Thai Beverage Public Company - DBS Research 2018-11-28: Post-Results Conference Call Key Takeaways

THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Thai Beverage Public Company - Post-Results Conference Call: Key Takeaways

Management sounded more upbeat that 2019 should be better on the back of elections.
Despite weak FY18 results, ThaiBev maintained market shares of Spirits and Beer in Thailand.
Work on extracting synergies from Sabeco ongoing, but will take time.
Repaid USD bank loans with recent THB-based debentures.

We continue to maintain our view that ThaiBev’s operational results have bottomed and we should expect a turnaround to growth trajectory from 1Q19 onwards. We are projecting core earnings growth of 10% in FY19, mainly on the back of recovery in its spirits and beer volume sales.
Our key take-away from the post-results conference call is management’s optimism on the improved outlook for FY19 compared to FY18.
We highlight the salient points and key takeaways post the results conference call:

The Thai economy seems to be showing good signs of recovery and the upcoming election could help to boost consumption.
Distributors’ inventory: As at end-Sep 2018, the level of Spirits inventory carried by distributors was slightly lower compared to the previous quarter. For beer, inventory level was estimated to be 3 weeks at the max, in the lead up to the peak year-end selling season.

2019 should be a better year; market share remains at 94.7%. Based on Nielsen data, alcohol consumption has been weak over the past year or so, and the decline in consumption bottomed out in July. Management adopts the view that sales in the lead up to the end of the year and into 2019 should be better than last year, especially on the back of the expected upcoming election on 24 Feb 2019. This will lead to a longer period of activities, from Feb to Apr in the lead up to Songkran (13-15 April 2019), and could help in sales for ThaiBev.
Competition update/ environment: The entry of new competitors has had limited impact on ThaiBev. Based on its checks, recently launched products by competitors (over the past 2 years) had limited success, and sales in fact fizzled out after the initial excitement.
Margins should improve on back of increase in sales volume. Margins for the Spirits segment in FY18 were down largely on the back of lower sales volume, higher percentage of new bottles in production (vs recycled ones), and advertising & promotional spend (as a percentage of sales, given lower sales volume). The price of raw material, molasses, is likely to trend lower. Margins should improve on the back of an increase in sales volume.

Market share maintained at 40% with slight growth seen in last quarter (4QFY18). There have been fluctuations in market share on a month-on-month basis, but largely centered around 40%.
Competition update/ environment: Noting that consumers are receptive to experience new products, ThaiBev launched specialty beer brands in late Oct, Huntsman (Cloudy Wheat beer) and Black Dragon (red beer) at 7-Eleven to counter Boon Rawd’s Snowy brand (wheat beer). These have taken some share from Snowy, and currently both have similar market shares. Management highlighted that volume sales for these beers is very small relative to the overall total domestic beer market.
Beer segment experienced negative EBIT in 4Q18 due to higher sales headcount to increase in sales areas, and coupled with lower sales volume, this had impacted margins. With an expected improvement in volume sales, this would help to drive topline and profitability. On A&P, management expects to be more efficient in spending.

Remains committed to target of achieving breakeven in FY20. Total volumes for NAB remained resilient, though green tea was impacted by the introduction of sugar excise tax. Sales in other categories, such as drinking water, were healthy and growing with Crystal taking the market leader position.
Competition in carbonated soft drinks remains keen, with international players engaging in price wars. Management is focusing on utilising returnable bottles to improve on margins.

Approval of unrestricted foreign ownership percentage. Sabeco’s Board has approved the foreign ownership cap, but management indicates that there are certain procedures to follow and is unable to share details, though they are “cautiously optimistic” for it to take place soon.
Extracting synergies in progress but will take time. Management provided an update that the quest to extract synergies is ongoing and touches on many fronts and hence will take some time. Citing the example of purchase of malt and hops, management indicated that these have existing contracts, and they would have to wait for them to expire, if early termination is not possible, before taking further action.
Working to improve margins. Management is working to improve the operating margins for Sabeco via several strategies. For one, it raised the selling prices of Saigon Export and Saigon Lager by c.3% in Oct. In terms of packaging materials, it is exploring the use of light weight cartons. Management is also looking at the distribution model in Sabeco, which is currently fragmented.

THB127bn debentures issued; THB-based loans. With the issuance of its second tranche of debentures amounting to THB77bn, ThaiBev has issued a total of THB127bn of debentures to-date. The proceeds from the recent issuance were used to pare down USD bank loans on 26 Sep 2018, and its debts are now Thai Baht based.
There is an outstanding bridging loan of THB81bn due in Dec 2019; and, management plans to issue another debenture in Feb 2019 to refinance this, though the amount has not been finalised yet. It could also utilise its cashflow from operations to make partial repayments of the bridging loan.

Our key takeaway from the call is the increased level of optimism in the outlook exuded by management compared with the more downbeat tone felt in the past few quarters. This gives us more confidence that operations have bottomed out and we should see uptick in growth from 1Q19.
Potential catalysts for the counter could arise from
1. recovery in domestic consumption, leading to stronger sales;
2. realisation of synergies arising from recent acquisitions, which would underpin EPS growth.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2018-11-28

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