Thai Beverage - RHB Invest 2018-05-10: Keep Calm And Drink Beer

Thai Beverage - RHB Invest 2018-05-10: Keep Calm And Drink Beer THAI BEVERAGE PUBLIC CO LTD SGX: Y92

Thai Beverage - Keep Calm And Drink Beer

  • Resuming coverage on Thaibev with BUY recommendation and revised Target Price of SGD1.06, from SGD1.10, implying 28% upside.
  • We think the stock is oversold despite the slower-than-expected recovery in alcohol consumption in Thailand.
  • We expect its earnings to improve in 3QFY18, as the World Cup lifts demand. A stronger recovery is anticipated in FY19F, as A&P expenses normalise along with alcohol consumption.

Recovery in alcohol consumption in Thailand has been slower than expected.

  • Based on statistics from Thailand’s Office of Industrial Economics (OIE), beer production continued to be on a declining trend in March, which signalled weak market demand. As such, we think that sales and margin in the upcoming 2Q18 results would continue to be soft. However, we note that the rate of decline has slowed from -20% y-o-y in February, to -5% y-o-y in March.
  • We think the slow consumption was due to a lack of broad based recovery in Thailand. Weaker-than-expected farm prices and the increase in prices following the excise tax hike in Sep 2017 could have impacted demand in the upcountry areas.
  • Anecdotally, our Thai consumer analyst, Vatcharut Vacharawongsith cited seeing an increased number of craft beer producers in Bangkok city. We also note that more breweries are trying to launch premium products to tap into the high-end market. We believe the increased variety of beer selection from both imported premium beers and crafted beer also contributed to the slower recovery in Thai Beverage’s (Thaibev) beer segment.
  • We believe there would be sales recovery in 3QFY18, with the World Cup as a catalyst to encourage agents to stock up in the months of May and June. Nonetheless, the beer segment’s full-year earnings is likely to pale in comparison to FY17, as we think the group would spend more on advertising and promotions (A&P) to drive up beer consumption. This should improve in FY19F as A&P expenditure normalises in line with consumption.

We think the spirits segment is likely to be more resilient

  • ... given the nature of white spirits, which are more frequently consumed in households in the upcountry region to enhance strength or energy. We believe this could help offset softer demand in brown spirits that are more often consumed on trade, and are considered more discretionary. 
  • With the introduction of new products like wine coolers and the consolidation of Grand Royal Group, we expect this segment to hold up well this year.

All is well outside of alcohol beverages.

  • Non-alcohol beverages continue to show strong traction amongst consumers. The improved market share allows the group to reduce overall A&P spending and improve profitability. The acquisition of over 240 KFC franchise outlets is expected to raise the food division’s profitability significantly. 
  • In addition, its associate, Fraser & Neave (F&N) also charted stronger 2QFY18 earnings.

Stock is oversold, reiterate BUY.

  • We believe the retraction of Thaibev’s share price has factored in weaker beer volumes. At the current share price, the stock is trading close to -1SD of its 3-year average forward P/E. Compared to other alcohol producers, which are trading at above 30x P/E, the group’s valuation is also undemanding.
  • We believe the group deserves a higher valuation given that it is now the largest alcohol producer in ASEAN with a dominant market share in Thailand spirits, Myanmar spirits and Vietnam beer.
  • Although muted beer consumption volumes remain a concern, we believe it has been priced in at current levels. The stock is currently trading at FY18F P/E of 17.9x, which we think is undemanding. This is close to -1SD of its 3-year average forward P/E of 19.6x.
  • We resume coverage on the stock with a BUY call and revised SOP-derived Target Price of SGD1.06, suggesting a 28% upside.

Segment breakdown to include Sabeco numbers

  • Given its management control over Sabeco, we expect Thaibev to consolidate 100% of Sabeco’s profit and loss in the upcoming 2QFY18 results. However, we highlight that the effective stake Thaibev has in Sabeco is still 26%.
  • Thaibev would also receive interest income from its 49%-owned JV, Vietnam Beverage - the investment vehicle used to acquire Sabeco. The rest of Sabeco’s earnings would flow out in the minority interest line.

Juliana Cai CFA RHB Invest | 2018-05-10
SGX Stock Analyst Report BUY Maintain BUY 1.06 Down 1.120