Thai Beverage Public Company - DBS Research 2018-02-15: Temporary Post-excise Blues

Thai Beverage Public Company - DBS Vickers 2018-02-15: Temporary Post-excise Blues THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage Public Company - Temporary Post-excise Blues

  • Thai Beverage's 1Q18 results hit by confluence of temporary factors.
  • Expect situation to improve further into FY18F.
  • Catalysts could come from clarity of plans, synergies for recent acquisitions.
  • Maintain BUY, Target Price: S$1.02.



Maintain positive view despite weak 1Q18; share price may be hit, but likely temporary. 

  • While Thai Beverage's share price may be affected in the near term on the underwhelming 1Q18 results, we continue to hold a positive view on the counter over the medium and longer term. 
  • We believe the weak 1Q18 results are temporary, and a function of “post-excise blues” coupled with a confluence of factors, such as one-off acquisition transaction costs (THB2.35bn) and weaker associates contribution. 
  • Moving further into FY18F, we expect this should blow over. Further catalysts could come from details of deleveraging, potential synergies, and tangible results from its recent acquisitions.


Where we differ? 

  • Corporate restructuring via asset swap unlikely. Since late 2016, we have been highlighting our thoughts that an asset swap with TCC Assets for a higher stake in that F&N using Frasers Property Ltd (FPL) shares is unlikely.
  • Instead, we believe ThaiBev will increase its stake only at an opportune time, but could look to partially divest/monetise its stake in FPL. We are still sticking to this view, especially in light of its current gearing.


Potential catalysts. 

  • Clarity on plans and benefits from the acquisition of Saigon Beer Alcohol Beverage Joint Stock Company (Sabeco), margin expansion from an excise-tax increase, market-share gains in beer and non-alcoholic beverages, a faster turnaround in non-alcoholic beverages, and monetisation/ partial divestment of FPL’s stake.


Valuation

  • Our Target Price is trimmed to S$1.02, based on sum-of-parts valuation, derived via discounted cashflows of its core operations, and 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. 
  • Hikes in interest rates.



WHAT’S NEW -  Temporary post-excise blues; 1Q18 results underwhelming 


Maintain BUY, Target Price revised to S$1.02; share price may be hit by weak 1Q18 headline, but likely temporary. 

  • While share price may be affected in the near term on the underwhelming performance of its 1Q18 results, we continue to hold a positive view on the counter over the medium and longer term. We believe the weak 1Q18 results are temporary, and a function of “post-excise blues” coupled with a confluence of factors, such as one-off acquisition transaction costs and weaker associates contribution. Looking ahead into 2Q18, we expect this should blow over. Further catalyst could come from details of deleveraging, potential synergies and tangible results from its recent acquisitions.

1Q18 results underwhelming, impacted by one-off costs, destocking, and higher A&P expenses. 

  • Headline net profit for 1Q18 was underwhelming, with net profit declining 62% yo-y to THB2.9bn, due mainly to a one-off THB2.35bn acquisitions-related transaction costs. Excluding that, we estimate net profit would have posted a drop of c.30% y-o-y to THB5.3bn. 
  • Besides the one-off costs, the drop in profit can be further attributed to: 
    1. Destocking of stocks, arising from a strong 4Q17 in the lead-up to the excise-duties increase in Sep’17, leading to lower sales and revenue (-2.6% y-o-y or THB1.2bn to THB45.6bn); 
    2. Higher advertising and promotional expenses for 1Q18, post-mourning period and thus stepping up promotional activities. Selling and administrative expenses increased 23% (THB0.9bn) and 20% (THB0.6bn), respectively, to THB4.9bn and THB3.4bn. In part, the surge in expenses seems large due to a low base effect in 1Q17, with a crimp-down on activities as the mourning period commences around Oct’16; 
    3. Lower associates and JV contribution, declining 54% (or THB0.99bn). This came about from lower Frasers Property Limited’s performance, partly due to the recognition of profits in property.
  • Overall, we expect its performance to improve going further into FY18, and the seemingly weak 1Q18 should be temporary, in our view.


1) Spirits 


Spirits posted a 23% decline in net profits. 

  • The Spirits segment registered a volume growth of 0.6% to 144.7m litres, but revenue declined 5.8% y-o-y to THB24.8bn in 1Q18. The Spirits segment also consolidated Grand Royal whisky in Myanmar. Excluding Grand Royal’s revenue contribution, we estimate that Spirits revenue declined c.12% y-o-y. This was due to agents’ destocking coming from a high inventory level post-the excise duty increase in Sep. 
  • Coupled with higher SG&A expenses accounting for 13.3% of sales, up from 8.8% last year, net profit declined 21% to THB4.03bn.

Grand Royal contributed THB1.8bn in sales. 

