS € 8,551m, css € 8,386m). EBIT beia grew by 11% (+3.9% organic.) to € 1,259m (KBCS € 1,374m, css € 1,341m) and (31,65 EUR, -12,58%) realized € 82m TCM savings (bringing the total realized at € 517m). Net profit (beia) grew by 11% (+5.7% organic.) to € 694m (KBCS € 789m, css € 716m). Net profit declined by -14% to € 605m (KBCS € 744m, css € 701m) due to some positive incidentals last year.
1H11 volumes were better than expected in all regions except the Americas. Volumes grew by 1.0% organically to 22.4m hl (KBCS 22.0m) in Western Europe on growth in France, Italy and Ireland. Volumes grew by 8.6% organically to 21.8m hl in CEE (KBCS 20.9m) mainly thanks to Russia where grew by over 25% as they recovered from the market share loss in 2010 following aggressive excise duty increase passing through. Volumes grew by 8.5% organically to 10.7m hl (KBCS 10.0m) in Africa and by 8.0% to 0.6m hl (KBCS 0.5m) in Asia. In the Americas, volumes declined by 2.4% organically to 24.3m (KBCS 25.3m) with Mexico volumes down in the two months included in the organic scope (and up 0.8% in 1H11) following some market share loss. If we look at the EBIT (beia) breakdown, we see a positive surprise in Western Europe (EBIT beia +13% organically to € 456m vs € 385m expected) while Africa (EBIT beia +5.9% organically to € 284m vs € 336m expected) and mainly the Americas (EBIT beia +5.9% to € 294m vs € 415m expected) were below expectations, as the integration savings (€ 47m) seems to be offset by higher marketing investments.
hinted at a slightly higher rate of input cost inflation in 2H vs 1H (which benefited from a flat 1Q) but overall FY guidance of low single digit increase in input costs on a per hl basis maintained, as expected. hinted that the marketing and selling expenses would increase by low single digits in 2H11 which seems broadly consistent with the previous comment of a higher marketing spend ratio for FY11. Important (and negative) are the comments about volume weakness in July and early August (on weak weather in Europe), and the guidance of a full year net profit (beia) being in line with FY10 on an organic basis. We reckon this fresh guidance means we will have to shave off over € 200m from our net profit beia forecast for 2011 which currently stands at € 1,750m (css € 1,684m) from css). Important and positive is that the company plans to introduce a new 3y cost savings program early 2012.
Despite volumes being better than expected, 1H11 profit performance and guidance disappointed. We will significantly cut our estimates (FY11 net profit beia forecast by over 10%) but maintain our BUY rating as the shortfall seems to a large extent due to the Americas, where EBIT grew less then expected but this relates in part to higher marketing spend, and might be temporary. We still like thedefensiveness of the beer industry and consider Heineken’s valuation remains quite attractive. We lower our target price from € 50 to € 45.