Thai Beverage Public Company - DBS Research 2018-07-24: Look Beyond 3Q18 Results; Farm Income Upturn Is Key

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THAI BEVERAGE PUBLIC CO LTD SGX:Y92

Thai Beverage Public Company - Look Beyond 3Q18 Results; Farm Income Upturn Is Key 

• Concerns on weak Apr/May beer production could be in the price. 
• Looking ahead, expect improvements led by elections, King’s coronation and higher farm income. 
• Control of Sabeco further strengthened with recent Board of Directors/management appointments. 
• Potential for margin improvement at Sabeco. 

Expecting an upturn; look beyond weak Apr/May figures.

• We reiterate our BUY recommendation on ThaiBev with a revised Target Price of S$0.94.
• Thai Beverage share price has underperformed this year, but we believe it has priced in the negatives. We believe the slow consumption in Thailand is temporary and we should see improvements, driven by:
  1. the lead up to the expected elections as well as the King’s coronation; and
  2. anticipated recovery in farm income which has recently turned to positive growth.
• The counter is trading at 19.8x/16.7x FY18F/19F core earnings, which is below its 5-year historical average forward PE of c.21x. 

Where we differ?

• Looking beyond June quarter; high gearing mitigated by strong OCF. The market has been concerned about the weak beer production figures and soft demand, which we believe is priced in. We advocate looking beyond these issues and position for an eventual recovery. 
• In addition, ThaiBev’s gearing should progressively taper down over the forecast years given its stable and strong operating cashflow. 

Potential catalysts.

• Demand pick up in Thailand, clarity on plans and benefits from the acquisition of Saigon Beer Alcohol Beverage Joint Stock Company (Sabeco), market share gains in beer and non-alcoholic beverages, a faster turnaround in non-alcoholic beverages, and monetisation/partial divestment of its stake in Frasers Property Limited. 

WHAT’S NEW - Look forward to consumption upturn with higher farm income

Upturn ahead; look beyond weak Apr/May figures.

• In our view, despite some uncertainties on the pace of improvement, this could be priced in. 
• We continue to advocate accumulation on any pull back with a view towards ThaiBev reporting improvements in FY19F. For Sabeco, recent events point to faster pace of gaining management and Board control, which we view as positive, despite guidance for lower profits this year.
• We continue to believe the slow consumption in Thailand is temporary and we should see improvements ahead. This is driven by:
  1. a lead up to the expected elections (Feb’19) as well as the King’s coronation; and
  2. anticipated recovery in farm income which has recently turned to record positive growth.
• The counter is trading at 19.8x/16.7x FY18F/19F core earnings, which is below its 5-year historical average forward PE of c.21x.
• Share price had retreated by up to c.25% at one point earlier this month on data from Bank of Thailand showing weak beer production, slower than expected consumer recovery and weak 1H18 results (FYE Sep). As per our earlier reports, this was attributed to
  1. weaker sales post excise increase (in Sep’17), coupled with weaker than expected consumption recovery post mourning period, as well as weak farm income;
  2. one-off transaction costs arising from its acquisition of a stake in Sabeco in Dec’17;
  3. higher advertising spend post mourning period, compared to a year ago when advertising was held back.

Weak Thailand beer production data could be in the price.

• Based on Bank of Thailand statistics up till May’18, beer production was weak, posting 13% YTD decline, particularly with steeper declines in Apr and May with 20-25% y-o-y declines. This could have also explained the share price decline in mid-June as the Bank of Thailand data was released back then. With that, we believe the weak production data may be in the share price with its recent retreat, hitting a low of c.S$0.68.

Farm income on improvement should bode well for consumption.

• In the prior quarters, the weak consumption was partially attributed to weak agriculture income. In its 2Q18 results conference call in May, management indicated that sales in the lead up to the Songkran festival was better in the urban areas, while rural areas saw subdued demand. Data in the month of Apr and May have shown that farm income has turned positive after posting negative growth since July 2017, with a recovery in agricultural prices. Prices of cassava and maize have registered strong surge, while rubber prices seem to have bottomed out.

Vietnam – Firming up control; potential for margin improvement over medium term 

Control of Sabeco established with Board of Directors, management appointments.

• There were initial concerns by the market with respect to the control of Sabeco post ThaiBev’s acquisition of a stake. This was done via its 49% owned subsidiary, Vietnam Beverage Limited, which in turn has a c.53.59% stake in Sabeco. Since then, ThaiBev has appointed 3 representatives to the Board of Directors. 
• In addition to that, there were three key management appointments to Sabeco on 9 May 2018 – namely Bennett Neo, Teo Hong Keng, and Melvyn Ng, which we believe would further strengthen the current team at Sabeco. In fact, Mr Bennet Neo has recently been appointed as General Director, taking over from Nguyen Thanh Nam. Based on their profiles, these individuals have prior experience in the beer industry within the region, with the common factor of having worked in Asia Pacific Breweries Ltd/ Heineken. 
• Sabeco’s margins low compared to peers despite being market leader in a robust market; potential for improvement. Based on our initial findings, Sabeco’s margins pale in comparison to peers within the region after adjusting for excise taxes. Sabeco reports sales revenue net of tax, while a number of brewers in the region reported gross revenue (including excise duties). 
• Granted that Sabeco’s brands may be in the mainstream segments, compared to other brewers such as Heineken, ABInBev, Carlsberg, which have premium brands, we believe there is potential for margin improvements, particularly given its dominant share in Vietnam at c.40%. We believe there is potential for better operational efficiency post the entry of ThaiBev, possibly in terms of lower cost of goods, consolidating the manufacturing facilities, controlling the distribution system and pricing, coupled with a premiumisation strategy (e.g. relaunch of Saigon Gold). 

A medium term initiative in the huge Vietnamese market.

• All said, we believe there is potential for ThaiBev to further extract operational efficiencies and improve the performance of Sabeco. While the acquisition price seems high, we believe this initiative will augur well for the Group’s growth prospects over the medium term. 

Valuation & Forecasts 

Lowered our projections.

• We trimmed our forecasts by 10- 12% as we dial back our revenue and margin assumptions, particularly for its Spirits and Beer segments, as seen with the weaker volumes recorded YTD in Thailand. That said, we believe the market could have factored this into the share price of Thai Beverage, and for the reasons explained above, we believe demand should improve. 
• The counter is trading at 19.8x/ 16.7x FY18F/19F core earnings, which is below its 5-year historical average of 21x. 
• Our Target Price is revised to S$ 0.94 as we lower our earnings projections. Target Price is based on sum-of-parts valuation, derived via discounted cashflows of its core operations, and fair values for its stakes in listed associates. 

Risks.

• Our positive thesis is premised on improvement in consumer sentiment and demand, albeit slow, going into 2019 backed by expectations of elections/ coronation, and improving farm income and the general economy. If these fail to materialise, there could be downside risks to our forecasts. 
• Spikes in interest rates and/or surge in strength of USD vs THB and VND could affect interest and translation. 

Gearing to drop on consistent OCF.

• Due to its acquisitions in the past year, particularly Sabeco, the group’s gearing has surged and is projected to be c.1.56x as of FY18F. However, we expect this to decline over time as management focuses on deleveraging, supported by its strong and consistent operating cashflow (OCF). In fact, assuming the monetisation of its stake in Frasers Property Limited, which would yield S$1.39bn or US$1.01bn (based on the current Frasers Property Limited share price of S$1.70), ThaiBev’s gearing will drop to <1x by FY20F. 

Andy SIM CFA DBS Group Research Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2018-07-24

SGX Stock Analyst Report BUY Maintain BUY 0.94 Down 1.020