Thai Beverage (THBEV SP) - UOB Kay Hian 2017-07-11: Alcohol Consumption Recovering, Excise Tax Not A Big Concern

THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage (THBEV SP) - Alcohol Consumption Recovering, Excise Tax Not A Big Concern

The latest data from Bank of Thailand shows a pick-up in beer sales volume, with a 10% yoy rise in May 17 vs the steep 17% yoy decline in Oct 16 when the mourning period commenced. We deem this as a positive sign that alcohol consumption may be gradually recovering.
Meanwhile, we see minimal impact from the upcoming excise tax hike in September as THBEV is usually able to pass through 100% or more of its cost.

While Thai Beverage’s (THBEV) share price has since recovered from its weak 1H17 results, we note that THBEV (FY17F PE of 19.9x) is still trading at a 24% discount to global alcohol peers (FY17F PE 26.3x) and 31% discount to Asia alcohol peers (FY17F PE 28.9x). This is despite THBEV’s solid fundamentals, where its FY17F ROE of 22.6% is tracking in line with peers’ average of 21%.
Moreover, THBEV’s dividend yield of 3.8% exceeds peers’ 1.9%.
We reckon the impact from mourning period is only temporary, and with consumption set to see gradual recovery in 2H17, we believe valuation still looks compelling at current levels.

We view the decline in alcohol consumption in 1H17 to be temporary, as signs of recovery have begun to emerge.
Tracking the latest industry data released by Bank of Thailand, we note that beer sales volume has rebounded with a healthy yoy growth of 5% and 10% as of April and May respectively. Compared with the six months following the Oct 16 mourning period (Oct 16-March 17) where monthly volumes recorded yoy decline ranging 2-17%, we believe this may be a positive sign that impact from the mourning period is gradually tapering off and alcohol consumption is picking up.

The above data also lends credence to our view of an even 2017 earnings split between 1H and 2H. While 1H is seasonally stronger, the impact of the mourning period is also likely to be larger.
Our earnings forecast remained unchanged, with 2017-19F CAGR of 9%.

The upcoming excise tax hike is expected to come into effect by 16 September. Over the past 10 years, excise tax hikes have been implemented four times in Aug 07, May 09, Aug 12 and Sep 13.

Tracking the volume and EBITDA trend of spirits over the past 10 years, we note that while volumes tend to see short-term fluctuations upon introduction of excise tax hike, EBITDA has consistently been on an upward trend.
THBEV is usually able to pass through cost to customers through increased ASPs, which has historically been of a higher magnitude than the increase in tax. As such, we take the view that margins should be maintained or even improved.
Besides, we may also see increased in sales volume in 4Q17, as sales agent typically build up inventory ahead of the excise tax hike in September.

We value:
1. the spirits business at 17x EV/EBITDA, in line with global peers,
2. the beer business at 15x EV/EBITDA, a premium to the global peer average of 13x as we see THBEV’s beer business is currently on a strong uptrend,
3. the NAB business at 3x EV/sales, a discount to peers’ 3.5x as THBEV’s NAB business is still loss-making and a recovery would take time, and
4. the food business at 13x EV/EBITDA, in line with local peers’.
FCL and FNN, in which THBEV owns 28% respectively, are valued based on their latest market values.
THBEV’s current PE at 19.9x is still lower than that of global spirits peers’ average of 31.2x 2017F PE, 23.0x for beer companies and 27.4x for NAB companies.

Thai Wei Ying UOB Kay Hian | Kingpai Koosakulnirund CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-11

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