Thai Beverage - DBS Research 2020-05-15: Betting On Alcohol To Bring Cheer During Gloomy Days

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THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Thai Beverage - Betting On Alcohol To Bring Cheer During Gloomy Days

• Thai Beverage's 2QFY20 net profit down 14.5% due to one-off tax; 1HFY20 eked out gain of 1.3%, thanks to strong 1Q20.
• Interim DPS of Bt0.10 declared, down from Bt0.15; commits to at least 50% payout ratio at full year.
• Lockdown measures easing in key markets bodes well; staple plays resilient in uncertain times.

Betting on alcohol to bring cheer during gloomy days

• Despite headwinds posted by COVID-19, we continue to maintain our positive stance on Thai Beverage (SGX:Y92) and the resiliency of alcohol consumption in the countries it operates in.
• In the current situation, we expect consumption to weaken, though we believe the impact should be lesser vis-à-vis other discretionary spending. We also expect 3QFY20 to be sequentially weaker given a seasonally slower quarter, coupled with restrictions arising from the lockdown due to COVID-19. That said, we are optimistic that operations are on the cusp of a recovery on the back of gradual lifting of restrictions.
• We trimmed our earnings by 16%/ 9% for FY20F/21F to reflect a slower sales environment particularly from the restrictions back in April in Thailand, coupled with lower contribution from associates. We project net profit to dip by 6% y-o-y in FY20F but expect a 16% jump in FY21F.
• At current Thai Beverage Share Price, the counter is trading at 17.3x/ 14.9x FY20F/21F, which is below its 10-year historical average of 18.4x.

2Q20 results within expectations; headline impacted by one-off tax charge on beer restructuring.

• Thai Beverage posted headline 2Q20 attributable net profit of Bt4.95bn, down 14.5% y-o-y, on revenue of almost Bt70bn (-12.3% y-o-y). Net profit includes a one-off charge and tax relating to its beer business restructuring amounting to Bt1.1bn, and excluding this, net profit would have increased by 5% y-o-y to Bt6.08bn.
• Not surprisingly, the group’s topline drop was contributed by lower sales from its Spirits, Beer and Food segments, partially mitigated by its Non-Alcoholic Beverages (NAB).

Interim DPS of Bt0.10 declared; committing to pay out at least 50% of profit on full year basis.

• An interim DPS of Bt0.10 was declared, down from Bt0.15 in the same period last year. This represented a 19% payout on 1H20 earnings (vs 1H19 payout ratio of 28.5%).
• Thai Beverage had indicated that it is still committed to its full year dividend policy of “not less than 50% of net profit after deduction of all specified reserves and subject to investment plans”. We believe the lower interim payout is to err on side of caution given the uncertainty arising from the current COVID-19 situation.
• We are penciling in a final DPS of Bt33 per share, which implies total dividends of Bt0.43, equating to 50% payout ratio on our earnings forecast for FY20.

Thai Beverage's segmental performance

• Looking at Thai Beverage's segmental performance, 2Q20 net profit performance was contributed by
  1. its Spirits segment, which posted segment attributable net profit growth of 9.5% y-o-y to Bt5.35bn despite topline declining by 3.9%;
  2. NAB segment continues to improve as seen in 1Q20 to turn in attributable net profit amounting to Bt243m, a reversal from a net loss of Bt143m in the same period a year ago.
• This was offset by substantially lower attributable net profit contribution from Beer segment (Bt7m, down by 99.2% from Bt891m) and a small loss in Food (-Bt20m, a reversal from profit of Bt102m).

Spirits: Spirits volume dipped but still managed to eke out profit growth.

• Total Spirits sales volume dipped by 6.1% y-o-y to 170.2m litres, which we believe came about from its Thai domestic and Grand Royal Group performance, given the same conditions faced by both operations – COVID-19 impact. Despite the lower sales revenue, segment operating profit inched out 0.5% y-o-y growth to Bt6.46bn on the back of lower advertising, promotion and staff costs.
• Operating margins increased to 33.8% from 33.1% a year earlier, which is still within the 32%-34% range seen in the past, highlighting management’s control of costs, in our view. (Chart 2 on previous page)

Beer: Thai beer resilient; Sabeco hit by triple whammy.

