HEINEKEN N V. COMPANY REPORT - run.unl.pt · PDF fileflagship brand is Heineken, ... Innovation rate2 evolution is presented in ... 8 Craft brewery founded in 1993 in the United States

THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY [INSER STUDENT’S NAME], A MASTERS IN FINANCE STUDENT

OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN

A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (PLEASE REFER TO THE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT)

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MASTERS IN FINANCE

READY TO GROW: The firm is well positioned to organically

grow in all the geographies, focusing on specific portfolio categories in

each region. We expect a volume grow of 14% until 2021.

INVESTING IN EMERGING MARKETS FOR GROWTH:

In contrast to the anaemic growth in Europe (revenue CAGR of -3%

between 2012 and 2016), Heineken is experiencing high volume growth in

emerging markets, thanks to growing populations and developing

economies. This trend is expected to continue and estimates identify the

Americas and the Asia Pacific geographies as main drivers of volume

growth (16% and 36% respectively).

FACING THE MARKET RISKS: Given that more than half of

Heineken’s total revenue comes from sales outside the euro zone, the

devaluation of key currencies, affecting the consolidated results is a risk

that the firm should be aware of. Nevertheless, the unfeasibility to predict

future exchange rates, organic changes were considered to forecast future

performance.

AGGRESSIVE ACQUISITION: Heineken and its competitors

have been accelerating their growth through acquisitions, increasing their

exposure to critical markets. After some significant M&A operations in the

last years (2010, 2012, 2016), given the unfeasibility to predict major

operations in the short/medium term, we rely on the suspension of those

activities.

Company description

Heineken N.V. (“Heineken”) is a Dutch brewing company with global operations in more than 70 countries. Company shares are traded on Euronext Amsterdam, where the company is included in the AEX Index.

HEINEKEN N.V. COMPANY REPORT

BEVERAGES INDUSTRY 11 SEPTEMBER 2017

STUDENT: MARIA DINIS MINEIRO [email protected]

Hopping to brew a better future

Time to invest!

Recommendation: BUY

Price Target FY17: 104 €

Price (as of 2-Sep-17) 88.01 €

HEIA: EN Bloomberg: HEIA:EN

52-week range (€) 67.47-89.71

Market Cap (€m) 40.595

Outstanding Shares (m) 570

Source: Bloomberg

Source: Bloomberg

(Values in € millions) 2016 2017E 2018F

Revenues 20.792 21.260 21.769

Revenue growth 1% 2% 2%

EBITDA 4.526 5.046 5.166

EBITDA margin 22% 24% 24%

Net Profit 1.736 2.244 2.298

Return on Equity 12% 13% 12%

Source: Company data; NOVA Research Team


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Table of Contents

Company Overview ................................................................................. 3

Smaller breweries are green with envie .................................................... 3

Shareholder structure ................................................................................ 6

Business structure ..................................................................................... 7

Brewing industry trends – Heineken among the peers ........................ 9

Geographical overview ............................................................................ 10

Europe ................................................................................ 11

The Americas ...................................................................... 13

Africa, Middle East & Eastern Europe ................................ 15

Asia Pacific ......................................................................... 16

Heineken among the peers ..................................................................... 18

Valuation .................................................................................................19

Financials ................................................................................................ 19

DCF – Target Price ................................................................................. 27

Sensitivity analysis ................................................................................28

Multiples analysis ..................................................................................28

Annex ......................................................................................................30

Balance Sheet ......................................................................................... 30

Income Statement ................................................................................... 31


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Company Overview

Smaller brewers are green with envie

Heineken N.V. (“Heineken”) is a Dutch brewing company with global operations.

Heineken shares are traded on Euronext Amsterdam, where the company is

included in the AEX Index. The company shares are also trading over-the-

counter in the USA as American Depositary Receipts.

From a single brewery in Amsterdam around 150 years ago, Heineken

exponentially grew and nowadays is one of the world’s brewing giants. The

flagship brand is Heineken, but the global portfolio amounts to more than 250

international, regional and specialty beers and ciders, including Amstel, Affligem,

Strongbow Ciders, Sol, Desesperados or Cruzcampo (Spain), Oxota (Russia),

Sagres (Portugal) and Bitang (Indonesia). Heineken ingredients are only water,

barley, hops and yeast and the company spent 15 years mastering their craft to

ensure that despite of the country of production, the taste is exactly equal all the

world over.

The company considers itself as the “most international brewer”, selling its

namesake beer in almost every country in the world, being present with over

165 breweries in more than 70 countries, employing about 75.000 people and

with 53 nationalities representing senior management. Today, Heineken is the

number one brewer in Europe and the second largest brewer by volume in the

world.

The firm sells its products through multiple distribution models including direct

sales via own wholesalers or own pubs as well as though indirect sales via

third parties. The company markets through a more-than 23,000-strong sales

force and has built commercial partnerships with popular marques such as

James Bond film series and sporting events such as the UEFA Champions

League. We assess and highlight three key aspects of the company: the

continuous investment in innovation & long-term brand investment to increase

leadership positions in both developed and developing markets, the continuous

capturing of opportunities in developing markets and the commitment to leverage

the benefits of Heineken’s global scale1.

1 The company describes its six business priorities as i) Win in premium led by Heineken brand, (ii) Shape the cider category, (iii) led by cool marketing and innovation, (iv) be commercially assertive, (v) Drive End2End productivity and (vi) Brewing a better world.

From a single brewery….

To one of the world’s brewing giants…

Figure 1- Heineken innovation rate

Source: Company reports


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Regarding the first point, the company relies on top-line investment through

innovation to capture opportunities in both developed and developing markets,

achieving different targets, bringing new costumers into the beer category and

opening up new drinking occasions. Innovation rate2 evolution is presented in

figure 1. Among the most important innovations we point out the following

examples:

Radler, a combination of 40% beer and 60% lemonade, with low alcohol

volume (2%) and already available in 23 different markets3;

Luso de Fruta, a combination for those who do not enjoy alcohol and

want a healthy lifestyle. It was the first combination of water and natural

juice in the Portuguese market;

The SUB – an at-home draught beer system that cool beers down to

2ºC;

Heineken igNITE, an interactive beer bottle, aiming to socially connect

people in clubs while highlighting the product;

Adapt the bottles design and capacity to the consumer needs: For

instance, the company was the first company, in 2015, to be available in

a 330ml sleek can with a design that allows standing out visually.

Regarding the second point, the company aims to diversify the business,

avoiding the dependence on one sole geography. Being already a key player in

some developed markets, the company has been focused on increasing the

presence in emerging markets through both organic and acquisitive growth. The

results are visible, with 61% of the profits delivered by developing markets in

2015 compared to 20% in 20104 (figure 2). In 2016, strong growth in Mexico

drove consolidated organic beer volume in the American region (3.7%)5 and in

the Asia Pacific region, organic volume change amounted to 17.9% driven by

Vietnam, Cambodia and Indonesia. In terms of investments, a relevant

investment was in 2012, the acquisition of Asia Pacific Breweries (APB)6. The

company had established leadership positions in several markets (namely

Singapore, Malaysia, New Caledonia, Indonesia, Papua New Guinea and

Solomon Islands), which gave them access to several important markets and

supported a CAGR of 354% in the Asia Pacific region. In 2016, Heineken

continued to invest in key developing markets and added capacity in Ethiopia

and Cambodia, opened a brewery in Shanghai, acquired a brewery in Vietnam

and built a new brewery in Mexico. In 2017, the company completed the

2 Percentage of sales coming from new innovations. 3 Source: Heineken website. 4 Source: Barclays Global Consumer Staples Conference, 6th September of 2016. 5 Company data does not discriminate the Mexican volume growth. 6 Asia Pacific Breweries Limited brews and distributes beer in the Asia Pacific.

Figure 2 - Profits from developing markets (%)


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transaction to acquire Kirin Brazil, and after the closing Heineken become the

Brazilian second largest player.

In what concerns to the third point, the company established the Global Business

Services in 2010, aiming at globalizing the processes and business operations

across the group and increase efficiencies. Among the objectives of the program,

the company created the Global Procurement Company (HGP) based in

Netherlands, in order to coordinate procurement, production and logistics and

being able to manage raw materials, price volatility and drive cost savings. As

part of the HGP, the company developed the Total Cost Management program

that led to a cost-saving of €637 million from 2012-20147.

