CIMB Research 2015-07-23: Thai Beverage - What is Charoen doing?

What is Charoen doing? 

  • Charoen has reportedly sold 534m Thai Bev warrants that will allow warrant holders to convert 1-for-1 to Thai Bev shares on Jul-2018, at an exercise price of S$0.9941. 
  • We read this as the tycoon cashing in on some warrant premiums when he does not think that share price can do so well over the next three years. 
  • With EPS growth of 7-8% in FY16-17, we think he has a point. 

What Happened 

  • Bloomberg today carried the news that Charoen’s investment vehicle, Kindest Place, had issued Thai Bev warrants. Thai Beverage’s share price has weakened the past two days. 
  • Details of the deal, as worked out by us, are in Figure 1. 

What We Think 

  • Chaoren is probably taking the view that market is peak-ish and is getting some call premium upfront for a promise to sell his shares at S$0.9941 in three years’ time, if the share price get there. 
  • We think this is a sensible move by Charoen. 
  • Committing to sell his shares three years forward at a 32% premium means he does not expect earnings to deliver a CAGR beyond 10% over the next three years. 
  • With the bulk of Thai Bev’s earnings coming from low-growth spirits division, we think this is a reasonable assumption. 
  • Our own earnings growth assumptions are 7-8% for FY16-17. 
  • If share price ends up above S$0.9941 in Jul 18, it will have to come from further valuation multiple expansion. 
  • Whilst management selling is always construed as a bad thing, the amount involved is small. If the warrants convert, Charoen will dispose of 534.3m shares paring down his 65.9% stake by a sale of a 2.1%-stake. 
  • We interpret that buyers of the warrants would be those bullish on Thai Bev's long-term prospects, betting that the transformation into a true ASEAN F&B giant will reap a higher valuation multiple. 
  • Yet, the warrant holders do not want to commit a large capital outlay on a stock that is not exactly high-growth. By subscribing to the warrants, they get the same dividend as the Thai Bev shareholders, yet only need to put down 4.2% of the capital needed to invest in the stock. 
  • Sure, their risk is that if the stock only appreciates 20-30% over the next three years, they will lose their upfront warrant premium paid. 
  • The reprieve is that they will enjoy dividends to offset the warrant premium paid. 

What You Should Do 

  • We do not change our estimates, our SOP target price (S$0.87) or our Add rating. 
  • Catalyst for greater upside lies in achieving scale for both its beer it carbonated soft drinks products. 

(Kenneth NG, CFA; Jonathan SEOW)