SINGAPORE (May 10): RHB Securities is resuming coverage of Thai Beverage with a “buy” and lower target price of $1.06, saying the stock is oversold despite slower-than-expected recovery in alcohol consumption in Thailand.

Although muted beer consumption volumes remain a concern, RHB believes it has been priced in at current levels.

Trading at 81 cents as at 3.19pm, the stock is valued at 18 times FY18F earnings, which RHB says is “undemanding” as it is close to -1SD of its three-year average forward P/E of 19.6 times.

To be sure, recovery in alcohol consumption in Thailand has been slower than expected, says analyst Juliana Cai in a Thursday report.

Based on official statistics, beer production continued to be on a decline in March, which signalled weak market demand.

“We expect its earnings to improve in 3Q18, as the World Cup lifts demand,” says Cai, “A stronger recovery is anticipated in FY19F, as A&P expenses normalise along with alcohol consumption.”

Cai expects sales and margin in the upcoming 2Q18 results to stay soft although she notes that the rate of decline has slowed from -20% y-o-y in February, to -5% y-o-y in March.

However, she expects a sales recovery in 3Q18 with the World Cup acting as a catalyst to encourage agents to stock up in the months of May and June.

Nevertheless, the beer segment’s full-year earnings is likely to pale in comparison to FY17, as the group is expected to spend more on advertising and promotions (A&P) to drive up beer consumption, says Cai, although this should improve in FY19F as A&P expenditure normalises in line with consumption.

Meanwhile, the spirits segment is expected to be more resilient given the nature of white spirits, which are more frequently consumed in households in the rural regions to enhance strength or energy.

“We believe this could help offset softer demand in brown spirits that are more often consumed on trade, and are considered more discretionary,” says Cai who expects the segment to hold up well this year with the introduction of new products like wine coolers and the consolidation of Grand Royal Group.

In addition, non-alcohol beverages is expected to show strong traction among consumers as improved market share enables the group to reduce overall A&P spending and improve profitability.

The acquisition of over 240 KFC franchise outlets should also to raise the food division’s profitability significantly while its associate, Fraser & Neave (F&N) also charted stronger 2Q18 earnings.

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