Lastly, Heineken has been engaging in mergers and acquisitions as a strategy to

grow. This type of internalization strategy is common among all the main peers.

The acquisition of local firms increases the company’s competitive positioning

and allows of benefiting from synergies and economies of scale from the sharing

of means of production, from the distribution network and from the knowledge

about the consumer’s behaviour. Additionally, as we will later see on this report,

there are clear differences in the levels of development in the beer market across

the regions, that also support the growth by acquisition of the breweries.

Depending on the relevance of the market for the acquirer brewery as well as of

the portfolio of the company itself, the beer companies have been acquiring the

100% or the targets or not. We point the following three examples - see table 1 -

with the amounts and market reaction (price return post-announcement):

The purchase of the beer business of Fomento Económico Mexicano

(FEMSA), in an all-stock transaction in 2010 to increase the exposure in

the Americas.

The acquisition of APB in 2012 (previously run by Heineken and F&M

through an equally held joint venture), to increase the presence in the

Asia Pacific geography. The price was 17 times EBITDA, price that the

CEO considered fair due to the opportunities of the market.

The partial acquisition of Lagunitas8 Brewing Company in 2015. The

brewer bought the first 50% stakes to enter in the craft beer segment in

the U.S., which has recently gained market share (11% of total beer

volume in 20179). Because the partnership was successful, the craft

beer market in the U.S. continued to grow and Lagunitas has been

7 Source: Financial Times 8 Craft brewery founded in 1993 in the United States. We do not identify this acquisition in table 1 because there is no available data. 9 Source: Heineken Company


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outperforming the market, Heineken announced in 2017 that it will

acquire the remaining shares.

The acquisition of Kirin Brazil in 2017 by Heineken was an important

strategic move that allowed the company to gain market share (second

biggest player), broadens the reach across the country and increases

Heineken exposure to growth from developing markets.

Shareholder structure

Heineken shareholder structure has not suffered many changes across the past

years with Heineken family retaining a controlling interest in the brewer via a tiered

holding structure. The company is held 50.005% by Heineken Holding N.V., which

in turn is owned 51.709% by L’Arche Green N.V., a company owned by the

Heineken family and by the Holder family. Fomento Económico Mexicano

(FEMSA)10 is the second major shareholder of the group, retaining about 12.5% of

Heineken shares and 14.9% of Heineken Holding N.V. shares. Consequently, the

family controls the group holding an economic interest of only about 23% while

FEMSA shareholding represents a 20% economic interest in the Heineken Group.

Heineken main shareholder (Heineken Holding) is not an ordinary holding

company and its main object is to manage and supervise the management of

Heineken group and to provide services for Heineken in accordance with internal

policy principles.

Even though Heineken family still holds the majority of the economic interest in the

group, the concentration of Heineken ownership structure is not abnormal and the

level of free-floating in the group is above 50%. Family-owned companies have

been a source of interest among scholars, politicians and economists and

amongst the results of studies on the topic, two success factors show up

10 FEMSA is a global company in the beverage and retail industry.

Table 1 - Heineken recent relevant acquisitions

Source: Heineken Press releases


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frequently: strong boards and a long-term outlook coupled with a prudent but

dynamic portfolio strategy11. Studies reveal that longer perspective tends to steer

strategy and makes family business less successful during bombs but increases

their chances of staying alive in periods of crisis12 while more diversified

institutional investors look for higher short-term returns. Secondly, large family

business tends to have strong governance13. Governance mechanisms

implemented generally separates ownership from management, setting up family

and business rules and defining dividend policy. Besides, members of these

families are considered a good asset for the management, since they know the

business for a long time and avoid the principal-agent issue by participating in the

work of company boards. On average, 39 percent of the board members of family

businesses are inside directors (including 20 percent who belong to the family),

compared with 23 percent in nonfamily business14. Lastly, most studies defend

that family business long-term vision makes it easier to the family business

owners to make decisions on innovation and long-term projects, despite returns

are not immediate.

We find evidence on those aspects in the Heineken case. Firstly, Heineken’s

annual returns outperformed the market in the period between 2007 and 2010 and

were of 2% against the -4% of the Eurostoxx600 Index (see figure 3). Secondly,

the two executives of the Board of Directors are part of the Heineken family,

Charlene Heineken (part of the board of directors since 1988) and Michel Ray de

Carvalho (member of the supervisory board since 1996)15. Thirdly, innovation, as

previously referred, has been in the heart of the Heineken Company.

Business structure

Despite the global recession, Heineken was able to beat the market and continue

to generate profits. Volume had been steadily increasing along with revenues, and

between 2012 and 2016, the firm annual volume sold increased from 201 to 231

million of hectolitres (figure 4). Heineken brand presents a significant portion of

total volume (figure 5).

Heineken operates in four different regions: Europe, The Americas, Africa, Middle

East & Eastern Europe and Asia Pacific. Each region has different contribution to

the global volume sold. From figure 4 we can notice that Europe contributed the

most with 38% of the volume sold in 2016.

11 The five attributes of enduring family businesses, McKinsey & Company, 2010 12 In “The five attributes of enduring family businesses”, the authors found evidence that a broad index of publicly traded family-influenced business from 1997 to 2009 achieved a total returns to shareholders two or three percentage point higher than those of MSCI World, the S&P 500 and the MSCI Europe indexes. 13 European Family Business Barometer — Successful & Resilient (fifth edition), EFB and KPMG, September 2016 14 Ronald C. Anderson and David M. Reeb, “Founding-family ownership and firm performance: Evidence from the S&P 500,” The Journal of Finance, 2003, Volume 58, Number 3, pp. 1301–27. 15 The Board of Directors consists of two executive members and four non-executive members.

Figure 3 - Heineken and Eurostoxx600 cumulative returns 2007-2010

Source: Bloomberg


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The Americas is the second biggest source of volume for Heineken since 2010,

the year in which the company acquired FEMSA. To note that also Asia and

Africa, Middle East and Eastern Europe have become promising regions in the

last years.

The anaemic growth of the European markets obliged the company to search

opportunities in growing markets and to address its M&A and expansion activities

to those markets. The FEMSA acquisition in 2010, the APB in 2012 and Kirin

Brazil in 2016 were major steps towards that aim (as previously mentioned).

In fact, the M&A activities have been a source of revenue growth for the firm. Over

time, Heineken performance has been a balance between organic and expansion

growth. In 2013, for example, the acquisition of the controlling stake in APV and

the acquisition of 28% of the Efes Breweries International16 in Central Europe

Beverages contributed to a total revenue growth of 5%, despite the organic

variation of -1%.

16 Beverage Company which primarily operates in Turkey, Southeast Europe, Russia, Central Asia, and the Middle East.

Figure 5 - Volume evolution (% of total)

Source: Company data

Figure 4 - Volumes (weighted by region) and revenues evolution

Source: Company data


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Brewing industry trends – Heineken

among its peers

Industry overview – Key players and trends

Heineken operates in the beverage industry. This sector can be divided in sub-

industries: Brewers, Soft Drinks & Waters and Wines and Spirits. Heineken’s

activities are mainly related with beer production and selling. Given the higher

importance of beer for Heineken’s business and because the firm’s statements

do not discriminate between types of beverages, we only analyse this core sub-

industry.

Beer is one of the highly preferred alcoholic beverages across the world (World

Wealth Organization). However, available data on the industry is very scarce and

almost limited to the company’s statements. The beer industry has undergone

some changes. One decade ago, the market was fragmented and dominated by

regional players. Progressively, a global consolidation process, through M&A and

joint Ventures, took place and enables some brewers getting bigger penetrate

other growing markets. According to the Canadean17, the main players in the

market in 2015 are restrictive to “the big four”: AB InBev, SABMiller, Heineken

and Carlsberg. The four firms have in common a diverse and global footprint

achieved through exportations, joint ventures and a significant number of

mergers and acquisitions.

The firms’ accumulated sales figures have been following an upward trend (see

figure 6). Based on the companies’ statements, we conclude that all the

companies together sold about 1 Billion hl of beer in 201518, from which AB InBev

represents 45% and Heineken 19% of the total. The companies’ portfolios have

many brands now exploiting niche segments on account of increasing health

consciousness among drinkers and constant changes of consumers’

preferences. For example, the increase of the health consciousness opens up a

new range of new beer categories and Heineken just launched its all-natural

alcohol free beer. Also AB InBev has as main objectives to ensure that low-no

alcohol products represent at least 20% of the company global volume by 2025.

