Thai Beverage Public Company - DBS Research 2017-07-25: Retaining Positive View Post NDR

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THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage Public Company - Retaining Positive View Post NDR

• Maintain positive view on counter with BUY and TP: S$1.07.
• Entrenched position in Spirits should be able to fend off competition; not resting on its laurels though.
• To improve Chang brand/market share via focused marketing; target non-alcoholic beverages to achieve EBIT breakeven by FY18F.
• Effects of mourning period will pass; pullbacks are opportunities, not setbacks in our view.

Maintain BUY, Target Price: S$1.07. 

• We maintain our BUY recommendation on ThaiBev and believe that uncertainties surrounding slower consumption in Thailand from the mourning period is temporary. 
• Our investment thesis on the counter remains unchanged from our last note (on 29 June 2017, Thai Beverage - Effects of mourning period will eventually pass). We believe the uncertainties surrounding consumption in Thailand from the mourning period is temporary and will eventually come to pass, latest in FY18F.
• Pullbacks in Thai Beverage's share price post a chance to accumulate the counter, in our view. While 1H17 saw results dipping by 2% y-o-y, we believe 2H17 could turn in a better yo-y performance on the back of tighter cost control. 
• In addition, the expectations of excise tax increase could lead to distributors and agents stocking up, thus spurring sales in 4Q17F. 
• On a longer-term horizon, we believe its ongoing transformation into a regional beverage player will help to further re-rate the counter. Its associate, Fraser & Neave Ltd (FNN) now owns 18.74% in Vinamilk, and has stated an intention to increase this further.

Where we differ? Share swap unlikely; FNN regional investment vehicle. 

• Since last year, we highlighted our thoughts that FNN is likely to be the regional expansion vehicle for ThaiBev (ex-Spirits) and an outright swap with TCC Assets for a higher stake in FNN using Frasers Centrepoint Ltd (FCL) shares is unlikely. 
• Instead, we believe ThaiBev increases its stake in FNN only when opportune, but could look to partially divest/monetise stakes in FCL. We are still sticking to this view.

Potential catalyst. 

• Margin expansion from excise tax increase, market share gains in beer and non-alcoholic beverages, faster turnaround in non-alcoholic beverages, corporate restructuring – monetisation/partial divestment of FCL’s stake.

Valuation

• Our Target Price is maintained at S$1.07, based on sum-of-parts valuation, derived via discounted cashflows of its core operations, and imputing higher fair values for its stakes in its listed associates.

Key Risks to Our View

• Large quantum in excise tax hikes. Increase in excise duties without a commensurate increase in ASP and/or large quantum increase, crimping consumption drastically.

Salient Points From Week-Long US NDR 

Key takeaway from US NDR. 

• ThaiBev was with us on a weeklong sold-out NDR in the US. In this note, we summarise the key points/concerns that were widely discussed, and responses from company representatives. In selected cases, we have also added in our comments.
• Overall, we retain our continued positive long-term view on the counter, with the group leveraging on its dominant market position in Thailand to expand regionally. The recent foray by Carabao Group into spirits has spurred numerous discussions.
• There were also much talk on Chang Beer's turnaround and market share update. ThaiBev management reps emphasised on the marketing team’s effort to differentiate the brand. On excise duties, we believe the impending hike could present the group with opportunities to capitalise on it and improve its margins.
• We summarise and highlight the key discussion/salient points and grouped it in the following sections, as follows: 

Updates on consumption, performance 

Key question: What is the impact on consumption arising from the mourning period, and does management expect recovery to trend going forward? 
Response: There has been some sequential recovery seen but it has been relatively mild, with the trend seen in white spirits.
This was possibly due to the home-based consumption pattern for white spirits. Recovery in brown spirits is not evident yet, though there could also be an element of high-base effect from 2016. Recall that there were some trade-loading in early 2016 on expectations of excise duty increase.
Going forward, expectations are for continued recovery in consumption though the pace is uncertain and if the lead-up to the royal cremation in October could again dampen consumer sentiment/consumption. There could be trade loading by sales agents in the lead-up to the excise duty increase that is expected in September 2017 (4Q17). The group will try to capitalise on this, but will also limit the total amount an agent could trade load (for example, up to 1.5x of its normal order).

Spirits 

Key question: How does management see the long-term growth profile for spirits, and the implications of competition, in particular reference to Tawandang distillery (linked to executives of Carabao)? 
Response: The spirits market is likely to see low single-digit growth over the long term. Management indicated that they are aware of the moves by competitors. ThaiBev believes a key success factor for its high market share lies in its 18 distilleries nationwide, distribution network, established brand name and its portfolio of brands.
The company noted that Thailand’s heavy restriction on advertising and promotion of alcohol products creates an entry barrier for new players. There have been previous instances of competitors entering this segment with limited success even though the new products were sold at much lower price points. In fact, certain competitors’ brands of spirits are currently retailed at lower prices but have not managed to gain share from ThaiBev. This is attributed to consumers’ faith and preference for established brands within the market.
While the company believes it is in a position of strength and is likely to be less impacted, it is not resting on its laurels and is monitoring the situation.

