Ok, I know market sentiments nowadays are pretty down. There seems to be talks of an impending crash. To be frank I haven’t been buying stocks in recent times.
However, I think one should never cease to check out promising companies, just so to keep the estimated right price in mind so as to be mentally prepared during an actual crash (to pick up the good bargains).
In one of my previous posts, I have mentioned about a number of Malaysia listed companies which have exceptionally high ROE
Let’s take a peek at the share price and stock price chart of Heineken Malaysia Berhad (see below).
The stock price has increased from a low of RM 9.68 on 3 Oct 2011 to the price of RM 15.04 on 3 June 2016 – an increase of approximately 55% in less than 5 years’ time. Not exactly great, but an increase nevertheless.
Before we look at it financial metrics, a bit about the company.
According to Heineken itself: It is the world’s most international brewer. It is the leading developer and marketer of premium beer and cider brands. Led by the Heineken brand, the Heineken Group has a portfolio of more than 250 international, regional, local and specialty beers and ciders. Heineken has a well-balanced geographic footprint with leadership positions in both developed and developing markets. Heineken employs 73,000 people and operates more than 167 breweries in 70 countries.
The Company is principally engaged in the production, packaging, marketing, and distribution of beverages, primarily alcoholic. Yes, the business model is simple to understand, which is good.
Incidentally, the company has been expanding its footprint and there has been a series of acquisitions in recent years.
For instance, Heineken NV won full control of the maker of Tiger beer in 2012. On 28 September 2012, F&N shareholders approved the deal to sell Asia Pacific Breweries to Heineken during the extraordinary general meeting held. Its core brands are Tiger, Guinness and Heineken.
Heineken wins Tiger battle; focus shifts to F&N fight (read here)
In terms of its financial fundamentals, let’s first take a look at the key statistics from Yahoo Finance (see below).
Looking at the above figures:
The bad points:
1) In terms of valuation, the stock price appears to be on the high side.. hmm a market crash may not be such a bad thing :p just joking. For one, the EV/EBITDA is 12.03 (As a rule of thumb, any EV/EBITDA below 10 is the sign of a good value).
2) The current ratio at 1.12 is slightly lower than I would have liked (Acceptable current ratios vary from industry to industry and are generally between 1.5 and 3 for healthy businesses).
The good points:
1) Management effectiveness is great. There seems to be much growth here despite this being a company with an enterprise value of RM4.48B.
The Return on Assets is a good 27.42%, while Return on Equity is a stunning 74.45%!
2) Balance sheet wise, it is also impressive. With a total cash of RM111.21M vs total debt of RM50M, thus leaving the company to be within an overall cash position of RM61.21M. However, the current ratio is just a tad on the low side as mentioned above.
3) To add on, it has a Trailing Annual Dividend Yield of 4.7%.
Ok, so that is the current financial statistics of this company. However, has it always been like this? For instance, was the Management Effectiveness always so good? Let’s check it out.
See below charts (data from Morningstar).
Frankly, looking at the charts above, things are looking great. There are consistent upward trends for all the major ratios (eg. EPS, free cash flow, ROA, ROE & ROIC) all the way back to the year 2006.
Trailing PEG and Intrinsic value
Let’s do a quick study on the trailing PEG and intrinsic value of Heineken Malaysia Berhad.
1) Trailing PEG
Dividend Yield (%): 4.70
EPS compound growth rate (5 yrs): 7%
The trailing PEG will be 18.25/(4.7+7) = 1.6. Which is not good (> 1).
2) Intrinsic Value
First, let’s look at the estimated 5 years earning growth. We are going to use a time-frame of 5 years from now for this purpose. Given EPS and a PE ratio, the stock price can easily be calculated for any company. Using the below formula.
F = P(1+R)N where:
F = the future EPS
P = the starting (present) EPS (0.82)
R = compound growth rate (7%. However let’s take a 20% discount, and use 5.6% as I am not really sure if growth can be maintained.)
N = number of years in the future (5)
Estimated future EPS: 1.08
I will be estimating the future PE of Heineken Malaysia Berhad to be 18.2 (See below data from Morningstar) – average of the PEs from 2006 to 2015.
Future Stock Price
P = future stock price
EPS = future EPS
PE = future PE
Hence future stock price of Heineken Malaysia Berhad is 1.08 x 18.2 = 19.656
P = present (intrinsic) value
F = future stock price (19.656)
R = MARR (15% or 0.15)
N = Number of years (5)
Hence, the intrinsic value of Heineken Malaysia Berhad is RM 9.77.
The stock price of Heineken Malaysia Berhad on 3 June 2016 is RM 15.04. Hence, there is no margin of safety. Even if we don’t take a 20% discount for the compound growth rate, the intrinsic value would work out to be RM 10.4 which is still lower than the latest stock price (eg. no margin of safety).
I reckon given the strong fundamentals of the company, this is a company worth considering. However, at its current stock price and despite its good consistent growth, there is no margin of safety (base on the trailing PEG and the calculated intrinsic value).
The growth is surprising for a company this size. In addition, it has a decent dividend yield.
Another consideration is that I don’t really consider this as a cyclical stock. Free cash flow and EPS were not adversely affected by the 2008-2009 financial crisis and the European debt crisis in 2011. I reckon during good times and bad times, people will still need a good drink (well maybe need more drinks during bad times ..haha).
Will keep a look out for this stock. If the KL market enters into a bear market, the price of this stock will be further depressed.