Thai Beverage - CGS-CIMB Research 2018-08-16: 3Q18 Awaiting A Consumption Recovery

THAI BEVERAGE PUBLIC CO LTD SGX:Y92

Thai Beverage - 3Q18: Awaiting A Consumption Recovery

Thai Beverage’s 3QFY9/18 net profit of THB6.0bn was below expectations on higher SG&A. 9MFY18 formed 65.7%/70.1% of our/consensus FY18F expectations (S$26.8m/S$25.1m).
Domestic spirit and beer volumes were still low as the rural economy is still cautious on spending in Thailand; but the drop in spirits volume in 3Q18 was a surprise.
The SABECO optimisation will take place in earnest now that ThaiBev has four of the seven board seats. Management is looking for ways to improve business productivity.
We think the sluggish domestic environment will persist until FY19F, hence we lower our FY18-20F earnings in the interim.

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Thai Beverage’s 3Q18/9MFY18 core net profit fell 11%/16% y-o-y as higher-than-expected SG&A, coupled with weak domestic spirits and beer volumes, led to lower profits.
Net margins for 3Q/9MFY18 fell to 9.9% and 10.1% (from 2QFY17/1H17: 14.8%/14.7%).

While weaker 3Q18 beer volumes were expected (-8.8% y-o-y), the domestic spirits segment surprised with volumes slipping 11.1% y-o-y to 129.8m litres, reversing the stable y-o-y growth seen in 2QFY9/18 of 0.6%.
Management guided that this was likely due to the lack of re-stocking activities seen in 3QFY9/18. Overall, estimated domestic 3QFY9/18 spirits and beer volumes of 316.8m litres were down c.9.7% y-o-y (3QFY9/17: 351m litres).

Thai Beverage’s 9MFY18 SG&A/sales was at 17.2% vs. our forecast of 13.6% for FY18F, as we had initially expected management to ease off on marketing activities given the weak consumption patterns. However, the competitive environment in Thailand is stiff; hence marketing spend is necessary to maintain market share.
On SABECO’s end, there could also be increased marketing spend, especially for the rest of FY18F, as some of these expenses were previously held back during the M&A.

Thai Beverage was more open with regards to discussions relating to SABECO. Currently, Thai Beverage has four out of the seven board seats and has also appointed three key management personnel. With greater control in place, management is getting into the nitty gritty and has started working on implementing good corporate governance.
Thai Beverage has also started assessing ways to improve the capabilities and efficiencies of SABECO’s supply chain, and improving business productivity with the aim of enhancing market share and earnings.

While beer sales will be marginally buoyed by World Cup festivities in 4Q18, Thai Beverage guided that a sluggish economy will likely weigh on consumption patterns until 2019F. However, it is hopeful of a recovery closer to the general elections (our Thai team believes this could be by 2H19F) as subsidies may be injected to kick-start the economy.
With near-term weakness in mind, we cut our FY18-20F EPS by 10.4-15.6% due to lower revenue and higher SG&A costs.

We lower our SOP-based Target Price to S$0.88 (vs. S$0.98 previously) due to our lower projections. We concur that the near-term outlook is weak, but Thai Beverage has positioned itself to be one of the largest Southeast Asian players and should benefit from this in the long-term.
The stock is trading at an FY19 P/E of c.16.3x, close to 1 s.d. below its 5-year average mean.
Upside risks are higher profits and lower net gearing.
Downside risks are deterioration in earnings.

Cezzane SEE CGS-CIMB Research | LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-16

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