Thai Beverage - DBS Research 2019-11-24: Happy Hour Extends To FY20

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THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Thai Beverage - Happy Hour Extends To FY20

• THAI BEVERAGE (SGX:Y92)'s FY19 earnings staged a recovery as expected with net profit up 14% to Bt23.3bn.
• Spirits segment rebounded, Beer’s operating profit was robust but net profit impacted by higher interest costs.
• Final DPS of Bt0.33 proposed, higher than FY18’s 0.24. See Thai Beverage Dividend History.
• Maintain BUY with higher S$1.04 Target Price on earnings growth, regionalisation strategy and deleveraging.

Robust FY19; expecting happy hour to be extended

• We maintain our BUY recommendation with a higher target price of S$1.04, premised on:
  1. steady growth in net earnings at 11% in FY20F;
  2. improved contributions from its 54%-owned Saigon Beer Alcohol Beverage Corporation (Sabeco) and lower losses from its Non-Alcoholic Beverages (NAB);
  3. continued deleveraging from its strong and stable cashflow, as well as potential monetisation of assets and corporate restructuring.
• Valuations is reasonable at 19.1x FY20F PE, below its historical 5-year forward average PE of 22x.

4Q19/ FY19 results within expectations; reaffirms our view that weak FY18 results was temporary.

FY19 earnings up 14% - within expectations.

• Thai Beverage’s FY19 core net profit grew 14% y-o-y to Bt23.3bn, while revenue was up 16% to Bt 267.4bn. On a reported basis, net profit growth was higher at 30%, arising from acquisition related costs of Bt2.46bn incurred in FY18. Thai Beverage’s 4Q19 net profit rose 16% y-o-y to Bt3.4bn, while topline improved by 11% to Bt62.1bn.
• See Thai Beverage Announcements; Thai Beverage Latest News.
• The growth in FY19 net profit was largely driven by
  1. better performance from its Spirits segment, which posted 13% expansion in net contribution to Bt19.2bn;
  2. narrower losses in its NAB segment of Bt1.05bn, an improvement of 21%;
  3. higher associates’ contribution of Bt4.8bn, up by 27% y-o-y.
• This was partially offset by lower profit contribution from Beer segment (Bt826m, down 36% from Bt1.3bn) and Food (Bt418m, down 20% y-o-y from Bt519m).

Final dividend of Bt0.33 proposed; FY19 DPS totaled Bt0.48 per share.

• A final dividend per share (DPS) of Bt0.33 per share was proposed (FY18: Bt0.24) and including the interim DPS of Bt0.15 paid, total DPS for the year amounted to Bt0.48. (FY18: Bt0.39). FY19’s payout ratio equates to 53% and is in line with its dividend policy of paying out not less than 50% of profits. See Thai Beverage Dividend History.
• Despite its seemingly high gearing, we expect Thai Beverage to be able to meet its stated dividend policy given its strong cashflow, coupled with the maturity of its debentures, which are well-termed out.
• The final dividend, after approval at the ECM, is expected to be paid on 28 Feb 2020.

Spirits: Volume growth helped by improving consumption.

• Spirits sales volume for FY19 was 8.9% y-o-y higher at 666.5m litres, contributed by both Thai domestic volumes and Grand Royal Group (GRG). Excluding GRG, sales volume increased by 7.9% y-o-y to 577.8m litres on the back of improved domestic consumption. Management opined that this was consistent with the trend seen earlier this year. Despite a weaker outlook for the Thai economy on the back of macro uncertainties, we believe Spirits volume should continue to remain resilient and could be supported by government stimulus package.
• GRG sales volume also posted robust growth for the year reaching 89m litres, with an estimated increase of c.15% y-o-y. In 4Q, volume growth bounced back strongly to surge by c.40% y-o-y, partly arising from a dip in volume in 3Q19 arising from a supply chain hiccup which was disclosed earlier.
• Spirits’ operating margin improved marginally to 21%, from 20.7% on back of higher sales volumes, but was negated partially by an increase in past service cost for employee benefits. Arising from the growth in volumes and above factors, Spirits net profit contribution for FY19 was higher at 12.9% y-o-y to Bt19.2bn.

Beer: Thai beer volume recovery; robust Sabeco volume growth, net profit impacted by higher interest expenses.