  • Based on financial disclosure, Grand Royal contribution since the completion of acquisition from 12 Oct to 31 Dec 2017, revenue contribution was THB1.8bn, with a net profit of THB455m.

Consumption slower than anticipated from mourning period.

  • Management indicated that while the quarter has been impacted by agent’s destocking, the inventory level is much lower. The recovery from the mourning period has been slower than anticipated; it remains hopeful that the situation will turn better.


2) Beer 


Soft quarter for Beer profits as well, though market share remains steady. 

  • The Beer segment saw a 4% drop in revenue to THB14.4bn in 1Q18 due to a 6.2% drop in volume to 2.07m hectoliters. It was highlighted by management that the beer industry volume remains soft, with overall volumes declining 9% in the quarter ending Dec’17. Despite that, ThaiBev managed to maintain its share at c.40%, with month-on-month variances of about 1% or so, based on industry studies.
  • Profitability was impacted by higher cost of goods (77.7% of revenue, due to higher packaging costs and lower volumes), coupled with higher SG&A expenses (16.5% of revenue, up from 13.4%). As such, Beer EBITDA and net profit fell 26% and 30% to THB1.26bn and THB0.89bn, respectively.


3) Non-Alcoholic Beverage (NAB) 


Non-Alcoholic Beverage continues to post smaller losses. 

  • In line with our earlier expectations, the NAB segment posted lower losses of THB227m, an improvement of 5% y-o-y. This came about from higher revenue of 5.8%, coupled with lower advertising and promotional expenses, despite higher COGS due to product mix and sugar taxes. 
  • We continue to maintain our view that losses should narrow and achieve a net profit by FY19F.


4) Food 

  • With the completion of the KFC acquisition effective 1 Dec 2017, the Food segment posted a 42% jump in revenue and a 20-fold jump in net profit to THB109m. Albeit small, we project contribution from this segment should increase. 
  • It was noted that KFC contributed THB602m in revenue in Dec, but registered a net loss of THB28.5m. The loss was due to the inclusion of THB54.3m in transaction costs, coupled with interest costs. Excluding the one-off transaction costs, we estimate that the acquisition would have been profitable.


Saigon Beer acquisition: 

  • We believe more clarity on plans, potential synergies, and/or tangible results are needed before the market is willing to rerate the counter.

Gearing high, but deleveraging by internal cashflow, dividends from acquired entities. 

  • Since Dec, the Group has undertaken two-year bridging loans of THB100bn and US$1.95bn to fund the acquisition of Sabeco. As such, net D/E as of end-1Q18 ballooned to 1.5x, and we estimate Net Debt-to-EBITDA stood at around 4.8x (assuming consolidation of Sabeco’s financials). While this seems high, we maintain our view that probability of equity-raising remains low.
  • Management has indicated that it plans to convert its current bridging loan into long-term debentures over the next two years, with a target of half of the loans to be converted this year and the remaining in the following year. 
  • In the longer term, management shared that with the internal cashflow of ThaiBev group, coupled with that from acquired entities, these monies could be used to deleverage.

Factoring in a lower payout assumption. 

  • That said, we believe there could be a possibility for ThaiBev to take its current dividend payout down. Its dividend policy is to pay out at least 50% of profits, subject to cashflow. 
  • We have revised down our payout ratio to c.50%, from c.60% previously.


Valuation & Forecasts 


Maintain BUY, trim forecasts by 1-8%. 

  • We have trimmed our forecasts by 1-8%, on the back of
    1. lower sales volume growth assumption for Spirits and Beer in Thailand;
    2. higher interest costs arising as we factor in its recent debt-funded acquisitions (except Sabeco); and
    3. one-off transaction costs for FY18F. 
  • Correspondingly, our sum-of-parts based Target Price is trimmed slightly to S$1.02.

Positive on long-term prospects, though near share price performance could be choppy. 

  • With the Group’s acquisition of Sabeco, via a joint venture company, we believe investors remain uncertain and jittery on the resultant potential effects of the move. For one thing, gearing has shot up, particularly in view of expectations of an increasing interest-rate environment.
  • We still like the long-term potential of ThaiBev evolving into a regional beverage player on the back of its recent acquisitions (Grand Royal and Sabeco) as a springboard. That said, we also believe the market may require more clarity on potential synergies and deleveraging plans. As such, in the meantime, we believe Thai Beverage's share price could remain choppy, though we would advocate accumulating on weakness.

Potential catalysts for the counter could arise from

  1. assurance and plans to hedge against interest-rate hikes, and or deleveraging, such as via the monetisation of Frasers Property Limited; and
  2. plans to share potential synergies arising from recent acquisitions, providing EPS growth.




Andy Sim CFA DBS Vickers | Alfie YEO DBS Vickers | http://www.dbsvickers.com/ 2018-02-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.02 Down 1.070



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