Thai Beverage - CIMB Research 2017-03-22: F&N/FCL restructuring to propel the group into a regional beverage play

Thai Beverage - CIMB Research 2017-03-22: F&N/FCL restructuring to propel the group into a regional beverage play THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - F&N/FCL restructuring to propel the group into a regional beverage play

  • Management reiterated its expectation of completing F&N/FCL’s restructuring by Sep 2017. Its tone on timeline guidance has never been so confident.
  • We think the key is to divest FCL and utilise the proceeds to further the group’s ambition of becoming a regional beverage play across multiple products.
  • However, we estimate earnings dilution of c.9% from restructuring F&N/FCL. We expect the group to mitigate this with other acquisitions.
  • Without equity fundraising, we estimate it will be able to undertake a US$1.5bn-2bn acquisition. For perspective, Sabeco, a potential target, is worth US$5.8bn.
  • Maintain Add as Thaibev evolves into a regional and total beverage play.

F&N/FCL restructuring to be completed by FY17 

  • The market had long been expecting a corporate restructuring of Thaibev’s c.28% stake in both F&N and FCL. That is, divesting its FCL stake and buying a bigger F&N stake.
  • Management shared that the restructuring is expected to be completed by FY17 (i.e. Sep 2017) but details have so far been scant. Hence, in this report, we work through several scenarios to explore the merits of such a restructuring.

More than just divesting non-core assets 

  • While one school of thought has been how a F&N/FCL share swap will make Thaibev a much cleaner beverage company and remove its property exposure, we argue that the “pure beverage play” focus is misguided. 
  • After all, with Thaibev trading above 20x forward P/E, we do not think the stock is being penalised for having a property exposure. Instead, we think the focus should be on how the restructuring will help Thaibev morph into a truly regional total beverage player – not just a Thai spirits play.

Setting the stage for being a regional and total beverage play 

  • We think the most likely scenario is to first divest FCL and use the proceeds to enlarge the group’s stake in F&N. The increasing media coverage on Sabeco sets the stage for the next step, where we see F&N as the vehicle for inorganic expansion into Vietnam. 
  • It is no coincidence that this is in line with the group’s Vision 2020 of deriving more than 50% of its revenue from both non-alcoholic beverages and outside Thailand. We see further synergies from being able to push products across channels and countries.

The need to balance the group’s P&L impact from divesting FCL 

  • We think an important consideration will be the P&L impact from restructuring F&N/FCL, which currently combine to form c.14% of group net profit. 
  • FCL is more profitable than F&N and we estimate the net impact from restructuring F&N/FCL will be a c.9% decline in group net profit. This leads us to believe that the group will look at inorganic opportunities to mitigate the earnings shortfall. We estimate it will be able to swallow a US$1.5bn-2bn acquisition. For perspective, Sabeco’s market cap is c.US$5.8bn.

Thaibev will be an entirely different proposition, reiterate Add 

  • Thaibev had typically been viewed as somewhat mundane and being a “one product one country” company. 
  • Chang’s rebranding in 2015 propelled a new product segment in beer and Thaibev is now on the verge of evolving into a regional beverage player with an even bigger platform; we believe this will aid in further re-rating. 
  • Therefore, we remain positive on the stock’s long-term merits and our SOP-based target price stays unchanged at S$1.07. Maintain Add

Jonathan SEOW CIMB Research | http://research.itradecimb.com/ 2017-03-22
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.070 Same 1.070