Another example has been happening in the U.S. beer market: while in 2015 the

whole beer category only grew by 0.6%, volume growth of craft beer for the same

17 Independent market research and data management provider. 18 We do not use the volumes reported for 2016 to compute this statistics because AB InBev consolidated partly SABMiller and in 2016 created a new reported segment (Africa & Europe). We do not have enough data to extrapolate those two effects, which can skew the data.

Heineken: A global player in a consolidated industry

Figure 6 - Global volume of the main players

Source:Companies data

Figure 7 - Main players' volume evolution (% of total)

Source: Companies data


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period was 10.2%19. Given the trend in the U.S. market, Heineken acquired 50%

of the shares of Lagunitas in the same year. Also AB InBev is entering into the

craft beer market and announced in May of 2017 the intention to acquire the

North Carolina’s Wicked Weed Brewing.

The market is highly dynamic and at the behest of Heineken, all the global

companies in the sector have been focusing on extending the geographic spread

benefiting from a balance between the growths that emerging markets provide

and the mature but valuable markets of Europe. Heineken global footprint

requires the portfolio strategy to adapt in each market because the key

performance drivers vary across regions.

The most important acquisition of the history of breweries occurred in October of

2016 in an operation that Financial Times classified as “the third largest

acquisition in the world”, with AB InBev acquiring SABMiller for 107 Billion Euros.

The acquisition is a threat for Heineken because the combined companies will

have a strong presence in a wide range of countries, taking advantage of the

knowledge each of them already have. AB InBev will benefit from the SABMiller

strong presence in key emerging markets as Latin America and Africa, benefiting

from the growth opportunities in those markets, while the company already has

strong presence in key developed markets, such as U.S.

Geographical overview

The industry have different expressions all around the world. Those differences

are related with consumptions patterns, growth opportunities, legislation,

purchasing power, population demographics evolution and urbanization

rate.

Also beer consumption is miscellaneous around the world, creating opportunities

in several geographies. Considering as reference Czech Republic, the country

with the highest beer per capita consumption – 142 litters/per capita20, we

conclude that there is still room to grow in many economies.

The year of 2016 was very positive for Heineken, with positive volume growth in

all the geographies. The company was able to outperform the volumes sold in all

the markets, expect in Europe.

To get a better understanding of each region, we further present a geographical

overview.

19 Data source: Nielsen 20 Our reference for all the data on per capita consumption is “Per Capita Beer Consumption by Country in 2015, Kirin Holdings Company”.

Figure 8 - Liters per capita

Source: Heineken


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a. Europe

Heineken is Europe’s leading player and Carlsberg is the second largest brewer.

The two companies are more dependent on the region than AB InBev and

SABMiller. Heineken represents 39% of the total volume sold in the region and

Carlsberg represented 22% in 2015. The European market is a mature market

that has been experiencing stagnation for all the big-four companies operating in

the region. Heineken has strong positions in the European largest markets, as

might be seen in figure 9.

In a study in 201621, Liesbeth Colen and Johan Swinnen examined the effects of

income growth and found that as GDP per capita increased in poorer countries,

beer became more popular. But when it reached around $27.000 per person,

consumption began to fall again, and the reason is likely to be, according to the

authors, because people became more aware of the danger alcohol poses to

health. The recent financial crisis impacted negatively the beer business: real

wages decreased22 and taxes on beer increased. The demographic trends are

also a limitation for breweries operating in Europe, with an expected population

growth of -1% until 202123. Additionally, European citizens changed their

consumption patterns during the financial crisis and switched from on-trade

consumption to off-trade consumption24, pattern that Euromonitor expects to

continue. This trend has a negative impact on margin (even though the

21 Economic Growth, Globalisation and Beer Consumption (2015) 22 Real wages in the euro area decreased by 3.1% in 2009, started to grow in 2009 by 2.% (source: European Comission). In the UK wages drop 10% since the onset of the financial crisis. 23 Source: United Nations 24 Source: www.thebrewersofeurope.org


Figure 9 - Volume evolution in the European region (in thousands of hectoliters)

Figure 10 - Heineken volume evolution - Europe

Source: Company data and analysts' estimates


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companies do not make this quantification publicly available) because generally

the margin is higher in on-trade consumption.

Despite the various consumption patterns in terms of beer per capita

consumption across the region, the region’s average consumption per capita is

high (global average is 67/per capita)25 and several markets are already part of

the most valuable ones in terms of global market share.

We identify France and Italy as potential countries for growth. Both countries are

already global valuable markets but their beer per capita consumption is still

below the European one (see figure 13).

Thus, on mature markets as the European one, consumers are increasingly

looking for variety and new experiences outside the core lager. Delivering top-line

growth in these markets is dependent on innovating products in order to

appeal to more consumers and also by investing in premiumisation (specifically

on marketing)26. Even though quantification data is not publicly available,

Euromonitor pointed out that category such as non/low alcohol beer saw strong

sales in 2016 in several European countries. For example in France, the

independent researcher considers that the Heineken’s market leadership is due

to the investment in premium markets as Aggligem and Desesperados.

The leading breweries strongly invest in innovative marketing as a way to gain

market share. AB InBev is the one which invests the most in marketing and

selling as percentage of revenue, despite the difference is not substantial (figure

14). In 2015, Heineken stayed above the competition on brand awareness, as it

was the leading beer brand in social and digital media (19.4 M fans on Facebook

against 12.5M of Budweiser) and was awarded with the Creative Marketer of the

year.

25 Source: What’s brewing seminar, 26th November of 2016 26 Source: Heineken NV 2014 What’s Brewing Seminar Western Europe

Figure 14 - Marketing expenses as % of revenues

Source: Companies' reports

Figure 11- Heineken market-share position across Europe

Source: Company presentation Figure 12 - Consumption per capita - main European markets Figure 13 - Consumption per capita and global

market share


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b. The Americas

Heineken reports Americas as a single geography. However, there are

strong differences across the region, since it encloses high GDP per

capita as the U.S. and Canada and lower GDP per capita markets, as

Mexico and Brazil (figure 15). Nonetheless, this is a region with attractive

characterisitcs and large beer markets. Beer is the favourite alcoholic

beverage in Mexico (87%), Brazil (60%) and United States (50%)27.

The most recent available data indicates that Unites States, Brazil and

Mexico are respectively the second, third and sixth largest beer markets

in the world (13%, 5.1% and 4% global volume market shares) but

there is still room to grow. Despite the U.S. and Canada are more mature

markets, those are still attractive because the economic situation was not as

severe as in Europe, the level of beer consumption is already considerable high

but there is still room to grow, GDP per capita is high and regulation is not so

restrictive28.

The Americas increased its importance for the Heineken Group since the

acquisition of FMESA in 2010, and since then the region has been representing

volume growth (figure 17).

From the direct competitors, only Carlsberg does not operate in the region. The

other three breweries have been experiencing volume growth, with positive

CAGR (figure 16). Nonetheless, the region is dominated by AB InBev, which

represented 69% of the volume of the three companies in 2015 and which

revenues came mainly from Latin America (63%) while the rest from North

America (37%). SAB Miller was the second largest player in the region in that

year (18%). With the acquisition of SAB Miller, the combined company will

become a giant in the region, despite the disinvestment that the companies have

to make in the U.S. because of anti-competition issues. The impact is still not

visible in the report of 2016, due to the consolidation issues previously

mentioned.

27 See Status Report on alcohol and health, World Health Organization, 2014 28 Several countries in Europe have been enforcing national laws and self-regulation on the advertising and marketing, sponsorship, availability and increased taxes and duties of alcoholic beverages.

