Thai Beverage - CIMB Research 2016-11-21: Timing difference to explain the earnings miss

Thai Beverage - CIMB Research 2016-11-21: Timing difference to explain the earnings miss THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - Timing difference to explain the earnings miss

  • Our key concerns over the results were: 
    1. what was causing the weakness in spirits, 
    2. still elevated SG&A expenses and 
    3. beer market share.
  • The spirits decline was led by brown spirits, and white spirits actually saw small growth. There was also the added impact of overstocked channels.
  • The key reason for the elevated SG&A was a change in the timing of the year-end bonus following the company’s fiscal year-end change.
  • Chang’s market share remains unchanged at c.40%.
  • We lower our EPS on lower sales. Maintain Add. Risks include subdued consumption and a prolonged mourning period.

Key takeaways post analyst briefing 

  • To recap, 3Q sales were up 5.6% yoy but EBIT was down 15.4% yoy on the back of increased SG&A expenses. Management explained that there was a change in the timing of the year-end bonus which was now accrued in 3Q16 vs. 4Q15 previously. Excluding which, we estimate that group EBIT would have been a better -c.4% yoy.
  • There was also a slight bunching up of A&P expenses this quarter. While these factors contributed, we do not contest that domestic consumption has somewhat slowed a little.

Spirits down on trading down and overstocked channels 

  • The biggest decline came from the spirits segment, with sales down 7.2% yoy and EBIT an even lower 13.7% yoy. We read the results as a tough consumption environment and consumers trading down. 
  • Management shared that the higher ASP brown spirits registered a c.7% decline, but it saw small growth in its lower ASP white spirits.
  • Management also confirmed some de-stocking effects and noted that inventory in the channels were currently about 3 weeks for white and 4-5 weeks for brown (vs. 2 weeks).

EBIT margins (9.5%) down qoq and yoy (2Q16: 14.0%; 3Q15: 11.9%) 

  • Gross margins actually held up pretty well and were even up yoy (3Q16: 30.2%; 3Q15: 29.1%). 
  • As mentioned, there was a year-end bonus timing difference which was the main drag on 3Q margins. Excluding which, we estimate that EBIT margins would have been a better c.10.8%, but were still down yoy. 
  • The silver lining is that we think margins going forward will improve as we expect A&P spending to be toned down given the mourning period, with A&P spend mostly concentrated in non-al.

Beer market share was the bright spot 

  • Beer was the brightest spot in this set of results on the back of both strong volume and sales growth. More importantly, we think that Chang continues to hold the advantage in its fierce duel with rival Leo. Market share (c.40%) remains unchanged from the previous quarter. However, what has changed is that Leo has launched a “new product” to little effect. 
  • Leo did not change its taste or bottle, but merely changed the position of its label. Chang still holds the upper hand, according to Thaibev’s internal brand perception tests.

Maintain Add 

  • We cut our FY17-18F EPS by 11%, mostly on the back of lower sales. 
  • We also introduce FY19F and roll forward our target price to CY18. 
  • Accordingly, our SOP-based target price is now S$1.07. 
  • Valuations have come off and are now at a much more palatable 18-19x forward P/E. This is in line with its historical mean (17.6x forward) and below peers (22.8x). 
  • Thaibev also declared a final DPS of THB0.4, bringing total DPS to THB0.6 (80% payout ratio). 
  • Re-rating catalysts include further beer market share gains.

Jonathan SEOW CIMB Research | 2016-11-21
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.07 Down 1.140