Thai Beverage Public Company - DBS Research 2017-06-29: Effects Of Mourning Period Will Eventually Pass

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THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage Public Company - Effects Of Mourning Period Will Eventually Pass

• Reiterate BUY on ThaiBev, despite near-term concerns from mourning period.
• Effects will eventually pass, latest by FY18F.
• 2H17 could surprise on costs and excise.
• Corporate restructuring an added long-term catalyst.

Reiterate BUY, TP: S$1.07. 

• We reiterate our BUY recommendation on ThaiBev and believe that uncertainties surrounding slower consumption in Thailand from the mourning period is temporary. Pullbacks in Thai Beverage's share price post a chance to accumulate the counter, in our view. 
• While 1H17 saw results dipping by 2% y-o-y, we believe 2H17 could turn in a better yo-y performance on the back of tighter cost control. 
• In addition, the expectations of excise tax increase could lead to distributors and agents stocking up, thus spurring sales in 4Q17F. 
• On a longer-term horizon, we believe its ongoing transformation into a regional beverage player will aid in further re-rating of the counter. Its associate, Fraser & Neave Ltd (FNN) now owns 18.74% in Vinamilk, and has stated an intention to increase this further.

Where we differ? 

• We believe an outright swap with TCC Assets for a higher stake in FNN is unlikely. Instead, we believe ThaiBev will rely on FNN as its regional expansion vehicle and increase its stake in FNN only when opportune.

Potential catalyst. 

• Margin expansion from excise tax increase, market share gains in beer and non-alcoholic beverages, faster turnaround in non-alcoholic beverages, corporate restructuring – monetisation/partial divestment property associate’s stake.

Valuation

• We revised our FY17F/18F forecasts down by 8%/7% to reflect more realistic sales forecasts. Our Target Price is tweaked down to S$1.07 (from S$1.09), based on sum-of-parts valuation, derived via discounted cashflows of its core operations, and imputing higher fair values for its stakes its listed associates.

Key Risks to Our View

• Large quantum in excise tax hikes. Increase in excise duties without a commensurate increase in ASP and/or large quantum increase, crimping consumption drastically.

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WHAT’S NEW

Effects of mourning period will eventually pass 

Reiterate long-term BUY, accumulate on pullbacks. 

• We reiterate our BUY recommendation on ThaiBev and believe that uncertainties surrounding consumption in Thailand from the mourning period is temporary. Granted that our expectations for a quicker uptick were misplaced and consumption has been slower in the past eight months, it will gradually revert to normalcy, in our view.
• We revised down our forecasts by 8%/7% for FY17F/18F as we factor in more realistic sales forecasts, offset by higher projected contribution from associates. Notwithstanding this, we opine that pullbacks in share price post a chance to accumulate the counter. We believe its ongoing transformation into a regional beverage player will aid in further re-rating of the counter.
• In this report, we explain our continued conviction on the company given: 
  1. Weak 2Q17 due to short-term effects, and 2H could show better growth 
  2. Consumption will eventually pick up 
  3. Expectations of excise increase could spur sales in 4Q17 
  4. Longer-term transformation into a regional beverage player, with FNN edging up its contribution from Vietnam 

Headline drop in 2Q not a trend, but a short-term effect, in our view 

Share price correction, 2Q17 was weak but…. 

• earlier in May, ThaiBev posted weak 2Q17 results that dipped by 23% from a year earlier. This was indeed below expectations on the back of slower sales revenue (due to slower consumption) and recognition of higher advertising and promotional expenses that was deferred from the earlier quarter (in 1Q17).
• However, we believe the market has misunderstood that 2Q17 performance marks a downtrend.
• Drop due to high base, temporary effects. Instead, the poor performance also stemmed from 
  1. a high-base effect compared to the same period a year ago (in 2016) as distributors and agents had stocked up in anticipation of an excise increase; 
  2. stronger-than-expected beer sales in September-December 2015, after the relaunch of Chang, which resulted in agents replenishing their stocks in the quarter ending March 2016; 
  3. softer volumes in 2Q17 due to the mourning period; and 
  4. higher A&P given the deferment from the previous quarter.

2H17F to see lower revenue than 1H17, but bottom line could surprise on cost savings. 

• Based on historical performance, the quarters ending March and December tend to register stronger sales vis-à-vis June and September quarters due to seasonal effects. We estimate that 1H sales revenue (i.e. for quarters ending December and March) tends to be c.55% of the full year's. 
• While ThaiBev's management has indicated that 2H17 revenue is unlikely to match 1H17's given the seasonally slower period, we understand that the focus is now on cost control. Thus, we believe 2H17 could still play some catch up despite the lacklustre 1H17 profits which dipped by 2.2% to Bt14.3bn.

