Thai Beverage - CIMB Research 2016-11-18: 3Q16 first take ~ spirits drinking issues and hungover on costs

Thai Beverage - CIMB Research 2016-11-18: 3Q16 first take: spirits drinking issues and hungover on costs THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - 3Q16 first take: spirits drinking issues and hungover on costs

  • 3Q16 core net profit (+8.5% yoy) came in below expectations. Spirits was the big disappointment, but the group was at least lifted by associates’ contribution.
  • 3Q’s spirits sales decline (-7.2%) outpaced the drop in volumes (-2.4%) as consumers traded down to cheaper white spirits. Margins were therefore also hit.
  • We maintain our forecasts and target price.

Core earnings hit by spirits division, lifted by associates

  • We think this is a quarter where we are seeing an element of slightly overstocked channels impinging spirits sales, yet still elevated levels of SG&A expenses as Thaibev continues to invest in its brands. That said, 3Q16 core net profit still grew by a decent 8.5% yoy, lifted by stronger associate contribution after adjusting for the previous year’s one-off (disposal of Myanmar brewery). 
  • 3Q formed 16% of our full-year forecast.

An element of trading down within the spirits business

  • 3Q spirits sales (-7.2% yoy) continued to retrace on the back of slowing volumes (- 2.4% yoy). We suspect that we are seeing an unwinding situation as there was an element of channel stocking earlier in 1H when agents were anticipating an alcohol tax hike. 
  • Management also highlighted in its notes a change in the sales mix, where consumers are trading down to white spirits (lower ASPs and profitability than brown spirits).
  • Spirits’ EBIT margins were therefore down both yoy and qoq (3Q16: 21.2%; 3Q15: 22.8%; 2Q16: 23.9%).

Beer grew yoy; but focus on market share

  • The strong beer sales momentum continued into 3Q with revenue up 42.9% yoy as volumes grew 37.9%, reflecting continued positive effects from a price hike in May.
  • The strong yoy growth was always expected given the launch of its rebranded Chang beer in Aug 15. However, we note that the sequential volume drop (3Q is seasonally weaker) in 3Q16 of 24% qoq is larger than the previous two years of 11-15%.
  • The key data point to monitor is Chang’s market share, which stood at c.40% in 2Q16. We will seek more clarity at the analyst briefing.

Non-alcohol did well on water

  • Trends in the non-alcohol segment were fairly unchanged from 2Q. Greater health awareness among consumers drove demand for water (3Q volumes +8.4%). 
  • More importantly, we are most positive on the continued gross margin improvements for non-al (3Q16: 36.9%; 3Q15: 26.4%; 2Q16: 36.7%) on the back of a better product mix and more favourable packaging costs. This is a longer-term story as A&P expenses continue to erode the profitability of this segment.

Maintain Add

  • We keep our SOP-based target price of S$1.14 and Add rating. The company will hold an analyst briefing next Monday.
  • Note that Thaibev changed its fiscal year-end to Sep (from Dec). Accordingly, its first new fiscal year is a nine month period from Jan-Sep 2016.

Jonathan SEOW CIMB Research | 2016-11-18
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.140 Same 1.140