Figure 15: Consumption per capita vs GDP per capita - main markets in the Americas

Source: Kirin Holdings Company & the World Bank


PAGE 14/34

The U.S. beer market is a higly concentrated industry since a few large firms

occupy a large market share driven by some mergers and acquisitions in the last

years29. According to Euromonitor, AB InBev led the industry with a volume

market share of 44% in 2016 with Corona Extra being the leading brand with

24% volume market share (MS). Modelo and Heineken followed the lead, with

respectively 14% and 11% of volume MS. Due to the AB InBev acquisition of

SABMiller, the company can not acquire another brewer, not even a craft brewer,

without prior approval of the U.S. Department of Justice. That is an opportunity

for Heineken in a country with already high beer per capital consumption (75

liters per capita), because craft breewer is a segment that is growing at a fast

pace in the country’s beer market (CAGR of 12% in 2016).

Regarding the emerging companies that are part of the region, Mexico is one of

the company’s most important markets and the main driver of performance

in the region30 (despite the company does not provide any quantification of

“strong performance”). The market is practically a duopoly, dominated by

Heineken and Grupo Modelo (part of AB InBev) with respectively 40% and 57%

volume market share as of December 201631 and increased the brewers pricing

power. While both the leading companies have well-developed distribution

networks, they have been focusing on expanding their reach to other

regions of the country and invested in massive advertising campaigns -

according to Euromonitor, in 2016, a common trend was the investment in digital

advertisement and in-store promotions. We believe that companies are taking

29 E.g. joint venture between SABMiller and Molson Coors in 2007 and now the acquisition of SABMiller by AB InBev 30 Source: Heineken 2016 annual report 31 Source: Euromonitor

Figure 16 – Volume evolution in the Americas region (in thousands of hectoliters)

Source: Companies data and analyst's estimates

Figure 17 - Heineken volume evolution - Americas

Source: Company data and analyst's estimates


PAGE 15/34

those actions because there is room to increase the per capita consumption32.

According to the same research, beer sales are expected to continue to

growth as companies are expanding the points of sale and consumers are

increasing their interest in trying different brands and discovering new

consumption occasions. Heineken is planning to invest in a new brewery in

northern Mexico, its seventh in the country, in an investment of $470 Million.

Brazil is other important market for breweries. It is, as previously mentioned, the

third largest market in the world33 and the per capita consumption is of 67.7 liters

per capita. However, the beer category has been declining in the country, seeing

a 3% decline in 201634 as a consequence of the challenging consumer

environment, in which the rising unemployment rate reaching 11%, the highest

level since 199535, resulted in a shrinking real disposable income. However,

consumer confidence increased, impacting the companies involved in

consumer and retail and the prospects are sligly positive, with forecasts pointing

to a 1% CAGR of the beer volume with recovery from 2018 onwards supported

by new trends in the market, as reduction in the purshasing frequency and the

look for more promotions and discounts.The positive GDP outlook and population

growth made Heineken to believe that the purchase Kirin Holding S.A. would

consolidate the firm positioning in the country, broadening its reach across the

region, streghnt the company portfolio and further increase the exposition to the

emerging markets, being the second largest player in the country, only after AB

InBev (19% agaisnt 63% volume market share)36 .

Overall, prospects in the region are very promissing due to already large

markets but with still room to increased per capita consumption, GDP growth

prospects and age of working age population prospects. The main variables

affecting the region are population growth (average of 1% between 2015 and

2020), GDP (average of 2% between 2015 and 2020) and GDP per capita

growth (average of 1% between 2015 and 2020).

c. Africa, Middle East & Eastern Europe

Heineken reports Africa, Middle East & Eastern Europe (AMEE) as a single

geography. Heineken faces two important competitors in the region, SABMiller

and Carlsberg. SABMiller, with its partly South African origins, holds 40% of the

volume total operations in 2015 and its operations are set in the African

continent where the company is present in 17 countries with its primary brewing

32 We take as reference the per capita consumption list (#30) from which Mexico is not part of. Source: Per Capita Beer Consumption by Country in 2015, Kirin Holdings Company 33 Source: Euromonitor 34 Source: Euromonitor 35 Source: OECD data 36 Source: Heineken

Source: Company data and analyst's estimates

Figure 18 - Heineken volume evolution - AMEE


PAGE 16/34


and beverage operations and in further 21 through associated interests.

Carlsberg focuses on the Eastern European region, accounting for 34% of total

volume sold in the region (figure 19).

Most markets in the region have an oligopolistic structure, which could benefit

pricing power and consequently margins. Still, margins have strong limitations

due to the low consumer income and underdeveloped infrastructures37.

Heineken has confidence in the performance of this market due to the last few

years’ GDP rise, inflation fall and working-age population growth. However, there

are still severe barriers to entry the market, such as several countries low per

capita income and weak infrastructures.

The most important markets for the company are Nigeria, South Africa, Egypt

and Ethiopia38.In all of them, excpet in Nigeria, volumes and revenues increased.

The Nigerian performance was impacted by a weak consumer environment with

low oil production output, economic recession and high inflationary pressure.

d. Asia Pacific

Asia Pacific is a very diversified region with beer markets at different stages of

development, with the consumption levels varying from 1 to 85 liters per

capita (figure 25). It was the region where all the four bigger competitors most

increased the volumes sold (figure 22).

37 Source: Heineken N.V. 2014 What’s brewing Seminar Africa & Middle East 38 Heineken N.V. reports 2017 half year results

Figure 21 - GDP growth (most relevant countries in AMEE)

Source: IMF

Figure 20 - Population between 15-64 yo (%) in the most relevant countries in AMEE

Source: World Bank

Figure19 - Volume evolution in the Africa, Middle East & Eastern Europe region (in thousands of hectoliters)


PAGE 17/34

Figure 24 - GDP per capita growth in the Asia and Pacific region (excluding high income countries)

Source: World Bank

In the Asia Pacific region, Heineken ranked the fourth place in terms of volume

(12%) and AB InBev dominates the region with 40% of the sales. The sales in

the region still do not represent a significant portion of Heineken’s sales despite

the company was in the Southern Asia for decades. However, as shown in figure

23, it has been gaining importance for the firm, mainly since the acquisition of

APB in 2012.

The region comprisis some mature markets as Australia, New Zeland and Japan

but some grewing and relevant markets, as China and Vietnam. China is the

larggest beer market in the world, accounting for 24% of global volume

market share and Vietnam is the 9th largest market, accounting to 2.1% MS.

Despite both countries are already above the global average of beer

consumption (27 liters/capita) and the Asia region (18 l/capita), there is still

room to grow.

Figure 25 - Consumption per capita in Asia Pacific

Source: Companies' data and analyst’s estimates

Figure 22 - Volume evolution in the Asia Pacific region (in thousands of hectoliters)

Figure23: Volume evolution - Asia Pacific

Source: Company data and analysts' estimates


PAGE 18/34

Summarizing, Asia Pacific region is very attractive for brewers due to the low

average beer consumption in the region, younger average population base and

rising urbanization39 and income levels. Further, the International Premium

Segment (IPS) penetration is still low in large markets, offering significant upside

for growth:

China is an important example where brewers have been investing in market

innovation, having as target the young adults. In 2016, AB InBev held or

sponsored multiple festivals and cooperated with ele.me, the largest online food

and beverage delievery platform in China, to create an O2O beer festival to

culminate beer culture and establish brand reputation among young consumers.

Heineken among the peers

In order to synthetize the study of the industry and Heineken position within it, we

present a SWOT analysis.

Strengthens:

Creative Marketing campaigns;

Leader in the IPS;

Strong position in the markets where operates (e.g. Mexico, the largest

beer market);

Weaknesses:

Still high dependence on the European market;

Opportunities:

Emerging markets in Asia;

Rising market for craft beer in the U.S.A.;

39 According to the World Bank, urbanization rose from 37% to 53% in the region.

Figure 26 - IPS penetration in Asia Pacific emerging markets (IPS as % of total beer market)

Source: Heineken N.V. What's Brewing Seminar Asia Pacific


PAGE 19/34

Room to increase in the beer consumption per capita in key markets;

Capability of growing through acquisition;

Threats:

Volatility of exchange rates;

Increase in AB InBev negotiation power;

Increase in rivalry from other beverages;

Increase in regulation and taxes;

Increase in commodities price;

Changes in consumer preferences.

Valuation

The valuation of the company was not done through a sum of the parts approach

because of the lack of information to accurately perform the valuation per

geographic region. We instead apply a discounted Cash Flow model and

discount the Free Cash Flow (FCF) at the firm Weighted Average Cost of Capital

(WACC). As a complementary method, we perform a valuation using multiples.

