Thai Beverage (THBEV SP) - UOB Kay Hian 2017-08-14: Temporary Drag From Mourning Period, Expect Earnings Recovery From FY18

Thai Beverage (THBEV SP) - UOB Kay Hian 2017-08-14: Temporary Drag From Mourning Period, Expect Earnings Recovery From FY18 THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage (THBEV SP) - Temporary Drag From Mourning Period, Expect Earnings Recovery From FY18

  • THBEV’s 9MFY17 adjusted net profit (+3.1%) is in-line (74% of our FY17F estimates).
  • Earnings were dragged by a revenue decline due to the continued impact of the mourning period. However, we reckon the impact from the mourning period is temporary and expect alcohol consumption to normalise in FY18. 
  • Separately, the upcoming excise tax in September could lift alcohol sales volumes in 4Q with sales agents stocking up before the tax hike. 
  • MAINTAIN BUY, with an unchanged SOTP target price of S$1.09.



RESULTS


9MFY17 adjusted core earnings in line with expectations. 

  • Thai Beverage’s (THBEV) 9MFY17 headline net profit increased 45% yoy on the back of recognition of F&N’s fair value gains on financial assets (Bt 8,498m). 
  • Adjusted 9MFY17 core earnings of Bt 21,117m (+3.1% yoy) was in line and represented 74% of our FY17 forecast. 
  • Earnings growth was mainly driven by higher contributions from its associates F&N and FCL (+62% yoy), but offset by a decline in revenue (-6% yoy) due to the continued mourning period effect.

Revenue dragged by continued mourning period effect. 

  • 9MFY17 revenue declined 6% yoy due to a decrease in sales revenue across spirits (-5.3% yoy), beer (-8.8% yoy) and non-alcoholic beverages (-2.9%). This was offset by a slight increase in food (+1.1%) segment revenue. 
  • The declines were a result of the continued effect of the mourning period, where on-trade consumption had not yet fully recovered.

Expect softer mourning period impact for 2H17, with a recovery in FY18. 

  • On a more positive note, we are seeing a less steep revenue decline for 3Q17 (-0.4% yoy) compared to 2Q17 (-9% yoy) and 1Q17 (-8% yoy), which supports our view that 1H17 may have seen a larger impact from the mourning period vs 2H17. 
  • Meanwhile, we expect stronger alcohol consumption recovery from FY18 onwards, after the mourning period ends in Oct 17.


STOCK IMPACT


Beer: Operationally strong with market share largely unchanged. 

  • For 3QFY17, the beer segment’s gross margin saw a 1.7ppt improvement to 23.7% (3QFY16: 22%) due to lower bottle and raw material costs. While beer sales volume in 3QFY17 declined 8.7% yoy, this was in tandem with the entire industry’s decline. Market share remained at around 40%. 
  • In terms of competition, management shared that since the launch of U Beer by Boon Rawd, there has not been any material response from competitors. We also understand that U Beer has not gained much traction since its launch in February.
  • Separately, we note that while the Bank of Thailand statistics showed an increase in beer statistics, those were production numbers instead of consumption figures.

Spirits: Dominant market share, saw sales volume improvement from a low base.

  • Spirits market share remained dominant at 90%. 3QFY17 sales volume saw a 4.3% yoy increase, which we understand was due to the low base of spirits sales in 3QFY16 as agents delayed stockpiling after THBEV increased spirit prices after the Songkran Holiday last year.

Excise tax: Minimal impact on spirits but that on beer is dependent on competitive landscape. 

  • Overall, we foresee a minimal impact of the excise tax on spirits, given that THBEV is usually able to pass through 100% or more of the costs to customers through higher ASPs. We even see an opportunity for margins to improve, as THBEV is a market leader with a 90% market share in spirits. 
  • With regard to beer, we understand that THBEV needs to track competitors’ reactions as it is a challenger instead of a market leader. 
  • Separately, we believe sales volume could increase in 4Q17 before the actual tax hike due to stocking up by agencies.

KFC acquisition: A small piece in Vision 2020. 

  • THBEV entered into agreement to acquire more than 240 KFC stores as well as some developing stores in Thailand.
  • THBEV did not give further financial details during the call as the deal will only be completed in December this year. However, referencing CENTEL’s operational statistics, with an assumption of average revenue per store of Bt26m and a net margin of 5%, earnings accretion to THBEV will likely be in the low- single-digit range of 1-2%. 
  • While we understand that acquisition is in line with THBEV’s Vision 2020 to diversify non-alcohol revenue contribution to 50%, we reckon it may be a small accretion in its grander target.


EARNINGS REVISION/RISK

  • No change to earnings forecasts. Maintain three-year FY17-19F net profit CAGR projection of 9%.


VALUATION/RECOMMENDATION

  • Maintain BUY with unchanged SOTP target price of S$1.09. 
  • We roll forward our valuation from FY17 to FY18, where we value:
    1. the spirits business at 16x EV/EBITDA, in line with global peers’;
    2. the beer business at 13x EV/EBITDA, a premium to the global peers’ average of 11.9.x as we see THBEV’s beer business is currently on a strong uptrend;
    3. the NAB business at 2x EV/sales, a discount to peers 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 a 28% stake each, are valued based on their latest market value. 
  • THBEV’s current FY18F PE at 19.3x is still lower than that of global spirits peers’ average of 26.8x 2018F PE, 21.7x of beer companies and 24.1x of NAB companies.


SHARE PRICE CATALYST

  • Completion of corporate restructuring.
  • Market share gains in beer segment.
  • M&As.
  • Faster-than-expected turnaround of NAB business.




Thai Wei Ying UOB Kay Hian | Kingpai Koosakulnirund CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-08-14
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.090 Same 1.090



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