THAI BEVERAGE PUBLIC CO LTD
Y92.SI
Thai Beverage Public Company - Toast To A Better Year Ahead
- Sequential growth projected, moving on to a better year post mourning period.
- 4Q17 results in line, showed y-o-y improvement.
- Growth to normalise back to 10%.
- Reiterate BUY, TP: S$1.07; our top large cap consumer stock.
Maintain BUY, TP: S$ 1.07.
- We reiterate our BUY recommendation on ThaiBev and it remains as one of our large cap top picks in the consumer sector.
- We expect performance to improve in FY18 on the back of recovery in consumption, post a year-long mourning period. We have been advocating to accumulate ThaiBev upon share price pullbacks; and, continue to maintain this stance. On a longer-term horizon, we believe its ongoing transformation into a regional beverage player will help to further re-rate the counter.
- Recently, the group has embarked on acquisitions, which will supplement growth and enable it to diversify outside of Thailand and/or alcoholic beverages.
Where we differ? Regional expansion.
- Since last year, we highlighted our thoughts that its associate company is likely to be the regional expansion vehicle for ThaiBev (ex-Spirits), and an outright swap with TCC Assets for a higher stake in that associate using Frasers Centrepoint Ltd (FCL) shares is unlikely.
- Instead, we believe ThaiBev will increase its stake only when it is opportune, but could look to partially divest/monetise its stake in FCL. We are still sticking to this view.
Potential catalyst.
- Margin expansion from excise tax increase, market share gains in beer and non-alcoholic beverages, faster turnaround in non-alcoholic beverages, corporate restructuring – monetisation/partial divestment of FCL’s stake.
Valuation
- Our TP is maintained at S$1.07, based on sum-of-parts valuation, derived via discounted cashflows of its core operations, and imputing higher fair values for its stakes in listed associates.
Key Risks to Our View
- Large quantum in excise tax hikes. Increase in excise duties without a commensurate increase in ASP and/or large quantum increase, may crimp consumption drastically
WHAT’S NEW
Toast to a better year ahead - Maintain BUY, TP: S$ 1.07.
- We reiterate our BUY recommendation on ThaiBev and it remains as one of our large cap top picks in the consumer sector.
- Moving into FY18F, we expect performance to improve on the back of recovery in consumption, post a year-long mourning period. We have been advocating to accumulate ThaiBev on share price pullbacks; and, continue to maintain this stance. On a longer-term horizon, we believe its ongoing transformation into a regional beverage player will help to further re-rate the counter.
- Recently, group has embarked on acquisitions, which will supplement growth and enable it to diversify outside of Thailand and alcoholic beverages.
FY17/ 4Q17 results within expectations.
- ThaiBev’s FY17 headline net profit surged by 82% y-o-y to THB34.5bn, partly due to one-off fair value gains (THB8.5bn) recognized by its associate FNN for its investment in Vinamilk. Excluding this and comparing on a similar 12-months period for FY16, core net profit was up by 4.6% y-o-y to THB26bn, which is within our expectations. This was despite a relatively slow first 9M17 due to the mourning period in Thailand.
- 4Q17 operating profit surged by 73.5% y-o-y to THB6.4bn on the back of 23.4% increase in revenue to THB47.5bn. The strong surge in operating profit is as per our earlier expectations, given the anticipated trade loading prior to excise duty increases in September. 4Q17 net profit at THB5bn registered a smaller growth vis-à-vis operating profit due to losses registered by its associates in the quarter.
Final DPS of THB0.47 proposed.
- A final dividend per share (DPS) of THB0.47 was proposed. Including the interim DPS of THB0.20 paid, FY17 total DPS amounted to THB0.67 (vs FY16: THB0.60), implying a payout ratio of 65% on core profits (excluding fair value gains).
Group revenue played catch up in 4Q17 registering 23% growth.
- Revenue in 4Q17 registered a strong growth of 23.4% y-o-y and 5% q-o-q to THB47.5bn, mainly driven by all business segments, despite being a seasonally weaker quarter. This, in our view, is largely due to trading loading by distributors in anticipation of excise increases, and in part on expectations of recovery in consumer sentiment.
- Our reading of the various business segments and salient points from the post-results conference call is as follows:
1) Spirits
- Spirits posted strong 38% net profit growth in 4Q17, with segment net profit at THB5bn. Revenue was up by 35% y-o-y to THB28.6bn, on the back of 28.7% y-o-y increase in volume to 154m litres, along with an estimated 4.8% implied ASP increase. For FY17 (and comparing to similar 12-month period a year back), revenue for Spirits increased by 2.6% to THB106.5bn, while net profit grew by 2.1% to THB20.4bn.
