Is The Market Rewarding Heineken Malaysia Berhad (KLSE:HEIM) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

By
Simply Wall St
Published
May 20, 2021
KLSE:HEIM
Source: Shutterstock

With its stock down 3.8% over the past month, it is easy to disregard Heineken Malaysia Berhad (KLSE:HEIM). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on Heineken Malaysia Berhad's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Heineken Malaysia Berhad

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Heineken Malaysia Berhad is:

44% = RM154m ÷ RM349m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.44 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Heineken Malaysia Berhad's Earnings Growth And 44% ROE

To begin with, Heineken Malaysia Berhad has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. Given the circumstances, we can't help but wonder why Heineken Malaysia Berhad saw little to no growth in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital

As a next step, we compared Heineken Malaysia Berhad's performance with the industry and found thatHeineken Malaysia Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 0.1% in the same period, which is a slower than the company.

past-earnings-growth
KLSE:HEIM Past Earnings Growth May 21st 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for HEIM? You can find out in our latest intrinsic value infographic research report.

Is Heineken Malaysia Berhad Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 101% (implying that the company keeps only -0.5% of its income) of its business to reinvest into its business), most of Heineken Malaysia Berhad's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Heineken Malaysia Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 98% of its profits over the next three years. Still, forecasts suggest that Heineken Malaysia Berhad's future ROE will rise to 94% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that the performance shown by Heineken Malaysia Berhad can be open to many interpretations. While the company does have a high rate of return, its low earnings retention is probably what's hampering its earnings growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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