Thai Beverage - UOB Kay Hian 2020-05-18: 2QFY20 Laying The Path To Recovery, Upgrade To BUY

THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Thai Beverage - 2QFY20 Laying The Path To Recovery, Upgrade To BUY

Thai Beverage reported 2QFY20 net profit of Bt6.0b, up 5% y-o-y, marking a positive surprise. While spirits sales volume was down 6% y-o-y, margins held up well given the segment’s earnings 10% growth y-o-y.
Looking forward, COVID-19 will have an impact on 3QFY20 given the alcohol ban, but we opine that Thai Beverage is well placed to recover given its larger proportion of off-trade sales as well as the easing of measures at its key markets of Vietnam and Thailand.

Thai Beverage (SGX:Y92) reported 2QFY20 adjusted net profit of Bt6.0b, up slightly y-o-y. See Thai Beverage Announcements.
1HFY20 earnings of Bt14.5b (+9.8% y-o-y) represents 57%/62% of ours/consensus full-year forecasts. Although 2HFY20 results will likely be weaker, the slight growth in earnings for 2QFY20 came as a surprise and we deem the results to be above expectations.

Thai Beverage declared an interim dividend of Bt0.10 per share (1HFY19: Bt0.15), and will continue to pay a final dividend, with a full-year dividend policy of no less than 50% of net profit. The group also recorded an extraordinary item of income tax expense and stamp duty from internal restructuring in its beer business amounting to Bt1.1b. See Thai Beverage Dividend History.

Thai Beverage’s revenue decreased to Bt61.4b (-12.3% y-o-y), mainly affected by Sabeco. Revenue for the spirits segment dropped mildly, down 3.9% y-o-y, while the beer segment saw a dip of 23.5% y-o-y. The beer segment was affected by Vietnam’s new drink driving law which had been enacted earlier this year.

The spirits segment recorded a volume decline of 6.1% y-o-y to 170m litres. Despite the lower volumes, segment net margin held up well at 17.9%, higher +1.8ppt y-o-y while net profit grew 9.5% y-o-y.
Management noted that white spirits, which contributes a larger proportion of its portfolio, has a low amount of on-trade sales, which makes it less susceptible to stay-home measures due to the COVID-19 outbreak. However, it can be affected by a weakening economy, though we are encouraged on two fronts: rising agricultural prices and government funding support to farmers in light of the virus.
On the cost front, management noted that it saw cost savings from low molasses prices in the quarter, though it is expected that prices would pick up from 3QFY20 onwards. However, the group noted that it has done better than expected in recycling used bottles which lowers packaging costs.

Domestic sales volumes reached 216m litres, up 1.6% y-o-y. 2QFY20’s decline was largely led by Sabeco, which saw weaker volumes, down 42% y-o-y - hurt by Vietnam’s new drink driving law as well as stay-home measures.
Sabeco’s revenue dropped 47% y-o-y in the quarter, though the operating entity was still profitable. Overall, attributable profit from the beer segment dropped to a net loss position.

Food revenue dropped to Bt3.5b (-8.0% y-o-y) while the non-alcoholic beverage (NAB) segment was profitable in the quarter, recording a net profit of Bt243m mainly due to insurance claims on property damage. Total sales volumes were up marginally to 432m litres (+6.4% y-o-y).

Thailand saw an alcohol ban in Apr 20, of between 2-4 weeks for various provinces. This was subsequently lifted at the start of May 20. While a night curfew and some restrictions in social drinking are still being enacted, off-trade sales for the sizeable white spirits segment offer some support to volume consumption for Thai Beverage.
On a relative basis, Thailand and Vietnam have also seen gradual easing of stay-home measures, which could lead to a faster-than-expected recovery in consumption volumes.

Advertising and promotional costs are some items which the group has identified for cost savings (ie reduction in concert promotions).

We have factored in a volume drop on the back of the lockdown measures, given the curfew and ban of alcohol sales seen in Apr 20, accounting for close to a 40% y-o-y decline in earnings in 2HFY20. Some households, according to local media, have stocked up alcohol in early-May 20 with the lifting of the ban, though we do not expect that it can boost volume levels back to normalcy. Not accounting for another lockdown, we are optimistic of Thai Beverage’s road to recovery.

We value:
1. the spirits business at 17x EV/EBITDA, in line with global peers’;
2. the beer business at 15x EV/EBITDA, in line with peers’ average;
3. the NAB business at 2.5x EV/sales (previously 2x), a discount to peers’ 3.5x; and
4. the food business at 14x EV/EBITDA, in line with local peers’.
Frasers Property (SGX:TQ5) and F&N (SGX:F99), in which Thai Beverage owns 28% each, are valued based on market value.
Key risks include that from Sabeco, which might remain hampered by alcohol consumption-based legislative changes on a longer term basis. Our new target price has incorporated a conservative stance, with an approximately 30% cut to the beer segment’s valuation due to its lower profit levels.
See Thai Beverage Share Price; Thai Beverage Target Price; Thai Beverage Analyst Reports; Thai Beverage Dividend History; Thai Beverage Announcements; Thai Beverage Latest News.
Thai Beverage currently trades at 18x FY20F PE, at -1SD to its 5-year mean PE (16x FY21F PE), and is a robust and potentially stronger-than-expected consumption recovery play.

Lucas Teng UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-05-18

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