- Operating profit margins slipped marginally by 30 bps to 23.3% in FY17 due partly to higher advertising and promotional expenses.
- Excess inventory at trade should be absorbed in quarter ending Dec. With the excise increase in Sep, distributors had stocked up inventory about 4 weeks prior to the increase. Management estimated that distributors are carrying an additional two weeks of inventory; and, assuming no change in consumer sentiment, it is estimated that the excess inventory should be absorbed within 1QFY18 (or last calendar quarter of 2017).
- Not much impact from new competition. Management updated that the entry of Tawandang 1999 into the white spirits market has had very limited impact. Distribution is still limited. Nonetheless, ThaiBev is monitoring the situation closely.
2) Beer
- Beer posted a dip in profits but maintains share. The beer segment experienced a dip in revenue of 4.7% to THB57.3bn in FY17 led by a 6.8% drop in sales volume to 8.45m hectolitres, mitigated partially by higher ASP. Notwithstanding lower volume, gross profit increased by 6.4% for the year to THB13bn, due to lower packaging and raw material costs. Net profit for the segment, however, dipped by 4% to THb3.13bn due to higher advertising and promotion expenses.
- Market share maintained at c.40%. Management updated that market share remained at c.40% in the quarter with minor variations of +/- 1% within the months. ThaiBev has increased its selling prices by 3.5% to 3.7%, passing on the increase in excise taxes. It noted the competition has increased promotional activities. Management indicated that it would be looking to maintain its A&P spend as per previous years.
- High stock levels of competitor beers. In clarifying the phenomenon seen in the past quarter – beer production volumes based on Bank of Thailand statistics, management indicated that stock levels for competitor beers were high. This confirms our earlier deduction as indicated in our 3Q17 post-results note on 14 Aug (Thai Beverage Public Company: On track for stronger y-o-y growth).
- While there could be concerns of pricing pressure to clear stocks, we continue to opine that ThaiBev could then utilise this opportunity to hold its fort to maintain its price and brand image. This should help widen the brand’s perception against competition as older beer will not taste fresh, compared to freshly brewed ones. Although a price competition could undermine market share for Chang in the immediate term, we view it as positive for the overall brand and profitability in the medium and longer term.
3) Non-Alcoholic Beverages (NAB)
- NAB posted smaller losses. Tracking within our expectations, the group’s NAB segment continued to post lower losses, amounting to THB855m in FY17, which was an improvement from a loss of THB1,570m over the period a year ago. The improvement was helped by a better gross profit due to lower packaging costs, coupled with lower A&P expenses. As such, this segment turned EBITDA positive for the year; and, we continue to maintain our view that losses should narrow and achieve a net profit by FY19F.
- In the post-results conference call, management shared that it’s A&P as a percentage of sales for NAB should trend lower on expectations of higher sales volume. Market share for its products remain healthy. In terms of breakeven, management shared that it should reach it within the Year 2020 timeframe, but was unable to commit on a firm timeline.
4) Food
- KFC franchise acquisition to be completed expected in Dec as per prior guidance. There were no further details shared on the KFC, except that completion is still expected in Dec as per prior indication. With respect to strategy for food, ThaiBev management maintained its rhetoric that it will continue to be on the lookout for strategic acquisitions.
- Our views Gearing remains healthy, even with recently announced proposed acquisitions. The group’s gearing continues to improve with net debt to equity ratio at 0.23x as of 30 Sep 2017, an improvement from 0.33x a year ago.
- We estimate that even with the recently announced proposed acquisition of the KFC franchise in Thailand (c.THB11bn) and 75% stake in Grand Royal whisky in Myanmar (c. US$742m), the group’s gearing would only increase to ~0.4x as of end FY18F.
Maintain BUY, TP: S$ 1.07.
- We reiterate our BUY recommendation on ThaiBev and it remains as one of our large cap top picks in the consumer sector. We expect performance to improve on the back of recovery in consumption, post a yearlong mourning period.
- We have been advocating accumulation upon share price pullbacks; and, continue to maintain this stance. On a longer-term horizon, we believe its ongoing transformation into a regional beverage player will help to further re-rate the counter.
Projecting EPS growth of 10% for FY18F/19F; upside potential from acquisitions.
- We retain our projections for FY18F/19F at the current moment but have yet to factor in the recent announced acquisitions, pending further details.
- Potential upside potential could arise from better than expected contribution or new acquisitions.
Andy SIM CFA
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Alfie YEO
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2017-11-27
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