Thai Beverage - CIMB Research 2017-02-14: Valentine’s Day surprise from beer segment

Thai Beverage - CIMB Research 2017-02-14: Valentine’s Day surprise from beer segment THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - Valentine’s Day surprise from beer segment

  • 1QFY9/17 core net profit (+27.9% yoy) came in above expectations, at 29% of our and consensus FY17F forecasts, mostly driven by beer.
  • All divisions saw sales decline as expected (mourning period) but was not as bad.
  • Spirits saw the biggest yoy contraction (-10.7%) but did improve qoq (+23.9%).
  • Beer led the group’s stellar quarter, with net profit surging 160% yoy on the back of higher gross margins and lower A&P expenses. Non-al losses also narrowed.
  • Maintain Add. The consumption slowdown does not appear to be as bad as initially feared.

Mourning period concerns prove unfounded 

  • Initial expectations were for Thaibev to have a challenging quarter given the mourning period, made worse by this traditionally being a seasonally strong quarter. 
  • While group sales did decline 8% yoy as volumes fell, effective cost management (lower A&P spend during mourning period) and higher associates contribution lifted overall earnings.
  • Accordingly, we view 1Q’s 28% yoy net profit growth as exceptionally strong.

Beer was the big positive as margins improved

  • We were positively surprised by the strong beer segment. 1Q’s beer volumes were down (-7.6% yoy), in tandem with the entire industry. However, a decrease in bottle and raw material costs lifted gross margins to a high of 23.2% (vs. its historical 17-20% range).
  • Savings in A&P expenses helped further. Beer net profit was therefore up a healthy 160% yoy. Ex-associates, beer now forms a meaningful c.20% of the group’s net profit.

Spirits weakness in the on-trade channels 

  • Spirits sales (-10.7% yoy) continued to retrace and were entirely driven by volumes (- 10.8% yoy), which were impacted by the mourning period and postponement of festive and entertainment activities. 
  • Management highlighted in its commentary a particular weakness in the on-trade channels (i.e. restaurants and entertainment venues). However, we see light at the end of the tunnel with the positives being: 
    1. margins held firm; and 
    2. spirits volumes improved sequentially (+17.5% qoq).

Non-al closer to reaching its target of EBITDA positive in FY17F 

  • The other positive came from the non-al segment. While the segment is still lossmaking, EBITDA losses have now narrowed to -THB0.1bn (1QFY16: -THB0.7bn). Even as this segment’s contribution to the group is still dwarfed by the much larger spirits and beer segments, we are positive that management should be able to achieve its EBITDA positive target this year.

Downside risks: what could we be missing? 

  • Recall that Thaibev only recently changed its FYE, which meant that the prior years’ quarter had additional accruals for year-end bonuses. While difficult to quantify, this would have an upward bias on this quarter’s strong net profit growth. 
  • Further, main beer rival Boon Rawd recently launched a new beer and while we do not think it will be competitive, we acknowledge that 1Q’s results do not yet reflect the new competition.

Maintain Add, with an unchanged TP of S$1.07 

  • We maintain our EPS forecasts as we prefer to monitor 2QFY17’s consumption trends first. Hence, our SOP-based target price remains unchanged at S$1.07. Valuations remain compelling with Thaibev currently trading at 20x CY17 P/E, below peers’ 24x.
  • Upside could come from corporate restructuring, M&As and beer market share gains.
  • Maintain Add.

Jonathan SEOW CIMB Research | 2017-02-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.07 Same 1.070