Thai Beverage - CIMB Research 2016-05-18: Just the beginning

Thai Beverage - CIMB Research 2016-05-18: Just the beginning THAI BEVERAGE PUBLIC CO LTD Y92.SI 

Thai Beverage - Just the beginning

  • Questions at its post-results conference centred on: 
    1. factors that drove the turnaround in beer and non-alcohol; and 
    2. limits to market share gains.
  • Management elaborated on the plans that led to beer’s stellar performance recently, and also synergies in the use of the group’s network, size and capacities.
  • We maintain our Add rating; SOP-based target price unchanged.

Beer market share gains only just starting to deliver

  • Management explained that its success in beer was not an overnight achievement. It took 20 months of planning and execution. Its Vision 2020 strategy’s initial aim was to achieve top beer market share and 45% was the quantifiable target to aim for.
  • The short-term goal is to reach the top position. The market share of top rival brand Leo was at 51% before Chang’s re-positioning. Chang has grown to 40-41% share in Thailand. Previously, Chang’s market share peaked at a high of 65-70% in 2003 when it was the market leader; theoretically, Chang’s market share can still grow.
  • When Chang did well in the early 2000s, it was deemed as the value beer. The market has evolved in the decade after. Chang was still perceived as value and not fashionable. Its brand repositioning in 3Q15 changed this.
  • Internal market perception studies suggest that the brand positioning of Chang is now above Leo’s. Chang is already at price parity with Leo and Thai Bev is exploring whether it can position Chang at a premium price point.

Non-alcohol beverage: why the growth in 1Q?

  • Non-alcohol swung from an EBITDA loss of THB125m (1Q15) to THB91m (1Q16).
  • Factors that drove the turnaround included: 
    1. a growing market, 
    2. subsidiary Oishi gaining market share with new products, and 
    3. successful promotion campaigns.
  • So far, its water and JubJai herbal drink products have been doing very well.
  • Part of the success in driving sales and keeping cost controlled is the more efficient use of the group’s distribution strength e.g. Thai Bev is strong in the north east and subsidiary Serm Suk is strong in Bangkok. 
  • Additionally, the group is consolidating its products when negotiating with the modern trade channels to get better trade terms. Future plans include trying to differentiate est cola vs. Coca-Cola and Pepsi. Thai Bev is looking at flavoured cola and differentiated communications to make an impact. 
  • Further cost efficiency plans include trying to improve logistics and making use of lighter PET bottles to reduce logistic costs. Investments into automation to automate credit, freshness policies are also being put into place.

Maintain Add, execution falling into place

  • We viewed the stock as a steady free cash flow generation vehicle in the past. Recent market share gains and the effect of positive operating leverage on margins, have triggered a likely cycle of quarterly results beat, especially when analysts’ expectations are anchored to its previous era of single-digit core earnings growth.
  • Our sum-of-parts target price (S$0.92) uses 20x P/E for its spirits business (peer average) and 21x P/E for its beer business. We will review our valuation methodology, and the scope for earnings growth beyond 2016 in a separate note. Maintain Add for now.

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | 2016-05-18
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.92 Same 0.92