Thai Beverage - CIMB Research 2017-08-14: 3QFY17 Consumption Soft But Better; Overall Lifted By Associates

Thai Beverage - CIMB Research 2017-08-14: 3QFY17 Consumption Soft But Better; Overall Lifted By Associates THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - 3QFY17 Consumption Soft But Better; Overall Lifted By Associates

  • Thai Beverage's 3Q17 headline profit was lifted by valuation gains. Nevertheless, core net profit (+16% yoy) was within expectations. 3Q/9M formed 26%/80% of our FY17F.
  • Consumption has not yet fully recovered and A&P was still high but strong associates contribution more than mitigated this and lifted group net profit.
  • Maintain Add. Our SOP-based target price is intact at S$1.07.

Results were within expectations

  • Group revenue growth was flat (-0.4% yoy) on still-weak consumer sentiment and lingering effects of the mourning period. Although not yet showing growth, this is much better than the 8-9% topline declines in the previous two quarters. 
  • By segment, spirits sales even grew 4.9% yoy while all other segments were still down. We remain confident that consumption will eventually recover.
  • While revenue growth was flat, that for operating profit was a tad softer (-1.8% yoy). This was mostly due to still-high A&P expenses, driven by beer (relaunch of Federbrau). 
  • Nonetheless, a stronger-than-expected showing from associates (FNN/FCL) covered the gaps. 3Q group core net profit was therefore up 16% yoy, forming 26% of our FY17F. 9M formed 80% of our FY17F.

Spirits resumed growth, partly helped by previous year’s low base

  • A big positive in this set of results was the growth in spirits sales by 4.9% yoy on the back of higher volumes (+3.7% yoy). The negative was that A&P remained high, somewhat against our initial expectations of a cutback given the weak consumption climate. 
  • Nonetheless, spirits’ EBIT growth was a positive 2.4% yoy.

Beer still dragged down by higher A&P; market share fairly stable

  • Beer volumes were still weak (-8.4% yoy) and sales fell 7.1% yoy, mostly due to the effects of the mourning period. The positive was that gross margins continued to improve (3Q17: 23.7%, 3Q16: 22.0%), consistent with the group’s guidance earlier in the year on lower bottling and raw material costs.
  • However, A&P remained elevated and EBIT margins fell to 4.9% in 3Q17 (3Q16: 6.8%). Management attributed this to the relaunch of Federbrau and Chang to a smaller extent.
  • On market share, Chang was still fairly stable but dipped slightly (c.1% pt), now just below 40%. The slight market share lost was to U-beer (0.3% pt) and Singha (0.6% pt).

Little shared on recent KFC deal

  • Management provided few insights into the KFC deal as the transaction has not yet been completed. Key takeaways included:
    1. operations were profitable, and
    2. the deal would be EPS accretive even if fully debt funded. 
  • As mentioned in our earlier note, we view the deal as a small positive given its EPS accretion but project little operational synergy with its existing spirits and beer segments.

Maintain Add; corporate action likely a bigger near-term driver

  • Our SOP-based target price is unchanged at S$1.07. The longer-term thesis is still for Thaibev to evolve into a regional beverage player. 
  • While management refused to comment on the FNN/FCL restructuring efforts, we do expect this to be a positive share price catalyst. 
  • Other catalysts include M&A into Vietnam. 
  • Key downside risks include weaker-than-expected consumption.

Jonathan SEOW CIMB Research | 2017-08-14
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.070 Same 1.070