We finish our analysis assessing the robustness of our target price and how it is

affected by changes in the selected drivers. Thus, we lastly run a sensitivity

analysis to the cost of capital and terminal value growth rate.

Financials

In this section we explain the main assumptions made to forecast future Cash

Flows. Revenues are breakdown in regions considering each regions volatility,

performance and sales main drivers and thus to facilitate more reasonable

assumptions but the other figures are not discriminated because historical data

was not provided.

Revenues

The projected revenue growth is the sum of volume growth per region multiplied

by the average price per hectolitre. Because of the unfeasibility to predict future

exchange rates movements and major M&A operations in the short/medium term,

only organic changes were considered.

Considering the differences in each region analysed in the previous chapter, we

evaluated the variables impacting the volume growth in the last years per

geographic region. We came up with the following critical variables per region:

Europe: Innovation rate & GDP growth


PAGE 20/34

The Americas: GDP per capita growth, innovation rate, population

growth & urbanization rate

Asia and Pacific: GDP per capita growth, urbanization rate, population

growth and innovation rate

Africa, Middle East and Eastern Europe: GDP per capita growth,

Population growth, urbanization rate & innovation rate

We further analysed the IMF prospects for those variables in the coming years.

We got our prospects on future revenue growth considering the historical growth

and the impact of those variables.

The explicit period considered is 5 years. We expect a global growth of 14% until

2021, driven by a CAGR of 36% in the Asia Pacific region and 16% in the

Americas.

For Europe, we expect a slight increase on volume in the next years. Despite the

ongoing decline in volumes, organic growth in the consolidated beer volumes has

been showing signs of better performance since 2014. Considering the past

performance, expectations on the economic recovery in the region and the

capacity of the firm to innovate, we forecast a growth of between 1% and 1.7%

for the next 5 years.

We expect an increase in the volume of the Americas driven by the U.S. market,

Mexico and Brazil. The U.S. already contributed meaningfully to Heineken sales,

and despite the growth changes are quite limited to the already high beer per

capita consumption, the craft segment where the company is investing offers

positive prospects. Inequitably, Mexico and Brazil are two markets that offer very

promising growth perspectives. We estimate volume increases of around 3%over

the next years.

The Asia Pacific region is the most promising among the four geographies.

Volumes are expected to grow in line with the values verified in the past years

and considering the positive and already stated positive prospects for the region.

Hence, we estimated a volume increase between 5% and 7% over the next 5

years.

Lastly, we estimated the volume of AMEE to grow at between 1% and 2%

annually, with the exception of 2017. Although the firm is well positioned in some

markets, as already stated, the high volatility of the economies in general aligned

with the still low GDP per capita and low infrastructures results in a quite unstable

growth prospects.

Europe is the region where more premium beer is sold and consequently with the

higher revenue per hectolitre. However, due to lack of information, is difficult and


PAGE 21/34

meaningfulness to predict by how much the average revenue per hectolitre will

increase in each region and therefore we used the estimated average revenue per

hectolitre of 2016 (90 EUR/hl).

Based on the previously described, we estimated the following 5 years volume per

region:

Table 2 - Forecasted volume summary (in Millions of hectoliters)

3. Operating Expenses

Operating Expenses are closely tied to sales and include raw materials,

consumable & services (RC&S) and personal expenses.

RC&S include materials and expenses directly related with the good sold. Given

the stability over the last years of the components of the item, we estimated each

of those as an average of the last 5 years (2012-2016) percentage of revenue,

expecting for Raw Materials and Energy and Water. For those items, we

considered the percentage of revenue of 2016 because those have been

decreasing over the previous years due to the Heineken’s cost management

programmes.

Regarding the personnel expenses, we analysed the evolution of the revenue per

employee. Heineken has been able to increase productivity and effective use of

the firm’s resources. While between 2011 and 2013 the number of FTE increased

along with revenue resulting in a stable ratio of revenue per employee, the firm

reduced the headcount 6% in 2014, but was able to increase its productivity. In

the last two years, the firm smoothly reduced the number of employees but was

still able to increase the productivity ratio. We estimate the revenue per employee

to remain at 2016 level and the cost per employee as an average of the last 5

years.

2017E 2018E 2019E 2020E 2021E

Europe 90 91 92 94 95

Americas 70 72 74 77 79

Africa, Middle East & Eastern Europe 44 44 45 46 46

Asia Pacific 32 35 37 40 42


PAGE 22/34

Tax Rate

According to Heineken’s expectations, the future effective tax rate40 will be in line

with the one in respect to 2016 (27.9%).

Net Working Capital Requirements

We identified the items composing Heineken’s Working Capital: Current assets

are composed by Inventories, Trade and Other Receivables and Prepayments

and Trade and Other Payables are the firm’s current liabilities.

Heineken presented historically a successive negative Working Capital. This is a

result of the Hunt for Cash Management Program. This programme started in

parallel with the TCM programme given the major financial crisis and consequent

uncertainty in the markets, and the aim was to change the focus of the firm from

profit to cash flow.

40 Tax Rate over Earnings before Share of profit of A&JV

Table 4: Historical and forecasted personnel expenses (in Millions of Euros)

2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Personnel Expenses 3 031 3 108 3 080 3 322 3 263 2 949 3 019 3 108 3 193 3 283

Number of FTE 76 191 80 933 76 136 73 767 73 525 70 867 72 565 74 687 76 724 78 905

Revenue per employee 24% 24% 25% 28% 28% 30% 30% 30% 30% 30%

Table 3 - Forecasted operating expenses (in Millions of Euros)

2017E 2018E 2019E 2020E 2021E

Raw materials. consumables and services 13 266 13 584 13 981 14 362 14 770

from which

Raw materials 1 683 1 723 1 774 1 822 1 874

percentage of revenues 8% 8% 8% 8% 8%

Energy and water 487 498 513 527 542

percentage of revenues 2% 2% 2% 2% 2%

Non-returnable packaging 2 951 3 021 3 110 3 195 3 285

Goods for resale 1 727 1 768 1 820 1 869 1 923

Inventory movements -63 -64 -66 -68 -70

Marketing and selling expenses 2 900 2 969 3 056 3 140 3 229

Transport expenses 1 159 1 187 1 222 1 255 1 291

Repair and maintenance 511 524 539 554 569

Other expenses 1 911 1 957 2 014 2 069 2 128


PAGE 23/34

As a result, the company has been very efficient managing its Cash Conversion

Cycle. Heineken takes longer to pay its costumers than to sell inventory and to

collect receivables, holding onto its money for a longer time period. Also the main

competitors present negative Working Capital41, using working capital as an

interest free way to finance their operations and increase liquidity. One of the

reasons that can explain this fact is that those are big companies that have high

bargaining power among the suppliers and so credit from them is extended.

We estimate future Working Capital Requirements assuming the same Days

Sales Outstanding (DSO), Days Inventory Outstanding (DIO) and Days Payable

Outstanding (DPO) as of 2016. We do not consider any improvement in the CCC

because it has been historically stable.

Capital Expenditures (CapEx) and D&A

For the purpose of estimation, we divide the CapEx and D&A between tangibles

and intangibles.

Regarding the purchase of PPE, we observe that Heineken has been increasing

its investment since the economic downturn. Except in 2011, the firm’s ratio of

capital expenditures to depreciation was always above 1, representing an

expectation of future growth. The ratio of CapEx to revenue increased from 6% in

2012 to 8% in 2016.

There is not available information regarding the plants’ capacity per region, so we

cannot calculate which part is already used. However, according to company

data, the firm has been engaging activities evolving the acquisition or

construction of new plants or expansion of modernization of already existing

ones. We remark the following recent important activities in all the four

geographies:

Expansion and modernization of plants in two breweries in the UK in

2015 and 2016 that increased the total brewing capacity by 2 million

hectolitres;

Inauguration of Ethiopia’s biggest brewery in 2015 that permits to meet

the needs of Heineken continent by up to 1.5 million hectolitres;

41 Source: Bloomberg

Figure 27 - Historical and forecasted purchase of PPE & depreciation (EUR M)

Table 5: Historical and forecasted NWC (EUR Million) and CCC (days)

2012 2013 2014 2015 2016 2018E 2019E 2020E 2021E

Net Working Capital -974 -839 -1 095 -1 226 -1 135 -1 163 -1 197 -1 229 -1 264

Cash Conversion Cycle -36 -36 -40 -44 -44 -44 -44 -44 -44


PAGE 24/34

Figure 28- CapEx to depreciation ratio

Purchase, from Carlsberg, of a brewery in Vietnam with the capacity of

50 million hectolitres per year. In 2016 announced an expansion plan to

increase the capacity up to 510 million hectolitres.

