Heineken Stock: Investing In Growth, But The Stock Is Pricey

  • Heineken is one of the world’s largest brewing companies and enjoys a worldwide brand recognition and reputation.
  • The stock is trading at a premium valuation.
  • I like the increased exposure to India, but I’m not willing to pay 25-30 times earnings for Heineken at this point.
  • Looking for a helping hand in the market? Members of European Small-Cap Ideas get exclusive ideas and guidance to navigate any climate.

Heineken (OTCQX:HEINY) (OTCQX:HINKF) doesn’t need a lengthy introduction as this beer brewery has a worldwide brand recognition which is perhaps even better than its beer. The beer consumption levels obviously suffered in 2020 and even this year we won’t be back at pre-COVID levels. That’s a pity, but the share price doesn’t seem to be impacted too much so I wanted to have a look at the underlying performance of Heineken.

Heineken trades in Amsterdam where it has its main listing. The ticker symbol in Amsterdam is HEIA and the average daily volume of almost half a million shares which makes it the preferred trading venue. Keep in mind there also is a Heineken Holding (ticker symbol HEIO in Amsterdam), but this article will specifically discuss the Heineken company and not the holding.

The first half of this year was obviously better than 2020, but we still aren’t back at 2019 levels

In the first half of 2021, Heineken reported a total revenue of just over 10B EUR (including the excise taxes which were deducted from the total revenue of almost 12B EUR). Although I do believe cost inflation will be an issue in the second semester (and going into 2022), I was very pleasantly surprised when I saw the operating margins of Heineken.

Although the revenue (excluding excise taxes) increased by just over 7%, the cost of raw materials barely increased while the net personnel expenses actually decreased compared to the first half of 2020. The combination of all these elements resulted in the company’s operating profit increasing by a multiple of 20, from 85M EUR to 1.72B EUR. Obviously, a great result and on top of that, the net finance expenses decreased and the share of the results of associates and joint ventures increased. This resulted in a relatively strong pre-tax income of 1.61B EUR and a net income of 1.17B EUR. As you can see on the image above, just over 10% of the reported net income was attributable to non-controlling interests, and the 1.03B EUR in net income that was attributable to the shareholders of Heineken results in an EPS of 1.80 EUR. Clearly better than in H1 2020, but still not good enough to justify a share price of 91 EUR.

Now the results are improving, I also wanted to have a look at the cash flow statements to see if the improvement is as noticeable.

The company reported an operating cash flow of 1.58B EUR, but this includes quite a few non-recurring items we should filter out. First of all, the net investment in the working capital position was about 310M EUR. Additionally, Heineken only paid about 324M EUR in taxes although about 440M EUR was due based on the H1 2021 pre-tax income. After taking care of both elements, the adjusted operating cash flow was approximately 1.78B EUR.

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