Thai Beverage - DBS Research 2020-10-20: Toast For Higher Returns!

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THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Thai Beverage - Toast For Higher Returns!

• At -1SD below 10-year historical average, market has not sobered up to alcohol consumption’s resiliency.
• Industry data points to healthy alcohol consumption despite weak consumer confidence; Bangkok protests/ unrest historically has limited impact on sales.
• No compelling reason to raise its stake in Sabeco.
• At c.13x FY21F PE, Thai Beverage is one of the great value-for-money alcohol plays regionally.

Not accorded its weight in (alcohol) content.

• We reiterate BUY on Thai Beverage (SGX:Y92) and Target Price of S$0.90. We believe the market has not attributed the resiliency of the Group’s operations, based on its valuations which are among the lowest for global and regional beverage players.
• As seen in its latest 3Q20 and YTD operational performance, we believe Thai Beverage does not warrant trading below -1SD of its 10-year historical average.

FY20F down, but not out.

• Tracking monthly data for spirits and beer in Thailand, we adopt the stance that the worst is possibly behind us with lockdowns and alcohol sales ban back during April/ May in Thailand. As it closed its financial year in September, with results to be announced in the later part of November, we retain our forecasts and project Thai Beverage to post net profit of Bt21.7bn in FY20 (-6.8% y-o-y from FY19). This is despite a challenging year brought about by COVID-19, and demonstrates the resiliency of the Group’s operations.
• We believe this is a catalyst for share price to re-rate from the current low valuations. Even if net profit should come in below our forecasts, we expect this should arise from weaker contribution from its property associates, rather than core operations.

Operations resilient, consumer confidence off from lows.

• Thailand’s consumer confidence has weakened substantially this year arising from the impact of COVID-19, lockdowns and absence of tourists, coupled with headwinds faced within the global macroeconomic environment. Its Consumer Confidence Index (CCI) plunged to a record low of 47.2 in April at the height of lockdown. That said, confidence has steadily picked up on a monthly basis to 51 in Aug. CCI was steady at 50.2 in Sept.

Has the weak consumer sentiment impacted alcohol consumption in Thailand?

• There have been concerns on alcohol consumption arising from the weak consumer confidence, and the recovery trajectory post the alcohol sales ban earlier in April/ May in Thailand. Tracking both liquor and beer domestic sales figures, July and August data seems to suggest that sales are stabilising and on the cusp of recovery, providing confirmation of the resiliency of alcohol consumption. The impact earlier in the year arose from a ban on sales, rather than sentiment, in our view.

Consumption of spirits and beer picked up after April.

• Thailand’s monthly domestic liquor sales data shows that sales are rebounding after a dismal period earlier in the year. Tracking domestic liquor sales in Thailand based on data from the Office of Industrial Economics, July and August sales are tracking well and posting y-o-y growth of 17%/ 13%, respectively, from earlier months from March till June, which saw high volatility. The volatility was caused by a ban on alcohol sales during the lockdown period from late March to April. Recall that from late March to May, a ban on alcohol sales was implemented across a majority of the 76 provinces in Thailand.
• The same trend can be seen in Thailand’s domestic beer sales. There was a steep y-o-y decline in the months of March to June but sales have since seen a strong 27% y-o-y rebound in July followed by 4% y-o-y increase in August. The rebound trend is less pronounced for beer, possibly due to higher reliance on tourist consumption, while the consumer base for liquor is largely domestic.

Would protest hurt alcohol consumption?

• Past historical data shows demonstrations, political uncertainty has limited impact on alcohol sales. The recent demonstrations in Bangkok once again raised concerns if these could have an impact on share price. While these are valid concerns, we looked at past instances of political unrest and demonstrations in Thailand as well as alcohol excise duty changes.
• Our observation was that Thai Beverage’s spirits sales volume fluctuations seem to be unaffected by political unrest, as seen in the various instances in the past decade, in 2009, 2010 and 2014.
• In fact, our observation was that excise duty changes have a greater bearing on spirits volume movements, which is the main profit driver for the Group.

Vietnam statistics are also showing stabilisation, and a reversion to normality

Vietnam beer industrial production in Sep dropped by a smaller amount, indicating gradual reversion to normality.

