Thai Beverage - CIMB Research 2017-05-05: 2QFY17 Preview ~ Eyes On Beer Margins And Sales Pickup

Thai Beverage - CIMB Research 2017-05-05: 2QFY17 preview – eyes on beer margins and sales pickup THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - 2QFY17 preview – eyes on beer margins and sales pickup

  • Thaibev is poised to release its 2QFY17 results after market closes on 11 May.
  • Key points to focus on: 1) beer margins, 2) sales recovery. With current consensus expectations relatively conservative, we think 2Q results could be a beat.
  • Maintain Add with an unchanged SOP-based TP of S$1.07.

Another earnings beat could be a share price catalyst

  • Recap that 1Q17 results proved to be a share price catalyst for Thaibev (+ c.7% the day after results). This came after the company delivered better-than-expected core net profit growth (+28% yoy) on the back of improved margins, shrugging off concerns about weakness due to the mourning period in Thailand.
  • If Thaibev was able to build upon its positive margin momentum from 1Q and consumption recovers, we believe there is a good chance 2Q results will beat expectations. Any further positive developments in its corporate restructuring/M&A will also be well received by the market, in our view.

Current expectations can be considered fairly conservative

  • 2Q is a seasonally strong quarter for ThaiBev (historically forming 28-29% of full-year earnings) due to higher consumption during Songkran (Thai New Year). 
  • Based on historical seasonality and Bloomberg consensus' FY17 expectations, 2Q implied net profit is THB7.9bn, slightly above our expectation of THB7.5bn. However, note that our net profit forecast implies a 12% yoy and 3% qoq decline. 
  • Even as 2Q16 was a high base, we still think our numbers are on the conservative side.

Beer margins will need to be sustained

  • A big reason for 1Q17’s earnings beat were better beer margins. 1Q’s strong beer EBIT margin of 9.8% (vs. 2.8% in 1Q16) were driven by lower raw material costs, lower packaging costs and higher recyclable rates. 
  • Management's guidance then was that these lower costs were locked in for at least the next 12 months. Therefore, we think investor focus will be on whether margins are sustained. We would consider it a success if EBIT margins are sustained at 9-10% in 2Q.
  • In terms of beer market share, we are expecting Chang to maintain its 40% share in Thailand. We understand that competitor U beer is still not widely available in the modern trade channels, and can only be found in very few on-trade premises. Any market share gains for Chang will be a share price catalyst, in our view.

Market could be underestimating a recovery in consumption

  • We think the next focal point will be whether sales recovers. While the mourning period did negatively impact overall consumption in Thailand, Thaibev’s 1Q sales were down only 8% yoy (i.e. not too bad). 
  • Management’s tone seemed to suggest that consumption will return to normal levels in 2Q. Further, management already started to see downtrading trends abate in 1Q, with its white/brown spirit sales mix remaining fairly stable. This could provide upside to our numbers.

2Q17 could come in above expectations; Maintain Add

  • Our SOP-based TP remains unchanged at S$1.07. 
  • While 2Q earnings could provide near-term catalyst, the longer-term thesis is for Thaibev to evolve into a regional beverage player. FNN/FCL restructuring is a likely first step to achieving this. 
  • With multiple visible catalysts and valuations undemanding at 20.8x CY17F P/E (below peers’ 25.1x), we keep our Add rating.

Jonathan SEOW CIMB Research | 2017-05-05
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.070 Same 1.070