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Heineken trades old man Europe for a new Asian model

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As far as Heineken is concerned, Western Europe is still the old guy lingering in the corner of the bar short changing the staff. Beer sales in the region continued to drag on the Dutch company's earnings according to full-year results on Wednesday. The good news is that sexier clientele are helping to make that old guy less of an issue. Heineken's organic beer volumes were up 3 per cent last year – growing in all regions except western Europe. The 9 per cent growth in earnings per share helped the company's shares gain 4 per cent.

Western Europe has long been a drag for Heineken. But the hefty €5.2-billion ($7-billion) it paid last year to buy the 58 per cent of Asia Pacific Breweries that it did not already own will reduce the contribution of earnings before interest and tax from the region to 30 per cent, from 35 per cent previously. Higher margins at the Asian brewer, which is behind premium brands such as Tiger, also helps.

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Heineken should see margin improvement elsewhere, too. The company saved €200-million in costs last year as part of its €525-million saving programme to be completed within the next two years. Much of that was offset by an 8 per cent rise in input cost inflation which is set to fall to 1-2 per cent growth this year. So if Heineken continues to shave a further €150-million off costs this year, say, and keeps advertising spend as a proportion of revenues in line with last year as it estimates, margins should expand in 2013.

Is this enough to close the gap with its bigger peers? Heineken now trades on 17 times forward earnings, a 13 per cent discount to ABInBev and one-fifth below SABMiller. But even after the APB acquisition, western Europe is still twice as important in terms of earnings contribution for Heineken as it is for its peers and its return on invested capital on its physical assets is still lower, notes Bernstein. The answer is no.

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