Thai Beverage (THBEV SP) - UOB Kay Hian 2017-10-17: Positioning For Vision 2020 With Grand Royal Acquisition

THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage (THBEV SP) - Positioning For Vision 2020 With Grand Royal Acquisition

Thai Beverage (THBEV) made a US$741.6m acquisition of Myanmar distilleries last week. We view the acquisition positively as it gives THBEV access to a huge population in Myanmar, signalling its commitment to Vision 2020 of diversifying revenue contribution out of Thailand.
Furthermore, with the one-year mourning period ending in October, we expect to see a strong uptick in alcohol consumption, where THBEV has already lined up several marketing campaigns to be launched in November.

THBEV recently completed the acquisition of 75% interest in MSC and MDC for US$741.6m. MSC and MDC operate two production facilities which include distillery, blending and bottling plants in Yangon and Mandalay, under the spirits brand Grand Royal which is the largest whisky player in Myanmar.
The acquisition was funded with a combination of internal cash flow and external bank borrowings. We estimate acquisition PE of around 25x, which is fair compared with peers.
THBEV has indicated transaction would be accretive on a pro-forma basis, where 9M17 EPS would increase from Bt1.18 to Bt1.20 after the transaction.
As the group did not disclose a breakdown of funding for the acquisition, we have assumed an 80% debt funded acquisition on 3% cost of financing. Based on the assumption, we estimate THBEV to have paid an acquisition PE of around 25x, which we deem as fair, given global spirit players are currently trading at FY18F PE of 29x.

We note that Grand Royal is currently the largest whisky player in Myanmar, with a market share of approximately 70%.
This acquisition is in line with THBEV’s Vision 2020 goal of diversifying revenue contribution out of Thailand. Following the transaction, THBEV would have access to not only the spirits market in Myanmar, but also a sizeable population of 53m people in a fast growing economy.
According to the Asian Development Bank, Myanmar’s GDP is projected to grow 8% in 2018, higher than the average of 5.1% projected for its Southeast Asian peers.

THBEV’s strategy for the more mature spirit segment is through brand premiumisation. For instance, in November, the group will introduce a new spirits product, Ruang Khao Silver under its bestselling flagship brand Ruang Khao. Ruang Khao Silver (priced at Bt168) is the bridge between the cheaper white spirits (Bt103-113) as well as the higher priced brown spirits (Bt189- 460). The product aims to target not just the premium segment of the market but also existing white spirit drinkers, who will likely consume the product on-trade.
Furthermore, the group is refreshing the look of flagship brands through repackaging of products and introduction of gift box.

We understand that the impact from beer competition has not been material, where U Beer by Boon Rawd has yet to gain much traction since its launch in February. THBEV’s market share for beer is still maintained at around 40%.
Meanwhile, we expect a step-up in marketing efforts post mourning period. For instance, the group is planning to promote a “special edition” beer packed in champagne bottle and festive packaging.

We expect 4Q17 to benefit from higher alcohol sales volume due to stocking up by agencies before the excise tax increase.
Meanwhile, with the mourning period ending in October, sales volume is poised for a strong yoy recovery from 1Q18 onwards. 1Q18 is a high season period, coinciding with festivals such as Christmas and New Year Expect more M&As with Vision 2020 approaching.
Under Vision 2020, THBEV targets to achieve more than 50% of its revenue from outside Thailand and from non-alcoholic products. However, as of 9M17, alcoholic products and revenue from Thailand still represent around 88% and 97% of group’s revenue respectively. We note that THBEV has been on an acquisition spree recently, such as the proposed KFC acquisition which is expected to close by end of this year.
With just two years left to Vision 2020, we believe more M&As may be in the pipeline, where the long awaited restructuring of FNN stakes would likely be the mainstay.

Maintain BUY and SOTP target price of S$1.09. 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 12.1.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 15x EV/EBITDA, in line with local peers’.
Frasers Centrepoint Limited (FCL) and Fraser & Neave (FNN), in which THBEV owns a 28% stake each, are valued based on their market value.
THBEV’s current 2018F PE at 20.0x is still lower than that of global spirits peers’ average of 28.6x 2018F PE, 22.3x of beer companies and 25.7x of NAB companies.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-17

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.090 Same 1.090