Investment in a plant in Chihuahua, Mexico, that will increase the

brewing capacity in the country in 5 million hectolitres a year, with the

possibility of expansion up to 10 million.

We forecast CapEx to be in line with the historical upward trend of the last 5

years and estimate the investment in CapEx as the percentage of revenue of

2016 (8.45%) to face future demand over the next 5 years.

Regarding the investment in Intangible Assets, we excluded Goodwill from our

estimates because being a result of acquisitions for premium values, it is very

hard to predict and may led to misleading information. Having very little

information about the prospects of this item, we computed it as the percentage of

revenues, assuming the last 5 years average ratio (0.4%).

In what concerns Depreciation and Amortization, we forecasted those items as

the percentage of PPE and Intangible Assets, respectively, as of December

2016.

Variation in Defered Tax Assets (Liabilities)

Deferred tax assets or liabilities are short-term differences between tax

accounting and financial accounting. Because of the nature of those items, we

have to consider them in our estimation.

We estimated them as a percentage of revenue, considering for that purpose the

average of the last 5 years (2012-2016). The company has been recognizing

more tax liabilities than assets. We consider that this trend will continue in the

future, considering the revenue growth. Historical and future deferred tax assets

(liabilities) as well as its variations may be observed be in table 4.

Noncontrolling interest

Noncontrolling interest on the balance sheet increases each year by the

nonctrolling interest on the income statement less the projected dividends to

noncontrolling shareholders.

Table 6 - Forecasted deferred tax assets (liabilities) – in Millions of EUR

2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Net Deferred Tax Assets (liabilities) -1 242 -936 -842 -900 -661 -1 002 -1 026 -1 056 -1 085 -1 116

Variation in DTAs (liabilities) -822 306 94 -58 239 -341 -24 -30 -29 -31


PAGE 25/34

We assume a future payout ratio of 35%, in accordance with historical data and

the firm’s prospects.

Considering the historical firm’s return on existing capital, i.e. the Return on

Invested Capital (ROIC) of 21% and the Reinvestment Rate (RR) of 26%, we

would expect a sustainable growth of 8%. However, we believe this value to be

too high to be used as a stedy state.

Employee benefits

Employee benefits of Heineken NV include, among other itms with lower

relevance, post-employment benefits (pension plan), termination benefits and

short-term employee benefits.

Therefore, we forecast employee benefits for the period 2017-2021 based on

personnel expenses estimated.

Weighted Average Cost of Capital (WACC)

WACC was used to discount the global Cash Flows, reflecting the opportunity

cost for Heineken bondholders and shareholders weighted by the percentage of

the firm that each owns. Table 7 specifies the summary of the WACC

computation.

Cost of Equity

The company’s cost of equity was estimated by means of Capital Asset Pricing

Model (CAPM), which has three different inputs: risk free rate, Levered Beta and

Market Risk Premium (MRP).

The proxy used for the risk free rate was the 10-year German Government bond

yield because it is in euros (and therefore avoiding FX risk) and the lower yield

expressed in that currency. The one that was used was of 0.5%.

Regarding the MRP, the MSCI World Index was used as a market proxy; a

portfolio whose return we believe closely tracks the true market portfolio.42 To

compute the MRP we first transformed the risk-free rates into monthly rates. After

subtracting those to the monthly index returns, we annualized the average of the

monthly differenced, which resulting in a MRP of 6.3%.

In order to estimate the raw beta, we regressed the firm’s returns against the

return of the market index (MSCI World). We subsequently did the same for the

competitors (AB InBev, SABMiller and Carlsberg)43 and finally averaged the

estimated betas. Lastly, we estimated the adjusted beta, which we consider is a

better estimate of a security future beta - using historical data of the stock but

42 Euro adjusted returns were considered. 43 We considered the pre-acquisition beta for SABMiller.

RE 7.8%

RD (after tax) 1.6%

E/EV 71%

D/EV 29%

WACC 6.02%

Table 7 - Summary of WACC computation

Risk-free rate 0.47%

Levered beta 1.13

Market risk premium 6.26%

Cost of Equity 7.8%

Table 8 - Summary of cost of equity computation

Figure 29 - Beta's estimates


PAGE 26/34

assuming that a security beta moves towards the market average over time. We

reached a beta of 1.13.

Considering the previous inputs, we estimated a cost of equity of 7.8%.

Cost of Debt

The cost of debt (𝐾𝑑) is estimated by computing the estimated average return on

Heineken bonds44.

We only consider the bonds’ yields (YTM) because by the one hand Heineken’s

debt is the major source of debt (see figure 30) and by the other hand due to

limited additional information. Additionally, one should note that using bond yields

we are considering the cost it would take to finance the company at the data of

the valuation, instead of considering historical cost of debt.

Heineken has been managing debt financing mainly through the Euro Medium

Term Note Programme established in 2008, which allows the issue of Notes until

a total amount up to 15 billion (currently approximately €7.2B is outstanding

under the programme). The company has a strong prospect for debt

management, establishing a target of Net Debt to EBITDA of 2.5 (see evolution

on figure 31).

As of December of 2016, Heineken has placed 21 types of bonds outstanding

which differ on currency, the amount outstanding and also maturity. We

computed the average of the bonds weighted by its amount in Euros.

Regarding the Recovery Rate, we used the methodology expressed by Hull45 due

to lack of available data. The estimated Recovery Rate (RR) is 58%. In what

concerns to the probability of default (PD), according to available data and that

Heineken bonds are rated as BBB+, we considered a rate of 0.19%. We

achieved a 𝐾𝑑 of 2.2% and an after-tax 𝐾𝑑 of 1.6%.

Capital Structure

Capital structure ought to be market values. Although one should consider the

target and not historical capital structure, Heineken intends to maintain the

operations financed by a low level of debt.

The market value of equity is equal to the market capitalization of the company,

which was EUR 40 595M as of 31st of December of 2016 (see table 9).

We estimate the market value of debt through the bonds’ value of trade (ask

price). For the other debt instruments, due to the lack of information, we were not

44 Kd = YTM ∗ PD ∗ (1 − RR) where YTM is the average yield of the Heineken rates, PD is the probability of default and RR is the Recovery Rate. 45 “Options, futures and other derivatives”, John C. Hull, 2009

Figure 31- Net Debt/EBITDA

Source: Heineken annual reports

Figure 30 - Division of gross debt FY 2016

Source: Heineken annual report

Shares (M) 570

Share Price (€) 71

Market capitalization (€ M) 40.595

Table 9 - Heineken market capitalization (EUR Million)

Source: Bloomberg


PAGE 27/34

able to use the NPV estimation, and instead assumed that the market value

equals the accounting value. By summing up the different types of debt, we

reached a market debt amount of EUR 16.237M.

Heineken is mainly dependent on equity financing. Equity has a weight of 71%

while debt the remaining 29%.

In line with the financial discipline in the generation and use of cash across the

industry, as previously stated, competitors are focused on investing behind the

brands to take advantage of the organic growth opportunities in the business.

The main competitors state that are committed into deleveraging to a net debt to

EBITDA ratio of around 2 times and are prioritizing debt repayment in order to

meet the objective46.

Terminal Value

The accurate estimate of the terminal value is fundamental, since it accounts for

a large percentage of a company’s total value.

Because Heineken is a global company, the growth rate assumed in the terminal

value shall not be greater than the one of the global economy. The expected real

GDP growth rate of 3.7% in 202047 is then the cap for Heineken growth. Because

the industry is already in a mature phase, we do not expect the company to grow

at that rate. We then applied a cut-off of 75%, assuming then a 2.6% growth rate,

value that is in line with the average of the last three years FCFF growth rate

(2.8%). We further conduct a sensibility analysis to analyse the impact on

valuation in the case of changes in the growth rate.

Considering the cost of capital of 6.02% and the last projected FCFF in 2021, we

calculated a terminal value of EUR 76.274 million.

