Thai Beverage - DBS Research 2019-06-10: Dominant Regional Beverage Player In The Making

THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Thai Beverage - Dominant Regional Beverage Player In The Making

Affirmed regionalisation strategy during Thai Beverage's non-deal roadshow to Europe.
Strong cashflow support from Thai domestic spirits; growth from Myanmar and Vietnam.
Still targeting to be #1 beer brand in Thailand; Non- Alcoholic Beverage to achieve EBIT breakeven by Sep 2020.
Maintain BUY and S$0.91 Target Price.

We maintain our view that Thai Beverage (SGX:Y92) is evolving into a leading regional beverage player in South-east Asia. It continues to leverage on its dominant Thai domestic alcohol operations for strong cashflow support, as it pursues growth in the region, namely Vietnam and Myanmar. Its acquisition of Grand Royal seems to be reaping fruits, while for Sabeco, we believe there is potential for marked improvement in the medium term.
While gearing is currently high, we believe deleveraging will occur given its cashflow generation ability.
We retain our forecasts and project earnings growth of 12%/13% for FY19F/20F, on the back of gradual recovery in the Thai domestic market, increased contribution from overseas operations (namely Myanmar, Vietnam), and lower losses from Non-Alcoholic Beverages.
Our Target Price is unchanged at S$0.91.

The questions centered around
1. domestic consumption and consumer sentiment, and impact on spirits and beer operations;
2. growth potential within and outside of Thailand;
3. gearing and dividend outlook, and other matters.
During the meetings, broadly, the spirits segment (domestic and Myanmar operations) and beer segment (Thailand and Vietnam, via Sabeco) each dominated 40% of the time, while explanations on gearing, deleveraging and food/ non-alcoholic beverages (NAB) took up the balance of time spent.
We summarise the key discussion points in the following, including our comments.

ThaiBev: Consumption has been weak since the mourning period, and due to weak farm income. Since late 2018, consumption recovery has been slow, and continues to be the case. The decline in 2Q19’s volume was due to trade loading in the previous year before the price increase was effective. Reference was made to volume growth in 1H19. In April, spirits’ volume recovered by 1% y-o-y. In the near term, consumption would also depend on the political situation, formation of government as well as investment flow.
Over the longer term, Thai domestic spirits volume is likely to grow in the low single digit given the relatively high per capita domestic consumption (c.10 litres/ capita) and Thai Beverage’s high market share of > 90%.
DBS: The long-term trend of low growth is not unexpected, and we have already penciled that in our forecasts. This is the main motivation for management’s intention to achieve growth outside of Thailand. In our view, investors are looking at quarterly volume performance as a signal of a structural change in consumption.

ThaiBev: Grand Royal is performing well and target is to achieve 10% growth. Since the acquisition, there has been synergies in costs. Market share is estimated at ~70%, up from c.65%. It also imports bulk whisky from its Scottish distilleries and introduced a premium brand (MacArthur’s) in Myanmar. Contribution of Grand Royal is still relatively small (at 10% of spirits volume) compared to the huge Thai market, though growth will be higher.

ThaiBev: Market share has increased from c.28% prior to the relaunch of Chang Beer brand in Aug 2015, to about 40% currently. The goal to be market leader (market share of C.45%) by Sep 2020 still remains, and management is cognizant that time is ticking. Re-branding in the first phase has helped though the focus now is to ensure that this translates into sales through localised activities, distributors management and on-the-ground activities. That said, company is not foregoing profitability to gain market share.
DBS: After the successful rebranding since Aug 2015 and strong gain in market share, we believe the focus on sell-through and on-the-ground activities is the right track. However, the goal of achieving an additional 5 ppts in market share seems challenging in light of the nearing timeline. Achieving this goal, without sacrificing margins and profitability, should be a catalyst for the counter.

ThaiBev: Sabeco Board and management in place since Aug 2018. Sabeco’s management has divided its transformation into 7 pillars - sales, marketing, supply chain, production, human resources, cost, and the Board. It is focusing on transforming Saigon Special to be the key brand, and “Pride of Vietnam”. Management and Sabeco’s Board have targeted 8% and 7% growth in revenue and net profit for FY19 respectively. There are margin improvement opportunities, though these are internal targets and not disclosed publicly.
DBS: Despite its dominant volume position in Vietnam, Sabeco’s current margins pale in comparison with other regional brewers, which we estimate to be in the region of 30%. As such, we believe there are opportunities for improvement, along with volume increases, which should help drive growth for the group in the medium term.

ThaiBev: Thai Beverage’s management has refinanced and converted acquisition loans into long term debentures, amounting to a total of Bt180bn. The most recent was in Mar 2019. The debentures have varying maturities but the average maturity works out to be 5.2 years, with average interest rate of 3.2%. Net debt/ EBITDA is currently high at > 5x, and prior to acquisition, the target was 2.5x (but was slient on whether it is now the current target). Deleveraging will take time and should progress with its strong cashflow.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2019-06-10

SGX Stock Analyst Report BUY MAINTAIN BUY 0.910 SAME 0.910