Thai Beverage Public Company - DBS Research 2016-10-17: Sensitivity analysis points to limited impact

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THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage Public Company - Sensitivity analysis points to limited impact

• Mourning period and avoidance of “joyful events” may have temporary impact on sales.
• Assuming loss of two weeks of sales, impact on FY17F earnings estimated at c.6%.
• Long-term growth prospects should not be affected.
• Maintain BUY, TP: S$1.13.

What’s New 

• With the loss of Thailand’s beloved King Bhumibol Adulyadej (King Rama IX), a one-year mourning period has been declared with calls to avoid “joyful events” for 30 days.
• A sombre mood, but no outright ban on alcohol sales has been imposed. The passing of King Bhumibol is a sad event.
• Thus far, there has been no ban on alcohol sales, though there are reports of voluntary closures of entertainment outlets.

Sensitivity/scenario analysis 

• We did a sensitivity analysis on the impact of slower sales.
• We have assumed two weeks of lost (i.e.zero) sales representing 4% each of beer and spirits volume, and a 0.5% pt drop in margins arising from lower production.
• Under these assumptions, our FY17F earnings may be cut by c.5.8%. We also show the sensitivity analysis of net profit with respect to changes in sales volume and margins for Spirits and Beer, respectively.

Sensitivity analysis on volumes and margins for Spirits and Beer 

Sensitivity analysis : 1% change in sales volume of Spirits and Beer => 0.9% change in net profit. 

• We did a sensitivity analysis on impact of sales volume and margins on ThaiBev’s net profit. Based on our assumptions, every 1% drop in Spirits and Beer volumes will impact net profit by 0.9% collectively (or 0.7% and 0.2%, respectively) for FY17F.

Assuming total suspension of sales for two weeks, FY17F net profit could reduce by c.3.5% with no impact on margins. 

• Assuming total suspension of alcohol sales for two weeks, we estimate that this could account for almost 4% of the year’s sales volume. The impact on net profit could amount to 3.5%. This assumes all else constant, such as margins.
• In most cases, sales volume changes are accompanied by a corresponding impact on margins, as there are fixed overheads that will still have to be met. Hence, we looked at the impact of sales volume and margin changes.
  1. Spirits sales sensitivity : 1% change in volume => 0.5%pt change in Spirits margins => 2.1% change in net profit.
  2. Beer sales sensitivity : 1% change in volume => 0.5%pt change in Beer margins => 1% in net profit.

Any knee-jerk share price reaction is an opportunity to accumulate. 

• We remain positive on ThaiBev’s prospects and any strong knee-jerk reaction could present accumulation opportunities. As seen in past instances, while there may be a temporary impact on volumes, consumption tends to revert back over time. Even assuming there is some impact on sales volume and margins, we project the impact to net profit to be c.5.8% for FY17F (based on our scenario).
• Our views are summarised in the following points: 

1. Sales should recover with time, based on past experiences. 

• While there could be a near term impact on sales volume, drawing from previous excise tax increases and/or political uncertainties such as coup, volumes usually bounce back. If an unfortunate event happens, this could have a short-term negative impact, but we believe sales volume should eventually recover.

2. Pragmatic angle – ThaiBev accounts for c.3% of government revenue. 

• We looked at ThaiBev’s contribution to government coffers in terms of excise and corporate taxes. Interestingly, ThaiBev contributes 3% of Thai governments’ total revenue, largely in the form of excise taxes. On this note, too long a period of restrictions on alcohol sales may dampen total government revenue. 

3. Stocks held at distributors back to normal, from high levels in 1Q16. 

• We understand that stock levels for ThaiBev’s agents and distributors are back to the usual 3-4 weeks for Spirits. This has come off from a higher inventory level as at end-1Q16, when expectations were high for an increase in excise duties. Thus, we do not expect any impact from further destocking within the distribution channel.

4. Large part of ThaiBev’s alcoholic beverages are offtrade. 

• Given that a large part of ThaiBev’s portfolio caters to the mainstream, majority of its sales are offtrade in nature. We estimate that for Spirits, about 90- 95% of its sales volume are off-trade, while for beer the ratio is 80%:20% (off trade: on trade). In the event of restrictions on entertainment, the impact could be less severe vis-à-vis premium brands which are typically consumed on-trade at outlets.

5. Competitors’ expected response may be on hold. 

• There have been talks that ThaiBev’s competition has been planning for counter action in response to the Chang Beer’s relaunch and success thus far. This was understood to take place in 4Q16. With the current development, this could be a “spanner” in the works for its competitors.

Maintain positive long term view. 

• While there could be near term uncertainties, we continue to adopt a positive view on the stock based on the fundamentals of the company. 
• Our current TP is S$1.13. Based on our scenario of 6% impact on FY17F estimates, our DCF and sum-of-parts based TP could be reduced marginally to S$1.09. The impact to our TP is relatively muted given the DCF assumption on its operations.

Andy Sim CFA DBS Vickers | http://www.dbsvickers.com/ 2016-10-17

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.130 Same 1.130