Thai Beverage - Phillip Securities 2018-05-17: Accretive Acquisitions But Domestic Beer Demand Drags

THAI BEVERAGE PUBLIC CO LTD SGX: Y92

Thai Beverage - Accretive Acquisitions But Domestic Beer Demand Drags

Thai Beverage's 1H18 Revenue/Core EBITDA met 55%/50% of our full year expectations; Earnings missed on higher than expected finance costs and effective tax rate.
Strong results from recent acquisitions unable to offset the persistent weakness in Thai Beer market.
Introduction of a new excise tax of 2% for Elderly Fund since 26 Jan-18.
Proposed lower interim dividend of 0.15 baht per share (1H17: 0.20 baht).
Maintained BUY with unchanged SOTP-derived Target Price of S$1.05.

Recent acquisitions fuelled growth. Acquired businesses contributed THB20.21bn and THB2.94bn to Group’s 1H18 Revenue and Profit, respectively. Pro-forma* contribution to 1H18 Revenue and Profit would have been THB130.98bn and THB12.50bn, respectively. (*Assuming acquisitions since 1 Oct-17)
1. Spirits: PATMI +2.8% y-o-y driven by contribution from Grand Royal, offsetting the lower net profit from its existing Spirits business.
2. Beer: Sabeco is earnings accretive. It contributed THB1.61bn or 13.7% to the Group’s 1H18 Net profit.
3. Food: SOA, QSA and Havi Logistics contributed THB111.3mn or 34.1% to the Group’s 1H18 Net profit.
Improved liquidity, current ratio was up from 0.88x to 1.82x q-o-q. THB50bn from the bridging loans obtained to fund the acquisitions was converted into long-term debts in Mar-18. The management intends to further refinance its short-term debts to long term.

Existing Alcoholic Beverages segment disappointed – hit by double whammy of protracted weak demand and implementation of a new excise tax. Effective from 26 January 2018, all alcoholic beverages have been slapped with an additional 2% of excise tax by law to contribute to the Elderly Fund.
1. Spirits: 1H18 Sales volume was down by 5.1% y-o-y, coupled with higher input costs and SG&A expenses, 1H18 Net profit margin decreased 2.7pp y-o-y to 16.6%.
2. Beer: Persistent weakness in domestic beer demand, increased SG&A expenses and introduction of new excise tax weighed on earnings. 6.0pp was shaved off 1H18 Net margin y-o-y to a mere 1.1%.
1H18 Sales volume for its existing beer business was down 8.3% y-o-y, in tandem with the 6.7% lower industry volume turnover. However, we take comfort of its stable beer market share in Thailand at c.38%.

On-trade consumption for alcoholic beverages has yet to turnaround despite starting from a low base. While stronger Thai economy is not yet broad-based, the high household debt has eroded consumers’ purchasing power. Soft demand for alcoholic beverages in Thailand could extend for longer period. Nonetheless, we believe that the FIFA World Cup is likely to boost beer sales, not only in Thailand but also in Vietnam.
On the other hand, we do not expect gross margin to deteriorate further compared to 2Q18’s. The Group has already adjusted its Spirits prices for the additional excise tax by end Apr-18, but may refrain from increasing its Beer prices in near term, in view of fierce competition. Management also noted that pressure from domestic molasses prices seen in the past 12-months should subside in 2H18.
However, SG&A expenses should remain elevated, as advertising and promotional activities normalised to pre-mourning period level (before Oct-16).

With better clarity in 2Q18 upon conversion of short-term to long-term loans, we have adjusted for higher finance expenses, thus FY18e Adjusted PATMI to -3.9% vs previous forecast.

Higher economic interest of Sabeco.
Margin expansion in conjunction with the excise tax hike.
A faster turnaround in non-alcoholic beverages (the Group targets to breakeven by 2020).
Unlocking value from potential synergies with partnership with Yum Thailand, Grand Royal Group, Sabeco, and Havi Logistics.

Havi Logistics (Thailand) Limited operates logistics businesses for food services in Thailand with expertise in cold chain logistics and multi-temperature food distribution technology.
This would expand the Group’s logistics business portfolio, improve operating efficiency via synergy with ThaiBev logistics, and enhance its platform for food business expansion in the future.
The acquisition was completed on 28 Feb-18. Since then, Havi Logistics has contributed THB16.1mn and THB0.8mn into the Group’s Revenue and Net profit, respectively.
The THB240mn cash consideration implied an acquisition P/E of 11.1x.

Soh Lin Sin Phillip Securities | https://www.stocksbnb.com/ 2018-05-17

SGX Stock Analyst Report BUY Maintain BUY 1.050 Same 1.050