Early signs of pick-up in consumption? – Thailand April sales volume improved by 5% y-o-y. 

• Based on market data, we noted that beer sales volume has been lacklustre since October 2016, registering negative and/or weak growth, possibly due to the sombre mood on the counter. In fact, we saw a steep 15% slump in beer sales volume in the month of October, given the immediate aftermath of the sombre event.
• Following that, beer volumes have been registering negative/weak growth in the ensuing months. While the uptick of 5% y-o-y in April 2017 may not mean much, this could suggest that the worst is over and will eventually lead to a pick-up in consumption.

Expectations of excise duty increase could spur sales in 4Q17.

• With the recent draft of Excise Tax being publicised, the expectations are that it will be effective from September 2017. The new excise tax calculation will change from ex-factory to one based on retail price before VAT. The formula and impact is currently unknown, but based on past trends, this could spur agents and distributors to stock up, and result in higher sales volume, notwithstanding a seasonally weaker quarter (ending September).

Effects of excise increase neutralises over time. 

• A common concern relates to the impact of excise increase and the aftermath. In our analysis, we found that sales volume could be impacted in the immediate aftermath of an excise increase, but this tends to normalise over time. In fact, when an increase in excise duty is widely expected, such as in 2012, there was a discernible increase in sales volume to capitalise on this. The upcoming round of excise duty increase could see a repeat of this situation.

For beer, excise increase may not a be the sole factor in the past ten years' volume decline. 

• We also analysed the impact of excise increase on beer, which seems to have a greater near-term impact. This could be due to the quantum in the past couple of hikes, amounting to over 20% jump in price.
• However, we also noted that sales volume decline could arise from political uncertainties, therefore indirectly affecting tourist arrivals.

Where we differ in terms of restructuring? 

• We note that there have been market expectations of a share swap between ThaiBev and TCC Assets for FNN, in exchange for other listed associates (i.e. ThaiBev exchanging listed property associate stakes for FNN shares). We differ in this perspective and continue to reiterate that this is an unlikely scenario as per our discussion in an earlier report (ThaiBev – “Identifying scenarios to unlock value”, dated 23 November 2016).

FNN to be the regional expansion vehicle, ex-Spirits business.

• In our view, ThaiBev is likely to have FNN take the lead in its regional expansion drive, for businesses outside of spirits/ liquor. As it is, FNN has increased its stake in Vinamilk to 18.74% from under 11% previously, which we estimate to have cost the company close to S$1bn. This has depleted FNN’s cash hoard which mainly came about from its divestment of the 55% stake in Myanmar Breweries Ltd back in August 2015.

Vietnam now accounts for more than 40% of FNN’s PBIT contribution. 

• With a higher stake and the treatment of Vinamilk as an associate (previously treated as an investment) by FNN, we estimate that Vietnam accounted for 40% of FNN’s group PBIT in FY16 (up from 23%). 
• Vietnam has emerged as FNN’s largest contributor, over and above its traditionally larger markets – Malaysia and Thailand.

Opportunity for ThaiBev to increase stake in FNN will arise from the latter’s mega inorganic pursuits, if any. 

• As of March 2017, FNN has slipped into a slight net debt position, after increasing its stake in Vinamilk. That said, we maintain our view that FNN still has ample firepower to leverage on its balance to undertake acquisitions. 
• FNN has a gearing policy of up to 80%, and if required, we believe it can undertake equity fund raising. In this scenario, we believe ThaiBev will be able to underwrite the equity issue, and in the process allow itself (ThaiBev) to increase its stake in FNN. This, as we have always maintained, will circumvent the need for a share swap.

Forecasts and valuation 

• We have revised down our forecasts by 8%/7% on the back of slower sales projections, which we admit may have been too optimistic, expecting the mood to revert to normalcy quickly post the initial 100-day mourning period. This is, however, offset partially by higher contribution from its associate FNN, which is turn benefitted from the consolidation of the latter’s investment in Vinamilk as an associate company.
• Nonetheless, we reiterate our BUY recommendation on the counter, with a revised TP of S$1.06 based on our derived value of its core operations, coupled with higher values for its associates. While some investors may be concerned on near-term performance, we would advocate accumulating on pullbacks in share price. 
• We reiterate our view that the weak 1H17 performance is temporary, and that 2H17 may turn out better for growth, notwithstanding a seasonally weaker half.
• In addition, over the longer term, we see its transformation into a regional beverage player. The drive by FNN with an increased stake in Vinamilk is a step in that direction, in our view.

Andy SIM CFA DBS Vickers | Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2017-06-29

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.07 Down 1.090