• The Beer segment posted robust volume growth of 31% y-o-y to 27m hls (hectoliters), driven largely by contribution from Sabeco. Sabeco was acquired in Dec 2017 and contributed about 9 months in FY18. Notwithstanding this, beer sales volume (excluding Sabeco) posted an increase of 7.4% to 8.04m hls.
• For Sabeco, we estimated that sales volume growth remained robust with 4Q19 volumes up by over 7%.
• While Beer’s operating profit margin improved to 6.6%, from 5.2% in 4Q18, contribution to net profit dropped by 36% y-o-y to Bt826m arising from higher finance costs relating to loans taken for Sabeco’s acquisition.

Non-Alcoholic Beverages: Lower losses; achieved positive EBITDA for FY19.

• NAB posted revenue growth of 7.5% y-o-y to reach Bt17.4bn, on the back of a 5.4% increase in sales volume. This was largely driven by growth in drinking water (+3.5%), carbonated soft drinks (+16.4%) and ready-to-drink tea (+9%), offset by declines in Jubjai (-20.8%), 100Plus (-12%) and Lipton (-100%).
• The segment posted positive EBITDA of Bt555m, a reversal from a loss of Bt95m in FY18. As a result, attributable net loss was a smaller Bt1.05bn, down from Bt1.3bn in FY18. We continue to pencil in continued improvements and expect the segment to achieve breakeven in 2020, as it continues to focus on the better margin segments, and volume growth.

Food: Bottomline impacted by finance costs and depreciation.

• Food segment posted robust revenue growth of 17.3% y-o-y in FY19 to reach Bt15.6bn with higher number of outlets. However, operating margins contracted to 5.4% on the back of startup costs, past employee service expenses and higher advertising and promotion expenses.
• The Group currently has 305 KFC outlets, up from 285 as of mid-FY19. As a result, attributable net profit contracted by 19.5% to Bt418m.

Gearing: Net debt/ Equity improved marginally to 1.3x.

• Thai Beverage’s net debt to equity improved marginally to 1.3x as of 30 Sep 2019, down from 1.34x a year ago. Net interest bearing debt to EBITDA also improved to 4.33x, from 5.52x a year earlier.
• Management reiterated that its dividend policy remains at “no less than 50%”, and we believe it should continue to be able to maintain this on the back of its robust cashflow. In fact, DPS has increased in line with higher profits, as per our earlier expectations.
• Going forward, we believe management is likely to look at deleveraging options and we continue to opine that monetisation of its assets could be one avenue.

Valuations and forecasts

Maintain BUY, Target Price raised to S$1.04.

• The latest set of 4Q19/ FY19 results reaffirms our positive view of the company, and its prospects. We raised our Target Price to S$1.04 as we roll our sum-of-parts based valuations to FY20F. Our Target Price implies PE of c.22.4x, which is around its 5-year historical average forward PE. See Thai Beverage Target Price.
• Thai Beverage Share Price has outperformed in 2019, rising by c.46% YTD, on the back of the recovery in its operating performance, we believe there is further upside as we move into 2020.
• We are projecting earnings growth of 11%/ 8% for FY20F/ 21F on the back of growth Sabeco, breakeven at NAB coupled with stable growth at its Spirits operations. We revised our FY20/21F earnings down marginally by 3%/ 1% as we tweaked down our growth and margin assumptions for its Thai domestic beer and NAB segments.

Regionalisation, coupled with deleveraging as share price catalysts.

• We continue to remain positive on the counter and expect its regionalisation strategy to aid earnings growth and re-rate the stock price. Its acquisition of Sabeco seems to be bearing fruit with the robust growth seen in Sabeco’s 3QFY Dec19’s financial performance, while Grand Royal continues to post robust volume growth.
• With its Thai domestic operations seemingly on the cusp of recovery after the weak consumption in 2017/2018, we believe the focus now would be on the Group’s deleveraging strategy going forward.
• Net gearing and net debt/ EBITDA have improved marginally to 1.3x/ 4.33x, respectively as of 30 Sep 2019 (vs 1.34x/ 5.52x as at 30 Sep 2018); and, we believe the strategy to deleverage remains among the top key priorities of management. As such, asset monetisation potential could aid in deleveraging taking place at a faster pace, and hence a likely share price catalyst.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2019-11-24

SGX Stock Analyst Report BUY MAINTAIN BUY 1.04 UP 0.910