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Analysts say 'buy' ThaiBev on cheap valuation and improving fundamentals

Jeffrey Tan
Jeffrey Tan • 8 min read
Analysts say 'buy' ThaiBev on cheap valuation and improving fundamentals
SINGAPORE (Nov 12): In the last two years, Thai Beverage (ThaiBev) has had to operate in a challenging environment. Following the death of revered Thai King Bhumibol Adulyadej in late 2016, domestic sales of its Chang beer and spirits had deteriorated. Th
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SINGAPORE (Nov 12): In the last two years, Thai Beverage (ThaiBev) has had to operate in a challenging environment. Following the death of revered Thai King Bhumibol Adulyadej in late 2016, domestic sales of its Chang beer and spirits had deteriorated. The drop in demand was a result of the restriction of entertainment activities during the one-year mourning period, which was subsequently extended. Then, a new excise tax was imposed last year. As a result, shares of the company closed at 65.5 cents on Nov 8, down 36.7% from their all-time high of $1.035 in mid-2016.

Yet, now may be the time for investors to consider ThaiBev again. The company is seen to be “cheap” for a “branded and dominant” consumer play, according to Exotix Capital, which specialises in providing investment research in emerging markets. This is because at 17 times forward earnings for FY2019 ending Sept 30, the company is trading at a 35% discount to its Asian liquor peers, it notes.

Exotix Capital says ThaiBev’s fundamentals are also on the verge of improving because the mourning period has ended; thus, alcohol consumption is expected to increase. The company’s stakes in other F&B companies are also expected to enhance its performance.

Notably, ThaiBev late last year paid US$4.8 billion ($6.6 billion) for a 54% stake in Vietnam brewer Saigon Beer-Alcohol-Beverage Corp, better known as Sabeco. The latter produces a variety of beer products under the Saigon brand, popular among locals. ThaiBev also acquired a 75% stake in Grand Royal Group, the largest player in Myanmar’s whisky market, for US$741.6 million.

In addition, the company recently announced a new organisational structure and management line-up to realise its Vision 2020 growth objectives. ThaiBev president and CEO Thapana Sirivadhanabhakdi has assumed the additional role of chief beer officer to “level up” the company’s commitment to the opportunities in the beer business. Two new senior positions — chief operating officer — Thailand; and chief finance officer — international business — have been created. Other management changes have also taken place.

“Now may be an ideal entry point ahead of the first full-year results after the Sabeco deal, with ThaiBev due to report FY2018 results on Nov 23,” Exotix Capital analyst Nirgunan Tiruchelvam writes in a report dated Nov 7. He had initiated coverage on the stock with a “buy” call on Oct 25, and has since raised his price target to 93 cents, from 90 cents.

UOB KayHian also has a “buy” rating for the stock, but with a price target of 84 cents. “With organisational restructuring in place to take advantage of synergies and value creation across ThaiBev’s business units, the group can look forward to cost savings from newly integrated business units such as Sabeco and Myanmar Spirits. We remain positive on the group’s ability to turn around underperforming business segments, as well as a renewed management focus on the beer business segment,” write UOB KayHian analysts Lucas Teng and Andrew Chow in a note dated Oct 4.

Exotix Capital forecasts that the company will record earnings of THB23.31 billion ($972.4 million) in FY2018. It forecasts ThaiBev’s earnings to grow 9.3% and 24.7% for FY2019 and FY2020 respectively to THB25.48 billion and THB31.79 billion. “This puts us 16% ahead of consensus in our FY2020 forecasts,” says Tiruchelvam.

UOB KayHian, on the other hand, has an earnings forecast of THB23.60 billion in FY2018. It forecasts the company’s earnings to grow 17.4% and 8.1% for FY2019 and FY2020 respectively to THB27.71 billion and THB29.96 billion. The research house says these forecasts factor in the lower consumption volume from its 3QFY2018 results, but with a view on “moderate” recovery ahead. They also account for slightly higher selling, general and administrative expenses and marginal interest increment.

Thai renaissance

Consumer confidence in Thailand has been working in ThaiBev’s favour. The consumer confidence index has climbed to a five-year high of 83.2 in August, from 80.1 in May, according to data from the University of the Thai Chamber of Commerce. This optimism comes on the back of rising exports, farm prices of produce such as fruits, corn and tapioca, and tourism numbers.

