Thai Beverage Public Company (THBEV SP) - DBS Research 2017-08-10: A Surprise Move On Fried Chicken

Thai Beverage Public Company (THBEV SP) - DBS Vickers 2017-08-10: A Surprise Move On Fried Chicken THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage Public Company (THBEV SP) - A Surprise Move On Fried Chicken

  • ThaiBev to acquire 240 KFC stores in Thailand for THB11.3bn.
  • Financials not shared, but operations understood to be profitable.
  • Funding via internal resources/ borrowings.
  • Moving to further diversify outside alcoholic beverages.

What’s New 

Fried chicken with beer? 

  • ThaiBev announced on 8 August that, through its subsidiary, The QSR of Asia Co., Ltd (QSA), it has entered into a sales and purchase agreement with Yum Restaurants International (Thailand) Co., Ltd (YRIT) for the acquisition of over 240 existing KFC stores and a number of developing ones in Thailand. 
  • The preliminary purchase consideration is about THB11.3bn (or about S$450m) including VAT. The acquisition is expected to be completed by Dec 2017.

Financial details are scarce. 

  • There were no financial details disclosed with respect to the proposed acquisition such as the profitability of the acquisition, but operations are understood to be profitable. 
  • With this proposed acquisition, ThaiBev will be a KFC franchisee in Thailand. 
  • Based on the acquisition price of THB11.3bn, this works out to about THB47m (or approx. S$1.9m) per restaurant/store. This includes properties and assets required and necessary for the operation of stores. 
  • Based on previous media reports, it is estimated that investment for each KFC restaurant branch is between THB15m to THB30m. While the amount paid by ThaiBev is higher, this is likely to account for operating and profitable branches, in our opinion.

Funded via internal resources/ bank borrowings. 

  • The acquisition will be funded by internal resources and bank borrowings. 
  • ThaiBev’s estimated net gearing is c.0.2x with an internal free cash flow of over THB23bn (FY17F).

ThaiBev will be largest of 3 KFC franchisee in Thailand. 

  • With this acquisition, ThaiBev will be one of three franchisee of KFC restaurants in Thailand. The other two franchisees are Central Restaurant Group and Restaurant Development Company Limited, operating about 217 and 130 restaurants, respectively, based on media reports back in August 2016. 

Rationale – to expand further into food business. 

  • According to ThaiBev’s announcement, the rationale is to further expand into the food business, complementing its current portfolio of Oishi restaurants and other eateries. 
  • We believe this also serves to move closer to its Vision 2020 plan to have 50% revenue contribution outside of alcoholic beverages. 

Our views: 

Surprised by acquisition of KFC. 

  • At this stage, notwithstanding the scarcity of financial details and profit contribution, we are surprised by this move. 
  • While the group does have restaurant operations in Thailand (largely Japanese theme/ cuisine), our understanding for ThaiBev’s initiative into Food business is that it serves as a “touch point”, an additional distribution and marketing channel for its non-alcoholic beverages (and alcoholic beverages on a selective basis). 

Maybe Oishi, but unlikely est cola, will go with fried chicken. 

  • Besides non-carbonated soft drinks such as Oishi, we believe there could be limited opportunities for ThaiBev to introduce other drinks, particularly est cola, given Pepsi will be the only cola of choice being served, and is highly unlikely to change, in our view. 
  • According to data from Euromonitor, KFC Thailand’s total food service value was THB16.1bn in 2016, with a market share of c.14%, in second place for fast food in Thailand, after 7-Eleven. Assuming a proportionate split among the outlets, we estimate this should work out to a revenue of THB6.6bn and net profit of between THB330m to THB660m (assume 5% to 10% net margin). This would imply a PE multiple of 17-34x. 
  • We highlight that these are only estimates, at best. 

Move may attract uncertainties and raise questions on the fit to overall existing business. 

  • We do not expect any significant changes to our forecasts at this juncture. That said, the market may react with some uncertainty on ThaiBev’s latest move. At this stage, our investment thesis remains intact on our view that the impact of mourning period is temporary and will pass. 
  • In addition, the expectations of an increase in excise duties should aid 4Q17 sales as agents and distributors stock up inventories. 
  • Lastly, we see ThaiBev morphing into a regional F&B player with regional expansion plans undertaken via FNN.

Andy SIM CFA DBS Vickers | Alfie YEO DBS Vickers | 2017-08-10
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