Thai Beverage (THBEV SP) - UOB Kay Hian 2018-02-01: One Step Closer To Vision 2020 With Sabeco Acquisition

THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage (THBEV SP) - One Step Closer To Vision 2020 With Sabeco Acquisition

Thai Beverage (THBEV) made a Bt156b acquisition of Sabeco in Dec 17 and now has an effective stake of 26%. Following the acquisition, we estimate THBEV’s net gearing to have risen to 1.5x (from 0.2x), but see limited repayment risk, as the loan is collateralised against Sabeco shares.
We view the acquisition positively as it gives THBEV access to the largest beer market in ASEAN, and is in line with THBEV’s long-term strategy for sustainable growth.
Maintain BUY with a lower target price of $1.06.

In Dec 17, Thai Beverage (THBEV) successfully acquired 53.59% of Sabeco through its 49%-owned associate, Vietnam Beverage, for Bt156.0b (THBEV’s effective stake in Sabeco is 26%).
As the Sabeco deal is subject to the foreign shareholding limit of 49%, participation in the competitive offering was required to be done via its Vietnam associate company so as to acquire a majority stake.

In terms of financing, we understand that a large part of the acquisition will be funded by debt, where THBEV has secured six loan facilities totalling Bt164b.
The rationale for the funding structure is that it is difficult for the associate company to secure financing given the tight timeline of the competitive offering. As such, THBEV with its financial strength and good relationship has agreed to secure the initial financing to fund the acquisition, with a plan to arrange for appropriate refinancing post-acquisition.

Based on our estimate, and taking into account the more recent acquisitions of KFC and Grand Royal Myanmar, we expect 2018-20 net gearing to rise to 1.5x, from 0.2x previously. However, we see limited repayment risk, as the loans will be secured against Sabeco shares.
Furthermore, the loans extended to Vietnam Beverage will be repayable within a 12-month period.

Through Sabeco, the largest brewer in Vietnam with over 40% market share, THBEV would be able to gain access to a fast growing population with a strong beer drinking culture. Vietnam is the largest beer market in ASEAN and the third-largest in Asia after China and Japan.
THBEV would also have access to an extensive local distribution network where we anticipate potential for synergies such as product cross-selling. The acquisition is also in line with THBEV's Vision 2020, where the company targets to diversify its revenue to outside of Thailand for sustainable growth.

After the mourning period ended in Oct 17, alcohol sales volume is poised for a strong y-o-y recovery in FY18 as alcohol consumption resumes.
However, given the stockpiling by agents prior to the excise tax hike in September, we expect 1QFY18 to undergo destocking to normalised levels, but we believe this will be offset by the high seasonality of Christmas and New Year festivities.

We trim FY18-19 net profit forecasts by up to 4% as we factor in the cost of financing impact from the Sabeco acquisition.

The lower target price is due to the increase in our net debt estimate as we account for the Sabeco acquisition, adjusted for the associate’s portion.
We value:
1. the spirits business at 18x EV/EBITDA, in line with global peers’;
2. the beer business at 14x EV/EBITDA, a premium to global peers’ average of 13x as THBEV’s beer business is 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’.
FCL, FNN and Sabeco, in which THBEV owns a stake each, are valued based on their market value.
THBEV’s current FY18F PE at 20.0x is still lower than that of global spirits peers’ average of 31.0x 2018F PE, beer companies’ 23.6x and NAB companies’ 28.2x. Meanwhile, THBEV is trading in line with Malaysian beer peers’ FY18F PE of 19-20x.

Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-01

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.06 Down 1.110