DCF Analysis – Target price

The following graph illustrates the forecast of FCFF until 2021. We estimate a

Target Price of 104€. Given the implied upside potential of 18% (market price as

of 2nd of September of 88.01€), we issue a BUY investment recommendation to

Heineken.

46 Source: AB InBev and Carlsberg annual reports.

47 IMF estimates.

Table 10: FCFF estimation (in Millions of Euros)

2017E 2018E 2019E 2020E 2021E

FCFF 2 626 2 327 2 397 2 459 2 527


PAGE 28/34

Sensitivity Analysis

All our valuations were performed under the assumptions that the variables used

for growth rate and cost of capital are the ones that best describe the current and

future figures of Heineken.

As terminal value represents a considerable portion of Heineken estimated

Enterprise Value (EV) and because of some uncertainties regarding market

performance that may impact NOPLAT, we performed an analysis of changes in

growth rate. The discount rate is also a critical variable impacting valuation, and

the fact that we derived our cost of debt only from bonds may mislead the price of

debt. Cost of debt may be impacted by eventual changes in the bond rating.

We present our results in a two-dimensional table, where are analysed changes

of 25 bps in each of the variables:

As one may observe, the outcome of the DCF valuation is very sensitive to

changes in WACC and terminal growth rate. Moreover, by changing the two

dimensions we achieved a range of prices that varies between 61€ and 263€.

Even so, those scenarios are very unlikely; as the variables considered for

WACC and g in this case are very far from the ones we believe accurately reflect

the firm’s growth perspectives.

Multiples analysis

We complement our DFC valuation with a relative valuation. In the multiples

valuation, one values an asset by looking at how the market prices similar assets.

Our peers are the ones considered by the Financial Times (FT). The only

exception is that the FT considers Heineken Holding NV for the relative valuation,

which we do not consider appropriate because its earnings only depend on

1,60% 1,85% 2,10% 2,35% 2,60% 2,85% 3,10% 3,35% 3,60%

5,02% 106 115 125 137 154 170 193 223 263

5,27% 98 105 114 124 138 151 169 192 221

5,52% 90 97 104 113 124 135 150 168 190

5,77% 84 90 96 104 113 122 134 149 166

6,02% 78 83 89 95 104 111 121 133 148

6,27% 73 78 83 88 95 102 110 120 132

6,52% 68 78 77 82 88 94 101 110 119

6,77% 64 68 72 76 82 87 93 100 109

7,02% 61 64 67 71 76 81 86 92 100

Terminal growth rate

W

A

C

C

Table 11 - Sensitivity analysis on Target Price (EUR)


PAGE 29/34

Heineken’s performance. All the companies in our selection operate

internationally, to be fairly compared with Heineken.

We selected EV/EBITDA48, EV/Earnings and P/Earnings and downloaded the

ratios from Bloomberg. We compute forward-looking multiples instead of trailing

12-month estimates, to better account for the growth perspectives.

The target price obtained in the relative valuation is above the current share price

of Heineken’s stock (88.01€). The prices reached are slightly higher than the one

reached in our DCF valuation, except in the Price-to-EBITDA ratio (95€).

48 We did not consider the EV/EBIT ratio to avoid skewedness due to accounting differences.

MultiplesTarget

Price (€)

EV/EBITDA 107

EV/Sales 135

Price/EBITDA 95

Table 13: Heineken's multiples valuation

Source: Analyst's estimates

Table 12- Peer group composition

Source: Bloomberg

Company Market Capitalization (M€) EBITDA margin

AB INBEV 205 069 36%

CARLSBERG AS-B 14 667 21%

PERNOD RICARD SA 30 948 27%

DIAGEO PLC 61 177 32%

HEINEKEN 40 595 22%


PAGE 30/34

In millions of € 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Assets

Property, plant and equipment 8 844 8 454 8 718 9 552 9 232 9 640 10 029 10 414 10 792 11 169

Intangible assets 17 688 15 934 16 341 18 183 17 424 17 161 16 915 16 686 16 474 16 276

from which goodwill 11 040 10 407 10 803 11 731 11 436 11 436 11 436 11 436 11 436 11 436

Others that not goodwill 6 648 5 527 5 538 6 452 5 988 5 725 5 479 5 250 5 038 4 840

Investments in associates and joint ventures 1 950 1 883 2 033 1 985 2 166 2 166 2 166 2 166 2 166 2 166

Other investments and receivables 1 099 762 737 856 1 077 1 077 1 077 1 077 1 077 1 077

Advances to costumers 312 301 254 266 274 274 274 274 274 274

Deferred tax assets 550 508 661 958 1 011 791 810 834 856 881

Total non current assets 30 443 27 842 28 744 31 800 31 184 31 108 31 271 31 451 31 639 31 843

Inventories 1 596 1 512 1 634 1 702 1 618 1 613 1 652 1 700 1 746 1 796

Other investments 11 11 13 16 0 0 0 0 0 0

Trade and other receivables 2 537 2 427 2 743 2 873 3 052 3 129 3 204 3 297 3 387 3 484

Prepayments 232 218 317 343 328 327 335 345 354 364

Income tax receivables 0 0 23 33 47 47 47 47 47 47

Cash and cash equivalents 1 037 1 290 668 824 3 035 5 179 7 390 9 647 12 011 14 375

Assets classified as held for sale 124 37 688 123 57 43 29 14 0 0

Total current assets 5 537 5 495 6 086 5 914 8 137 10 338 12 656 15 050 17 546 20 066

Total assets 35 980 33 337 34 830 37 714 39 321 41 446 43 927 46 501 49 185 51 909

Equity

Share capital 922 922 922 922 922 922 922 922 922 922

Share premium 2 701 2 701 2 701 2 701 2 701 2 701 2 701 2 701 2 701 2 701

Reserves 365 -858 -427 -655 -1 173 -1 173 -1 173 -1 173 -1 173 -1 173

Retained earnings 7 746 8 637 9 213 10 567 10 788 12 775 14 811 16 914 19 082 21 321

Equity attributable to equity holders of the Company 11 734 11 402 12 409 13 535 13 238 15 225 17 261 19 364 21 532 23 771

Non-controlling interest 1 071 954 1 043 1 535 1 335 1 495 1 718 1 910 2 159 2 358

Total equity 12 805 12 356 13 452 15 070 14 573 16 720 18 979 21 274 23 691 26 129

Liabilities

Loans and borrowings 11 437 9 853 9 499 10 658 10 954 10 954 10 954 10 954 10 954 10 954

Tax liabilities 140 112 3 3 3 3 3 3 3 3

Employee benefits 1 575 1 202 1 443 1 289 1 420 1 296 1 327 1 366 1 403 1 443

Provisions 419 367 398 320 302 302 302 302 302 302

Deferred tax liabilities 1 792 1 444 1 503 1 858 1 672 1 793 1 836 1 890 1 941 1 997

Total non-current liabilities 15 363 12 978 12 846 14 128 14 351 14 349 14 423 14 515 14 604 14 699

Bank overdrafts and commercial papers 191 178 595 542 1 669 1 669 1 669 1 669 1 669 1 669

Loans and borrowings 1 863 2 195 1 671 1 397 1 981 1 981 1 981 1 981 1 981 1 981

Trade and other payables 5 285 5 131 5 533 6 013 6 224 6 204 6 353 6 539 6 717 6 908

Tax liabilities 305 317 390 379 352 352 352 352 352 352

Provisions 129 171 165 154 154 154 154 154 154 154

Liabilities classified as held for sale 39 11 178 31 17 17 17 17 17 17

Total current liabilities 7 812 8 003 8 532 8 516 10 397 10 377 10 526 10 712 10 890 11 081

Total liabilities 23 175 20 981 21 378 22 644 24 748 24 726 24 948 25 227 25 494 25 780

Total equity and liabilities 35 980 33 337 34 830 37 714 39 321 41 446 43 927 46 501 49 185 51 909

Annex - Financial Statements

Balance Sheet


PAGE 31/34

In millions of € 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Revenue 18 383 19 203 19 257 20 511 20 792 21 260 21 769 22 406 23 017 23 671

Raw materials, consumables and services -11 849 -12 186 -12 053 -12 931 -13 003 -13 266 -13 584 -13 981 -14 362 -14 770

