Heineken

INVESTMENT SUMMARY AS AT 31 DECEMBER

Heineken, the 'quality compounder of global beer', is an anchor tenant in portfolios. In an increasingly uncertain world, the defensive nature of brewing is under-appreciated. Beer is a great business, with returns rewarding scale. The global industry is approaching oligopoly, with ABI and Heineken the protagonists in most key markets. Competition is rational. Heineken has an attractive earnings growth profile, underpinned by:

1. its exposure to faster-growing emerging markets such as Vietnam and Mexico,
2. a high proportion of premium products in its mix, in turn, supported by a suite of world-class brands, led by the eponymous Heineken brand, and
3. significant self-help options, unlocked by the Evergreen efficiency programme.

The current earnings base is depressed by extraordinary pressures in input costs such as barley and aluminium and by recent volume misses in Vietnam (a key market) and Nigeria. These effects will normalize over the next few years, helping margins. The balance sheet is strong, the strategic direction is sound, and management's reputation is growing. The existence of Heineken Holding, a cheaper entry point in the corporate structure, makes an already attractive proposition compelling. Via this counter, Heineken is trading on a most attractive forward PE of ~15x. It offers ~100% upside to our fair value.

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