• Again, similar trends are seen in Vietnam. Earlier in the year, beer sales was initially impacted by the imposition of drink-driving laws, and thereafter lockdowns due to COVID-19.
• Beer production fell by 30-40% y-o-y in the months of March and April. Having been one of the first countries in Southeast Asia to come out of a lockdown, beer production stabilised in May to July with only marginal y-o-y declines. However, with the second outbreak in Danang in August, production volumes dipped once again. As of Sep, production volumes, while registering 9% y-o-y declines, have recovered slightly from Aug. This possibly indicates a reversion to normality soon.

ThaiBev frontrunner for additional stake in Sabeco? Maybe not.

Sale of additional 36% stake by Vietnam’s State Capital Investment Corp (SCIC).

• With the transfer of the 36% stake by Vietnam’s Ministry of Trade & Industry to State Capital Investment Corp (SCIC), there are media reports suggesting that the sale may happen soon. Thai Beverage has been named as a frontrunner. This has accordingly raised questions on its ability to further add leverage to its seemingly stretched balance sheet.

No compelling reasons for ThaiBev to increase its stake in Sabeco.

• The details of the said sale by SCIC, timing, form, quantum, pricing, and so on, are not known at this juncture. Contrary to mainstream market speculation, we believe there are no real compelling reasons for Thai Beverage to take on the additional 36% stake. Our take is that:
  1. Thai Beverage already owns majority stake at 53.59% in Sabeco, which we believe is a position of strength from a shareholding perspective. Unless the valuation and/or pricing is compelling, it may not warrant topping up.
  2. Existence of major strategic shareholder could put off other strategic bidders. Further to the first point, with Thai Beverage already holding a majority stake, this could put off other strategic investors, unless the potential strategic suitors are willing to hold second fiddle in terms of shareholding.
  3. Gearing high. Thai Beverage’s gearing is already high, and the stake increase may financially not be a prudent step.
  4. Timing not optimal and could be much later than expected. With operating results being impacted by drink driving laws as well as COVID-19, the timing may not be optimal. Looking at past records, we understand that the intention to bring down Vietnam’s MTI stake to below 36% was mooted much earlier (in 2015), but the sale (in which Thai Beverage eventually emerged as the buyer), had only materialised in Dec 2017. No doubt the initial stake sale may pave the way for a subsequent sale, if at all, we believe the timing could be better.

Thai Beverage - Forecasts & Valuation

• Forecasts largely unchanged, projecting Thai Beverage's revenue/ net profit to contract by 9%/ 7% for FY20F. This compares to 1H20 which saw 3.9% topline contraction (vs 1H19) and 1.3% growth in net profit to Bt13.38bn.
• As of 9M20, revenue has contracted by 7.4% y-o-y. Thai Beverage has adopted interim reporting, and hence its 9M20 net profit figure was not available. We expect 2H20 to be impacted in part by weaker contribution from its property associates given the resultant knock-on effects from COVID-19.
• But, on its core operations, we continue to expect steady contribution from its Spirits segment, while its Non-Alcoholic segment moves towards breakeven in FY20F.

Our Target Price of S$0.90 implies 19.8x FY21F PE.

• Our sum-of-parts Target Price for Thai Beverage remains at S$0.90, implying 19.8x FY21F PE, which is still below its 4-year historical average PE.
• We believe valuations for Thai Beverage are attractive vis-à-vis regional and global alcoholic beverage peers, and the market may have overlooked the resiliency of alcohol consumption in Thailand. In addition, we also see gradual deleveraging of its debt position as a positive step, given its stable operating cashflow, and no compelling reasons to take up an additional stake in Sabeco, from our perspective.
• The upcoming FY20E results may give us comfort that operations are recovering and stable. Reiterate our positive stance and BUY recommendation.
• See Thai Beverage Share Price; Thai Beverage Target Price; Thai Beverage Analyst Reports; Thai Beverage Dividend History; Thai Beverage Announcements; Thai Beverage Latest News.

Andy SIM DBS Group Research | Alfie YEO DBS Research | https://www.dbsvickers.com/ 2020-10-20

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