Thai Beverage - CIMB Research 2018-02-15: Still Gestating SABECO Purchase; 1Q18 Remains Soft

Thai Beverage - CIMB Research 2018-02-15: Still Gestating SABECO Purchase; 1Q18 Remains Soft THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage - Still Gestating SABECO Purchase; 1Q18 Remains Soft

  • Thai Beverage's 1QFY9/18 core net profit of THB5.3bn was below expectations at 18.8%/18.3% of our/consensus FY18F estimates due to higher-than-expected selling expenses.
  • Spirit and beer volumes were still soft as the Thai economy had not really shaken off the effects of the mourning period.
  • Management guided that it would incorporate SABECO's financials from 2QFY9/18 onwards; but the effective economic stake is still undergoing auditor evaluations.
  • We were surprised that the loan repayment from Vietnam Beverage for the SABECO acquisition may spill beyond the guided 12-month repayment period.
  • Maintain HOLD with a lower target price. The company will hold its Annual Information Meeting for Shareholders (AIM) on 21 Feb 2018.

Thb Higher-than-expected selling expenses in 1QFY18 

  • While we had expected a softer 1QFY9/18 on the back of de-stocking exercises by sales agents (4QFY9/17 volumes and revenues were higher due to sales agents stocking ahead of the excise tax implementation in Sep CY17); core net profit of THB5.3bn was slightly below expectations due to higher-than-expected selling expenses of THB4.9bn (vs. our forecast of THB4.6bn/quarter). 
  • Core net profit excludes one-off SABECO costs amounting to THB2.4bn.

Alcohol volumes could remain slow in 2QFY9/18 

  • 1QFY9/18 spirit and beer volumes of 352m litres were down 8% q-o-q from 383m litres in 4QFY9/17 due to the above-mentioned de-stocking exercises; but were also 3.6% lower y-o-y (1QFY9/17: 365m litres), largely due to beer volumes falling 5.9% due to sluggish demand post the mourning period. 
  • Management guides that demand for spirits and beer is still soft, which suggests that volume growth could be flat in 2QFY9/18.

Still gestating SABECO purchase; impact fully seen from 2QFY9/18 

  • ThaiBev guided that SABECO’s profitability and cashflow will only be incorporated from 2QFY9/18 onwards as the deal was completed close to the end of Dec 17. This is despite assets and liabilities already being included in its balance sheet. 
  • We understand that SABECO’s earnings are likely to be consolidated; however the effective economic stake is still being evaluated by its auditors. We previously assumed that ThaiBev has an effective 26.3% stake in SABECO.

Repayment of Vietnam Beverage’s loans could spill beyond CY18 

  • ThaiBev guided that the repayment of loans extended to Vietnam Beverage could match the two-year bridging loan it had obtained to fund the SABECO deal. This is a surprise to us given that it previously guided that such loans would be repayable within 12 months.
  • To recap, ThaiBev is bearing 100% of the deal’s acquisition costs of THB156bn; despite having an estimated 26.3%-stake in SABECO. This elevates ThaiBev’s balance sheet risk, keeping net gearing levels above 1x in FY18-20F (vs. 0.2-0.3x historically).

Maintain HOLD with a lower Target Price of S$0.98 

  • We cut FY18-20F EPS by 0.6-1.7% as we factor in higher selling expenses. Uncertainties relating to the SABECO acquisition and elevated balance sheet risks could continue to cap investor sentiment on the stock. 
  • We maintain our HOLD call, with a lower SOP-based Target Price of S$0.98 (from S$1.00) as we revalue ThaiBev’s stake in SABECO post the latter’s share price decline of c.37% to VND234k/share currently (vs. ThaiBev’s acquisition price of VND320k/share). 
  • Upside risks are higher profits and lower net gearing. 
  • Downside risks are deterioration in earnings.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2018-02-15
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.98 Down 1.000