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


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.
  • Upgrade to BUY with a target price of S$0.78.

Thai Beverage's 2QFY20 adjusted net profit up by 5% y-o-y.

  • 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.

Interim dividend lower.

  • 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.

Revenue affected by Sabeco; though Spirits decline was mild.

  • 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.

Sprits: Lower volumes, but encouraging profit growth.

  • 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.

Beer: Affected by a larger extent; domestic beer segment remains solid.

  • 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: Dropped to net loss; NAB remains profitable.

  • 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).

3QFY20 will see impact from temporary alcohol ban, but easing of measures offer a glimmer of hope.

  • 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.

Managing costs to sustain profitability.

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

Cut earnings forecasts for FY20-22F by up to 16%.

  • 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.

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