A Global Brand At A Knock-Down Price

Published in Investing on 17 October 2011

This looks a rare opportunity for far-sighted investors.

Sponsors of UEFA Champions League football and the Rugby World Cup, and sold in pubs, bars and supermarkets the length and breadth of the land, there can be few people in the UK who are unfamiliar with Heineken (NASDAQOTH: HINKY.PK).

Yet, I'd bet Heineken is not on many people's radar as a potential investment. Right now, it's on mine.

The Heineken company's shares are traded on the Amsterdam stock exchange; but investing in overseas markets is relatively easy these days, and the shares look such good value to my eyes that I'm considering making a rare step outside my UK comfort zone.

Fizz and Facebook

Heineken is the flagship brand, but the group brews and sells more than 200 international premium, regional, local and specialty beers and ciders, including Amstel, Newcastle Brown Ale and Strongbow.

In terms of volume, the Heineken group ranks behind Anheuser-Busch InBev (NYSE: BUD.US), best known as the owner of the Budweiser and Stella Artois brands, and SABMiller (LSE: SAB), whose brands include Grolsch and Miller Genuine Draft.

However, Heineken has the widest international business, with a global network of distributors and 140 breweries in more than 70 countries. Furthermore, its eponymous lager is arguably the only truly global beer brand. And it's growing …

According to the Interbrand 2011 Best Global Brands report, Heineken's brand value increased 8% over the last year (more than 60% since 2005). That pace of growth knocks spots of its brewing rivals, and more closely resembles the performance of top spirit brands, such as Diageo's (LSE: DGE) Johnnie Walker. Just for good measure, Heineken has the biggest Facebook fan page of any alcohol brand!

Relative ratings

The table below shows the forecast 12-month price/earnings (P/E) ratio, dividend yield, and dividend cover for the three big brewers, plus Diageo, which, though spirits-focused, also owns brands such as Guinness and Red Stripe.

CompanyShare priceP/EYieldCover

Data at close of business 13/10/2011

As you can see, I've ranked the companies from the most expensive to the cheapest, based on prospective P/E. Heineken sits at the bottom, rated on less than 12 times earnings.

Why the low rating?

Heineken spooked the market with a half-year update in August. It reported volume weakness in the high-selling summer season, reflecting poor weather conditions in Europe, and lower spending in some of the region's more distressed economies. Furthermore:

“Volume development in parts of Europe and the USA is expected to remain challenging given the current economic uncertainty, high unemployment and ongoing weak consumer confidence.”

The company said it expects current year "organic net profit" (excludes currency movements, acquisitions and some other items) to be broadly in line with last year.

The announcement, coming on a grim day in a grim month for the markets, sent Heineken's shares down a record 16% on the day at one point. As things currently stand, they are down over 20% from their highs earlier this year.

Since August, the shares have traded between around €32 and €35, and I think the market is offering a rare opportunity for far-sighted investors to buy into a genuine global consumer brand at a knock-down price.

And it gets better

The shares I've been discussing are the widely-traded Heineken NV shares, listed on the Amsterdam stock exchange with the ticker HEIA. Another, and I think shrewder, way to invest is through Heineken Holding NV, also listed in Amsterdam but with the ticker HEIO.

The Heineken family, now in its fourth generation, is no longer involved in the day-to-day running of the business, but retains a majority shareholding. It does this via Heineken Holding, a company whose sole object is to hold shares in Heineken.

The net asset value of every Heineken Holding share is identical to that of every Heineken share; and the dividend payable on the two shares is also identical. However, the Holding shares tend to trade at a lower price due to what the company calls 'technical factors that are market-specific' -- which I think translates as relative illiquidity.

That's not a problem for a small private investor, and Heineken Holding gives you a stake in Heineken at a substantial discount, making what I've suggested is an already attractive valuation even better. At yesterday's close, while the Heineken shares were at €34.21, the Holding shares were 12.4% lower at €29.98.

That level of discount is about the average, but it has been known to go out beyond 20% and narrow below 10%; so it's possible to pinch some extra value at times when the discount's on the wider side.

I'm currently watching the shares and the discount closely. A little weakening of the price and widening of the discount, and Heineken will, to borrow a line from its famous ads, "reach the parts other beers cannot reach."

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RPM07 19 Oct 2011 , 11:47am

Although not truly global Carlsberg produces better beer, has a philanthropic side to it and is wonderfully profitable if a little slow.

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