Thai Beverage Public Company - DBS Research 2018-11-27: Darkest Before Dawn; Expect Upturn In FY19F

SGinvestors.io

THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Thai Beverage Public Company - Darkest Before Dawn; Expect Upturn In FY19F

• FY18 weak; core attributable net profit fell by 19%.
• Spirits and Beer registered lower profits on lower domestic volumes, while NAB losses widened; Food segment shines.
• Final DPS of THB0.24; FY18 payout ratio at 53%.
• Maintain BUY, Target Price revised to S$0.87; Expect upturn from 1Q19 and growth in FY19.

Expecting upturn in FY19F.

• We maintain our BUY recommendation on ThaiBev with a revised Target Price of S$0.87. Thai Beverage's share price has underperformed this year, and we believe negatives are priced in.
• The slow consumption in Thailand is temporary and we should see improvements ahead, 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 record positive growth.
• Looking forward to 1Q19 (quarter to Dec-2018), we expect earnings to return to growth. The counter is trading at 17.5x FY19F core earnings, which is near to -2SD of its 5-year historical average forward PE.

Where we differ? Look past weak FY18; high gearing mitigated by strong OCF.

• The market has been concerned about weak Thai domestic alcohol sales, which we believe is temporary and 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, realisation of 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 (SGX:TQ5).

Valuation:

• Our Target Price is revised to S$0.87 as we lower our earnings projections. Our 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.

Key Risks to Our View:

• Expectations of upturn in demand misplaced. Our current thesis is premised on demand recovery on the back of recovery in farm income; and, if not sustained or misplaced, could present downside risks.

WHAT’S NEW - FY18 a year to forget; expect upturn in FY19F

Maintain BUY, position for growth in FY19F.

• Despite weak FY18 results, we maintain our positive view on the counter as we expect that the worst operational performance is behind us, and we should see the group return to a growth trajectory in FY19F. The c.28% YTD decline in Thai Beverage share price has priced in the negative operating performance and the weak domestic consumption, in our view.
• Looking into 1Q19F, we expect operating performance to turn up as it enters into the peak season, coupled with a lower base effect compared to 1Q18 when destocking had taken place arising from the increase in excise tax in the prior quarter.

Valuation attractive at near to -2SD of 5-year average.

• We continue to believe the slow consumption in Thailand is temporary and we should see gradual improvement. This will be driven by:
  1. lead up to the expected election in 2019;
  2. recovery in workers and farm income, albeit offset by high household debt.
• We have trimmed our earnings by 16%/12% for FY19F/20F on the back of lower sales volume and margins from spirits and beer. Nonetheless, the counter is trading at 17.5x FY19F core earnings, which is near to -2SD below its 5- year historical average forward PE of c.22x.

Results: Weak FY18; 4Q18 likely a kitchen sinking quarter.

FY18 a year to forget; core attributable net profit fell 19%.

• ThaiBev’s FY18 results was weaker than expected. Headline net profit registered a drop of 46% y-o-y largely due to the absence of a fair value gains recognised by its associate (F&N) on an investment coupled with costs relating to the acquisition. These amounted to THB8.5bn and THB2.5bn, respectively.
• Excluding that, core net profit (attributable to shareholders) would have declined c.19.1% y-o-y to THB21bn, due to drop in profits from its Spirits and Beer business, and higher losses from its Non-Alcoholic Business (NAB).

Final DPS of THB0.24.

• A final DPS of THB0.24 was proposed, down from THB0.47 last year. Along with the interim dividend of THB0.15 paid, this equates to a payout ratio of 53%, compared to 65% payout (excluding exceptional fair value gain) in FY17.
• The final DPS is a tad below our expectations due to the lower profits, though the cut in payout ratio is expected given the group’s gearing from recent acquisitions.

4Q18 a kitchen sinking quarter?

• While 4Q18 revenue increased by 17.3% y-o-y to THB55.8bn, net profit registered 34% y-o-y decline to THB3.3bn. The increase in topline was helped by contribution from Beer and Food segments, arising from its acquisitions earlier in the financial year, offset by drop in Spirits and NAB. The drop in net profit was mainly due to decline in Spirits contribution, which fell by c.28% y-o-y to THB3.6bn. The seemingly huge decline could be partly attributed to a high base effect in 4Q17 arising from agents/ distributors stocking up in anticipation of the excise duty increase in Sep 2017.
• For FY18, group revenue was THB229.7bn, an increase of 21% y-o-y, on the back of increased contribution in beer (+64.8 % y-o-y) due to acquisition and consolidation of Saigon Beer (Sabeco), food business (+96.8%) but offset partially by decline in its Spirits revenue (-3.1%) and Non-Alcoholic Beverages (- 3.5%).

Total Spirits volume growth contributed by Grand Royal, but domestic volume sales declined.

• For FY18, Spirits registered 1.2% y-o-y growth in volume to 612.4m litres, which was contributed by Grand Royal. Excluding this, Spirits sales volume declined by 11.5% in Thailand. We believe the decline is partly due to the stocking up prior to the increase in excise duties in Sep 2017, thus leading to a high base effect.
• Coupled with an increase in SG&A expenses, Spirits EBIT margins dipped by 2.4ppts to 21.1% in FY18, compared to the same period a year ago. As a result, attributable net profit from Spirits dropped by 16.9% y-o-y to THB16.98bn in FY18, from THB20.4bn in FY17.

Domestic beer also dropped, offset by Sabeco’s contribution.

• Similar to the situation seen in Spirits, revenue for Beer segment was helped by consolidation of Sabeco, leading to a surge in revenue to THB94.5bn (+64.8% y-o-y). Excluding Sabeco, beer sales volume declined by 11.4% y-o-y. As a result, Beer segment’s attributable net profit dropped by 53.2% to THB1.46bn, from THB3.13bn a year ago.
• According to the company’s announcement, the group’s acquisition of Sabeco contributed positively to its beer bottomline, although we believe it was relatively small.

Non-Alcoholic Beverages losses widen.

• Continuing the trend from 2Q18, NAB losses widened in FY18, due to changes in product mix. The group saw a decline in sales volume of ready to drink tea, Jubjai and 100Plus, offset partially by higher sales of drinking water and carbonated soft drinks.
• Net loss for the segment widened to THB1.3bnm, up by 33% y-o-y.

Food segment contributed positively.

• Revenue for Food segment almost doubled to THB13.3bn (+96.8% y-o-y), largely arising from increase in restaurants along with recent acquisitions. Along with that and an increase in operating leverage and margins, attributable net profit jumped to THB521m (+624% y-o-y), from THB72m.

Valuation and forecasts

Maintain BUY, Target Price revised to S$0.87.

• Despite the weak FY18 results, we maintain our view that we have seen the bottom of its operational performance and we should see improvements going forward.
• The drop in profits in FY18, in our view, other than a weak domestic consumption environment, could be partly due to a high base effect arising from stocking up prior to the excise duty increase in Sep 2017.
• We believe consumption would recover on the back of
  1. upcoming elections stimulating demand; and,
  2. improving farmers and workers’ income.

Projecting FY19/20F earnings returning to growth at 10%/15%.

• We trimmed our earnings forecasts by 16%/12% for FY19F/20F on the back of lower sales volume and margins from spirits and beer.
• Notwithstanding our earnings revision, we are projecting earnings growth of 10%/15% for FY19F/20F. The counter is trading at 17.5x FY19F core earnings, which is near to -2SD below its 5-year historical average forward PE of c.22x.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2018-11-27

SGX Stock Analyst Report BUY MAINTAIN BUY 0.87 DOWN 0.940