Thai Beverage - CGS-CIMB 2018-05-17: 2QFY18 Downside Risks Priced In

Thai Beverage - CGS-CIMB 2018-05-17: 2qfy18 Downside Risks Priced In THAI BEVERAGE PUBLIC CO LTD SGX: Y92

Thai Beverage - 2QFY18 Downside Risks Priced In

  • Thai Beverage’s 1HFY9/18 core net profit of THB11.6bn was below at 42.1%/42.8% of our/consensus FY18F estimates.
  • 2QFY18/1HFY18 core net profit fell 3%/19% y-o-y on weaker domestic beer volumes despite higher revenues due to the consolidation of SABECO and Grand Royal.
  • Lower interim DPS of THB0.15 was announced; implying a 35.1% payout ratio in 2QFY18 (from THB0.20/40.5% payout in 2QFY17).
  • We lower our FY18-20F net profit as we opt to be conservative on domestic beer sales and overall net margins given the sluggish underlying demand. 
  • However, post a 13.6% correction in Thai Beverage’s share price YTD, we believe downside risks for the stock are now priced in. We upgrade our call to ADD.

Weaker domestic beer business leads to y-o-y net profit fall

  • Thai Beverage’s 2QFY18/1HFY18 core net profit fell 3%/19% y-o-y, largely on lower profits from the domestic beer segment and higher SG&A and finance costs. 
  • Net margins for 2QFY18/1HFY18 fell to 9.4% and 10.3% (from 2QFY17/1H17: 13.0%/14.7%). This quarter marks the first time SABECO (effective stake estimated at 26.3%) has been consolidated in ThaiBev’s earnings and cashflow.

Stable spirits but weak domestic beer; awaiting World Cup cheer

  • Estimated domestic 2QFY9/18 spirits and beer volumes of 365.1m litres were down c.5% y-o-y (2QFY9/17: 384m litres) largely on lower beer volumes (-10% y-o-y) despite market share staying at c.40%; whilst spirits chartered flat 0.7% y-o-y growth.
  • Weaker beer demand was attributed to the stagnant purchasing power of the rural economy (which is its main clientele) due to soft household income. Apr volumes are purportedly still weak, but there is hope that World Cup festivities could catalyse beer sales in 3QFY9/18F.

SABECO update

  • ThaiBev guided that it recently gained one more seat on the board of representatives; bringing its total seats to four. While it is still early days, management sees opportunities to optimise SABECO’s processes which could enhance earnings growth moving forward.
  • Consensus currently forecasts a 3-year CAGR of c.19%; SABECO trades at FY18/19F P/E of 32.5x/28.7x.

Lower FY18-20F net profit

  • Whilst we are hopeful of an uptick in sales due to World Cup festivities, we believe the sluggish and competitive market conditions could recur in 4QFY9/18 and spill over into CY19F, leading to lower domestic sales and lower blended GPMs. Hence, we cut our FY18-20F EPS by 2.5-6.2%. 
  • We adjust our earnings to account for the consolidation of SABECO’s earnings, leading to an overall uplift in revenues.

Downside risks priced in; upgrade to Add

  • Thai Beverage’s share price has tumbled 13.6% YTD on uncertainties relating to the SABECO acquisition and elevated balance sheet risks. It is currently trading at CY18-19F P/E of c.17.5x/16.5x, close to 1 s.d. below its 5-year average mean.
  • We note the last time it traded at such levels was at end-CY15 when net profits were lower at THB4.2bn-THB5.9bn vs. THB6.3bn currently. We believe the downside risks are priced in; hence, we upgrade our call to an ADD (from Hold previously) with an unchanged SOP-based Target Price of S$0.98.

Risks and catalysts

  • Upside risks are higher sales/profits and lower net gearing. 
  • Downside risks are a deterioration in earnings.

Cezzane SEE CGS-CIMB | LIM Siew Khee CGS-CIMB | https://research.itradecimb.com/ 2018-05-17
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