• The beer segment had a bad quarter, which is not surprising, having seen Sabeco’s results for the quarter ending Mar 2020 reported couple of weeks earlier. Overall sales volume plunged 28% to 4.77 m hls (hectoliters). Along with that, Beer operating margin fell to 5.9% from 8% a year ago, due to operating deleverage. Excluding Vietnam, Thailand’s domestic beer performed relatively better with sales volume growth of 1.6% despite the challenging conditions.
• Sabeco: Based on Sabeco’s results, which were reported separately earlier, topline and net profit dropped by 47% and c.43% respectively, attributed to
  • strict drink driving laws;
  • repercussions of fake news and
  • lockdown arising from COVID-19.
• Based on media and industry reports, the Vietnam beer industry saw consumption plummeting by 40-50% in the first few months of this year, which is in line with that experienced by Sabeco.
• Other Vietnam beer players such as Hainoi Beer and Alcohol Beverage Joint Stock Corp (Habeco) have also reported sales revenue declines of c.50% and a net loss for the quarter.
• However, based on Heineken’s commentary, it had indicated that its beer volumes grew in the low teens, though in March, volumes declined by mid-single digit. We believe that while this could suggest the strength of its brands (Tiger, Heineken), given the conditions faced in Vietnam, stock levels could be higher than usual.
• Sabeco has indicated that traditionally, its market share does face fluctuations in the various quarters and tends to be slightly lower than average during the Tet (Lunar New Year) holidays. While its 1Q20 earnings (quarter ending March) was disappointing, we noted that the situation is gradually improving with Vietnam being the first country in Southeast Asia to ease its lockdown measures.
• On drink driving regulations, Sabeco’s management has indicated that it would continue to work with the authorities to better manage towards a more gradual and sustainable way of enforcement.

Non-Alcoholic Beverages: Continuing its profitable streak from 1Q20.

• NAB segment’s performance continued to bear fruit, albeit small, with a net profit of Bt243m. This compares favourably against the loss seen last year of Bt386m, and an improvement from 1Q20’s profit of Bt27m. Revenue grew by 5.1% y-o-y to reach Bt4.48bn, on the back of a 6.4% increase in sales volume. This was largely driven by growth in drinking water (+15.1%), offset by declines in ready-to-drink tea (-3.2%), carbonated soft drinks (-8.4%), Jubjai (-40%), and 100Plus (-22%).
• We continue to pencil in continued improvements and for the segment to achieve breakeven in 2020, on expectations of better margins as it continues to focus on better margins and volume growth.

Food: Slipped into losses; challenges ahead due to social distancing.

• Revenue for the Food segment fell by 8.0% to Bt3.48bn, and its bottomline slipped into attributable net loss of Bt122m. As per 1Q20, there were already expectations that performance of this segment would be the most impacted within the group arising from COVID-19.

Valuation and forecasts

• We have trimmed our Thai Beverage's FY20F/21F earnings down by 16%/ 9% factoring in contraction in sales volume on the back of the impact from COVID-19. This is particularly so with lockdowns seen in its key markets, such as Thailand and Vietnam. The silver lining is that these countries have relaxed / are progressively relaxing measures related to COVID-19 and barring a second wave of infections or unforeseen circumstances, we should have seen the worst.

3Q20 may be the weakest quarter, but on a path to recovery.

• Our forecasts project a 6% y-o-y contraction in earnings in FY20F. With 1H20 net profit at Bt13.4bn (+1.3% vs 1H19), we do expect to see a weaker 3QFY20E, before recovery in the last quarter of its FY. Our expectations for a sequentially weaker 3Q20 is premised on the fact that Thailand’s lockdown and ban on alcohol sales started in late March and lasted for the month of April.
• While we have seen media reports and heard anecdotal stories of consumers rushing to stock up, the lockdown and ban will still invariably affect throughput in our view.

Target Price revised to S$0.90; Maintain BUY.

• Along with our lower earnings forecasts and lower fair value of its associates, we have reduced our sum-of-parts based Target Price to S$0.90 (from S$1.04 previously).
• Post earnings revision, Thai Beverage is trading at 17.3x/ 14.9x FY20F/21F, which is below its 10-year historical average of 18.4x.
• See Thai Beverage Share Price; Thai Beverage Target Price; Thai Beverage Analyst Reports; Thai Beverage Dividend History; Thai Beverage Announcements; Thai Beverage Latest News.
• With market uncertainties still plaguing the market, we believe consumer staples players such as Thai Beverage should remain relatively resilient and be a safe harbor for investors.

Andy SIM CFA DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2020-05-15

SGX Stock Analyst Report BUY MAINTAIN BUY 0.90 DOWN 1.040