Thai Beverage (THBEV SP) - UOB Kay Hian 2018-02-15: 1QFY18 Earnings Below Expectation, Downgrade To HOLD As We Await More Clarity On Sabeco

Thai Beverage (THBEV SP) - UOB Kay Hian 2018-02-15: 1QFY18 Earnings Below Expectation, Downgrade To HOLD As We Await More Clarity On Sabeco THAI BEVERAGE PUBLIC CO LTD Y92.SI

Thai Beverage (THBEV SP) - 1QFY18 Earnings Below Expectation, Downgrade To HOLD As We Await More Clarity On Sabeco

  • Thai Beverage (THBEV)’s 1QFY18 adjusted earnings (-31.8% y-o-y) was below our and consensus forecasts. Earnings were largely impacted by the slower-than-expected recovery in the alcohol segment and destocking impact by agents post the excise tax in September.
  • Meanwhile, uncertainty still remains on the Sabeco acquisition, specifically in terms of potential refinancing and repayment plans by its JV partners. 
  • In view of these events, we downgrade to HOLD, with lower target price of S$0.99. Entry price: S$0.84.



RESULTS


1QFY18 adjusted earnings below consensus and our estimates. 

  • THBEV’s headline 1QFY18 net profit decreased 62% y-o-y to Bt2,911.9m, largely due to a non-recurring expense related to acquisitions of Sabeco (Bt2,350.5m). Stripping out the non-recurring acquisition expense, adjusted PATMI would be Bt5,262.4m (-31.8% y-o-y) below our and consensus FY18 forecast, (representing 20% of our full-year estimates). 
  • Downside surprise came from the 1QFY18 revenue decline of 3% y-o-y, as we had expected a much stronger alcohol sales recovery.

Revenue dragged as alcohol segment still on a decline. 

  • 1QFY18 revenue fell 3% y-o-y due to a decrease in sales of spirits (-5.8% y-o-y) and beer (-4% y-o-y). The decline was partially offset by increase in non-alcoholic beverage (+5.8% y-o-y) and food (+42.3% y-o-y).


STOCK IMPACT


Alcohol segment impacted by destocking... 

  • The destocking of sales agents’ inventory following the excise tax in September impacted the domestic alcohol beverage, where both the spirits and beer revenue saw declines during 1QFY18. 1QFY18 earnings for both beers (-30% y-o-y) and spirits (-20% y-o-y) were further dragged by a step-up in A&P spending this quarter, which we expect to continue in the near term.

…and weaker-than-expected recovery post mourning period. 

  • We understand that private consumption in the domestic beverage market increased at a slower-than-expected pace even after the official mourning period had ended, as the economy has yet to fully recover. 
  • Management cited that industry data still alludes to beer and spirits volume declining for the month of January. Thus, we are of the view that while the alcohol segment may see recovery post mourning period, the recovery may be slower than expected.


Uncertainty still clouds the Sabeco transaction. 

  • While THBEV had previously guided that the JV partners will repay the loan within a 12-month period, we understand that THBEV may possibly extend the loan tenure to its JV partners beyond one year.
  • Separately, we understand that Sabeco will be fully consolidated as a subsidiary from 2QFY18 onwards as auditors have deemed THBEV to have effective control over the entity. However, no clarity was given in regards to the percentage of minority interests that will be attributed to the JV partners following the consolidation.


EARNINGS REVISION/RISK

  • Reduce FY18-19 earnings by up to 6% to factor in mostly the slower-than-expected recovery in the alcohol segment as well as higher SG&A.


VALUATION/RECOMMENDATION


Downgrade to HOLD with lower SOTP-based target price of S$0.99. 

  • There remain uncertainties regarding the Sabeco acquisition as well as potential repayment plans by its JV partners. Furthermore, while we expect alcohol consumption to recover post mourning period, it may be slower than expected. As such, we downgrade THBEV to HOLD with lower SOTP-based target price of S$0.99. Entry price: S$0.84.
  • 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 an 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 Property Limited, FNN and Sabeco, in which THBEV owns a stake each, are valued based on their market value.


SHARE PRICE CATALYST

  • Market share gains in beer.
  • M&A.
  • Faster-than-expected turnaround of NAB business.







Thai Wei Ying UOB Kay Hian | Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-15
UOB Kay Hian SGX Stock Analyst Report NEUTRAL Downgrade BUY 0.99 Down 1.060



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