Personnel Expenses -3 031 -3 108 -3 080 -3 322 -3 263 -2 949 -3 019 -3 108 -3 193 -3 283

EBITDA 3 503 3 909 4 124 4 258 4 526 5 046 5 166 5 317 5 463 5 618

Depreciation and impairments of property, plant and equipment -1 061 -1 089 -1 088 -1 222 -1 437 -1 389 -1 450 -1 509 -1 567 -1 624

Amortisation and impairment of intangible assets -255 -492 -349 -372 -380 -353 -337 -323 -309 -297

Amortisation, depreciation and impairments -1 316 -1 581 -1 437 -1 594 -1 817 -1 742 -1 787 -1 831 -1 876 -1 920

EBIT 2 187 2 328 2 687 2 664 2 709 3 304 3 379 3 486 3 587 3 698

Interest income 62 47 48 60 60 63 63 63 63 63

Interest expenses -551 -579 -457 -412 -419 -419 -419 -419 -419 -419

Other net finance/(expenses) 168 -61 -79 -57 -134 14 14 14 14 14

Other income 1 510 226 93 411 46 0 0 0 0 1

Profit Before Income Tax & Profit of Associates 3 376 1 961 2 292 2 666 2 262 2 963 3 038 3 145 3 245 3 357

Share of profit of associaties and joint ventures and impairments threof

(net of income tax)213 146 148 172 150 150 150 150 150 150

Profit before income tax 3 589 2 107 2 440 2 838 2 412 3 113 3 188 3 295 3 395 3 507

Income tax expense -515 -520 -732 -697 -673 -868 -889 -919 -947 -979

Average tax rate 14% 25% 30% 25% 28% 28% 28% 28% 28% 28%

Profit 3 074 1 587 1 708 2 141 1 739 2 244 2 298 2 375 2 448 2 529

Income Statement


PAGE 32/34

Disclosures and Disclaimers

Recommendations

Buy Expected total return (including expected capital gains and expected dividend yield)

of more than 10% over a 12-month period.

Hold Expected total return (including expected capital gains and expected dividend yield)

between 0% and 10% over a 12-month period.

Sell Expected negative total return (including expected capital gains and expected

dividend yield) over a 12-month period.

This report was prepared by [insert student’s name], a Master in Finance’s student of Nova School of

Business & Economics (“Nova SBE”), within the context of the Field Lab – Equity Research.

This report is issued and published exclusively for academic purposes, namely for academic evaluation and

masters graduation purposes, within the context of said Field Lab – Equity Research. It is not to be construed

as an offer or a solicitation of an offer to buy or sell any security or financial instrument.

This report was supervised by a Nova SBE faculty member, acting merely in an academic capacity, who

revised the valuation methodology and the financial model.

Given the exclusive academic purpose of the reports produced by Nova SBE students, it is Nova SBE

understanding that Nova SBE, the author, the present report and its publishing, are excluded from the

persons and activities requiring previous registration from local regulatory authorities. As such, Nova SBE, its

faculty and the author of this report have not sought or obtained registration with or certification as financial

analyst by any local regulator, in any jurisdiction. In Portugal, the author of this report is not registered with or

qualified under COMISSÃO DO MERCADO DE VALORES MOBILIÁRIOS (“CMVM”, the Portuguese Securities Market

Authority) as a financial analyst. Rosário André - as the academic supervisor of the author - is registered as a

financial analyst with CMVM. No approval for publication or distribution of this report was required and/or

obtained from any local authority, given the exclusive academic nature of the report.

The additional disclaimers also apply:

USA: Pursuant to Section 202 (a) (11) of the Investment Advisers Act of 1940, neither Nova SBE nor the

author of this report are to be qualified as an investment adviser and, thus, registration with the Securities and

Exchange Commission (“SEC”, United States of America’s securities market authority) is not necessary.

Neither the Author nor Nova SBE receive any compensation of any kind for the preparation of the Reports.


PAGE 33/34

Germany: Pursuant to §34c of the WpHG (Wertpapierhandelsgesetz, i.e., the German Securities Trading

Act), this entity is not required to register with or otherwise notify the Bundesanstalt für

Finanzdienstleistungsaufsicht (“BaFin”, the German Federal Financial Supervisory Authority). It should be

noted that Nova SBE is a fully-owned state university and there is no relation between the student’s equity

reports and any fund raising programme.

UK: Pursuant to section 22 of the Financial Services and Markets Act 2000 (the “FSMA”), for an activity to be

a regulated activity, it must be carried on “by way of business”. All regulated activities are subject to prior

authorization by the Financial Conduct Authority (“FCA”). However, this Report serves an exclusively

academic purpose and, as such, was not prepared by way of business.The author - a Masters’ student - is

the sole and exclusive responsible for the information, estimates and forecasts contained herein, and for

the opinions expressed, which exclusively reflect his/her own judgment at the date of the report. Nova SBE

and its faculty have no single and formal position in relation to the most appropriate valuation method,

estimates or projections used in the report and may not be held liable by the author’s choice of the latter.

The information contained in this report was compiled by students from public sources believed to be reliable,

but Nova SBE, its faculty, or the students make no representation that it is accurate or complete, and accept

no liability whatsoever for any direct or indirect loss resulting from the use of this report or of its content.

Students are free to choose the target companies of the reports. Therefore, Nova SBE may start covering

and/or suspend the coverage of any listed company, at any time, without prior notice. The students or Nova

SBE are not responsible for updating this report, and the opinions and recommendations expressed herein

may change without further notice.

The target company or security of this report may be simultaneously covered by more than one student.

Because each student is free to choose the valuation method, and make his/her own assumptions and

estimates, the resulting projections, price target and recommendations may differ widely, even when referring

to the same security. Moreover, changing market conditions and/or changing subjective opinions may lead to

significantly different valuation results. Other students’ opinions, estimates and recommendations, as well as

the advisor and other faculty members’ opinions may be inconsistent with the views expressed in this report.

Any recipient of this report should understand that statements regarding future prospects and performance

are, by nature, subjective, and may be fallible.

This report does not necessarily mention and/or analyze all possible risks arising from the investment in the

target company and/or security, namely the possible exchange rate risk resulting from the security being

denominated in a currency either than the investor’s currency, among many other risks.

The purpose of publishing this report is merely academic and it is not intended for distribution among private

investors. The information and opinions expressed in this report are not intended to be available to any

person other than Portuguese natural or legal persons or persons domiciled in Portugal. While preparing this

report, students did not have in consideration the specific investment objectives, financial situation or


PAGE 34/34

particular needs of any specific person. Investors should seek financial advice regarding the appropriateness

of investing in any security, namely in the security covered by this report.

The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion

about the target company and its securities. He/ She has not received or been promised any direct or indirect

compensation for expressing the opinions or recommendation included in this report.

[If applicable, it shall be added: “While preparing the report, the author may have performed an internship

(remunerated or not) in [insert the Company’s name]. This Company may have or have had an interest in the

covered company or security” and/ or “A draft of the reports have been shown to the covered company’s

officials (Investors Relations Officer or other), mainly for the purpose of correcting inaccuracies, and later

modified, prior to its publication.”]

The content of each report have been shown or made public to restricted parties prior to its publication in

Nova SBE’s website or in Bloomberg Professional, for academic purposes such as its distribution among

faculty members for students’ academic evaluation.

Nova SBE is a state-owned university, mainly financed by state subsidies, students tuition fees and

companies, through donations, or indirectly by hiring educational programs, among other possibilities. Thus,

Nova SBE may have received compensation from the target company during the last 12 months, related to its

fund raising programs, or indirectly through the sale of educational, consulting or research services.

Nevertheless, no compensation eventually received by Nova SBE is in any way related to or dependent on

the opinions expressed in this report. The Nova School of Business & Economics does not deal for or

otherwise offer any investment or intermediation services to market counterparties, private or intermediate

customers.

This report may not be reproduced, distributed or published, in whole or in part, without the explicit previous

consent of its author, unless when used by Nova SBE for academic purposes only. At any time, Nova SBE

may decide to suspend this report reproduction or distribution without further notice. Neither this document

nor any copy of it may be taken, transmitted or distributed, directly or indirectly, in any country either than

Portugal or to any resident outside this country. The dissemination of this document other than in Portugal or

to Portuguese citizens is therefore prohibited and

unlawful.

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