“We deem this a positive sign that alcohol consumption may be gradually recovering,” says UOB KayHian. “Consumption is likely to spread wider in the country towards rural communities with rising agriculture exports, as well as the elections slated for Feb 19 [next year].”

As such, ThaiBev’s domestic beer business is expected to improve, particularly with the relaunch of its Chang beer brand in 2015. The company streamlined its product line and introduced Chang Classic, positioned as its flagship beer. Chang Classic is a light beer sold in emerald green bottles, as opposed to amber. These measures, Exotix Capital notes, have helped ThaiBev gain market share to more than 30% in Thailand. “The investments are finally bearing fruit, owing to an innovative marketing ploy, which is to promote the light beer to widen the drinking population,” Tiruchelvam writes in his Oct 25 report.

KGI Securities is similarly optimistic about the beer business. “We expect beer consumption to rebound in the coming quarter and efficient marketing strategies to continue capturing market share for the company,” the brokerage writes in a note dated Oct 30. It has a “buy” call and price target of 75 cents.

ThaiBev’s domestic spirits business is expected to do well too. Exotix Capital says the company’s sales volume of core spirits could grow faster than expected by 4% in FY2019 and FY2020 — in line with the average for FY2011 to FY2016. This would be driven by higher Thai consumer spending, which is expected to accelerate in 2019 and 2020 as a result of lower unemployment and a new stimulus package as elections loom, it adds.

Bright prospects in Vietnam

Meanwhile, ThaiBev should continue to reap rewards from its investment in Sabeco, which is estimated to control 41% of the beer market in Vietnam, according to Euromonitor data. Sabeco’s next closest competitor, Heineken, controls a 23% share, followed by Habeco at 18%, Carlsberg at 8%, Sapporo at 1% and others at 9%.

Vietnam is one of the world’s largest beer markets. Exotix Capital estimates that Vietnam has a beer consumption per capita of 45 litres, which is higher than that of countries with a similar income level, and even more than that of some developed markets. “Vietnam has a deep and vibrant beer market, with Sabeco at the helm. ThaiBev’s investment in a 54% stake in Sabeco could create synergies, driving earnings in Vietnam,” says Tiruchelvam.

Further, beer consumption is expected to grow at a compound annual rate of 6% from 2015 to 2020, according to Euromonitor data. For one, Vietnam has a large youthful population, with an average age of 30, who view beer as a “cheap and safe pastime”. For another, the excise regime for beer in Vietnam is much more “congenial” towards beer than elsewhere in the region. Beer accounts for more than 90% of the country’s total alcohol consumption, which is one of the highest ratios in the world. Finally, beer is easily accessible because there are limited restrictions on its advertising and sale. This is in contrast to Indonesia and Malaysia, where liquor advertising is heavily regulated.

Debt concern

While things are looking up for ThaiBev, the company’s high leverage and debt servicing ability are a concern. Exotix Capital notes that ThaiBev has a net gearing level of 1.5 times, while its interest coverage ratio has dropped to five times in 3QFY2018 from 27 times in 1QFY2018. This was the result of its taking US dollar-denominated loans to finance its acquisition of Sabeco. The company’s credit rating has been downgraded by Moody’s and Fitch Ratings.

But ThaiBev has made efforts to strengthen its balance sheet. In particular, the company has refinanced its foreign debt by issuing bonds worth THB77 billion — the largest-ever issuance in Thailand.

Still, Exotix Capital thinks the company can further enhance its balance sheet by conducting a restructuring of its holdings. To do so, Tiruchlevam says, associate company Fraser and Neave could inject its F&B business into ThaiBev, in return for the sale of ThaiBev’s stakes in F&N and another associate company Frasers Property to TCC Group, parent company of ThaiBev. This would enable the company to use the funds remaining after selling its F&N stake to pare down its debt.

Such a restructuring would also help streamline ThaiBev’s business. “The current [Frasers Property] exposure dilutes the beve rage exposure,” Tiruchelvam says. “We feel a restructuring would extract value from the beverage holdings of the TCC Group. A restructuring could also raise the free float beyond the 12% threshold. [Moreover,] it would maintain ThaiBev as a beverage-focused entity.”

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