Beer 

Key question: How has market share been trending recently, and response by competition? 
Response: Beer market share remains at around 40%, since rising from about 30% prior to Chang Beer's relaunch in August 2015. Response from competition has picked up a year after its relaunch. Boon Rawd has updated its label for LEO Beer and also launched U Beer. The target market for U Beer are younger consumers such as university students, and hence it has been active on social media. The market share for U Beer is currently about 1%, which was largely taken from LEO Beer.
Under the group’s Vision 2020 plan, the target to be the No.1 beer brand in Thailand remains unchanged, which implies a market share of c.45%. It intends to continue focusing on targeted marketing (for example, Chang Music Connection, Chang Carnival, Chang Football Moment), continually refreshing and providing innovation on its packaging (updated can packaging, shrink wrap bottle, festive 1.5 litre Magnum bottle) and extending products under its portfolio (e.g. Chang mineral water).
Management reps highlighted that its marketing team is focused on “promoting a brand, not a beer”. It has also been careful with its social media engagement in Thailand in that it has not featured the beer itself and the “beer” word (given advertising restrictions), but rather the “Chang” brand and ancillary products (e.g. Chang mineral water). The company noted that the Chang brand has remained ahead in consumer brand health surveys which bodes well and provides optimism for its drive towards gaining market share.

Non-Alcoholic Beverages 

Key question: What are the plans for Non-Alcoholic Beverages and what are the issues facing the segment? 
Response: NAB is largely made up of three key segments within ThaiBev – green tea, water and carbonated soft drinks.
Green tea and water are profitable while carbonated soft drinks continue to incur losses. The target is to achieve EBIT breakeven by FY18 for the NAB segment.
The company is focusing on being more efficient in its distribution channel, focused marketing to recruit new consumers rather than trying to convert others. For instance, it has appointed the popular K-pop group, “Got7”, as brand ambassador for the est brand. In addition, the focus is also on upgrading the skills of its sales force to promote a portfolio of brands and use of IT (tablet) in order taking rather than using manual pen-and-paper.

Excise taxes 

Key question: What is the update on excise tax, the expected quantum and management’s response? 
Response: The authorities have indicated the changes in excise tax from one that is pegged to percentage of alcohol content (by volume) and wholesale price, to one based on retail price.
The quantum and rate of excise increase is currently unknown.
ThaiBev is monitoring the situation.
For Spirits excise duty increase, it will pass on excise increase fully (at the base case). For Beer, it is likely to check on competitor’s response, given its challenger status. ThaiBev, as a group, has a portfolio of brands and products and is likely to be less impacted vis-à-vis competitors who are focused on only a certain product group.
The Excise Department will be introducing excise tax on sugar.
As per the alcohol tax, the details are not known as yet. (DBS: According to media reports, there will be three categories on taxes levied on drinks with sugar content – 10%-14% sugar, 14%-18% sugar, and 18% or higher. The rates are not announced.) In terms of response, there are several alternatives for the company to adopt, such as changing formulation, increasing price and/or adjusting the packtype (volume). At this juncture, despite the development on the sugar excise tax, there are no changes in its target to achieve EBIT breakeven for the NAB segment by FY18.

Restructuring of stakes in FNN/ FCL 

Key question: What are the updates to restructuring and purported share swap of FNN and FCL? 
Response: Under its Vision 2020 plans, ThaiBev aspires to be the leading regional beverage player. The company has appointed an Independent Financial Advisor (IFA) to review its options but is unable to comment on the timeline. It was highlighted that should there be a share swap as per the consensus market expectations, this will be an interested party transaction (IPT) and the controlling shareholder will be unable to vote.
ThaiBev and its F&B associate company (Fraser and Neave Ltd [FNN]) have already been collaborating operationally.

DBS’s views: 

• Our long-standing view is that a share swap between ThaiBev and TCC Assets for FNN shares (with FCL shares) is an unlikely outcome given complexities of the IPT and potential earnings dilution for ThaiBev. We have detailed our views in our earlier reports (23 November 2016 - Identifying scenarios to unlock value).
• Instead, we see ThaiBev leveraging on FNN as the regional expansion vehicle and will only consolidate its holdings in the entity when the opportunity arises, such as during an equity fund raising (in event of an acquisition).
• For Frasers Centrepoint Limited (FCL), we believe ThaiBev will continue to treat it as an associate and look to partially monetise it when opportune. ThaiBev’s stake in FCL is currently worth about S$1.6bn (at share price of S$1.89) and provides a yield of about 4.5%. A partial divestment could provide a signal to the market and could also re-rate FCL shares, providing a boost to liquidity.

Regional plans 

Question: What are ThaiBev’s regional expansion plans and strategy? 
Response: The focus is on the ASEAN region within the beverage space. FNN will be the vehicle for expansion into Vietnam given that it has already own stakes in Vinamilk (18.74%) with an intention to increase this further. Under the Vision 2020 plan, the target is to have 50% revenue contribution outside of Thailand, and 50% revenue from non-alcoholic beverages.
Stripping out excise duties from revenue (in Spirits and Beer), the NAB segment and FNN currently contribute about 20% each to the group’s top line. To achieve 50% contribution, it will undertake organic and inorganic opportunities.
For instance, in Vietnam, it has obtained licence for the distribution of spirits and is also using a third-party distributor for its beer.

Balance sheet/ gearing 

Question: What is its dividend policy and maximum gearing? 
Response: Dividend policy is for payout ratio of not less than 50% of profits, though it had exceeded that in previous years. Management will continue to evaluate the need for funds and also in consideration of total shareholder return.
The limit for gearing is less than 2.5x net debt-to-EBITDA.
However, the group had exceeded that back in 2012 when it acquired a 28.5% stake in FNN. It has, however, managed to pare down its debt over the past couple of years and net debt-to-EBITDA currently stands at about 1.1x (annualised as of 31 March 2017)

Andy SIM CFA DBS Vickers | Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2017-07-25

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