SINGAPORE (Jan 15): Thai Beverage’s recently released annual report — for FY2017 ended September — highlights the company’s growing regional presence. “We have expanded further in Southeast Asia and are now an even more significant player in the region’s beverage industry,” says the company’s chairman, Charoen Sirivadhanabhakdi, in his message to shareholders.
“The branding and route-to-market collaboration between ThaiBev and Fraser and Neave, as well as the coordination of sales and marketing initiatives among us with the support of agents, has facilitated business expansion to other countries in the region,” he says. Through its shared distribution network with F&N, ThaiBev is selling its Chang beer in Vietnam and Oishi green tea in Myanmar. Through the manufacturing base of Malaysia-listed Fraser & Neave Holdings, ThaiBev has also expanded into the halal market in Southeast Asia.
Charoen also highlights ThaiBev’s October 2017 acquisition of a 75% stake in Grand Royal Group, the largest player in Myanmar’s whisky market. “The acquisition is an important step for ThaiBev as we further expand in Southeast Asia. Myanmar’s spirits industry is growing rapidly and proving to be one of the key markets for such products in the region, and we believe that we can work with the Grand Royal Group to co-create collective growth by sharing the knowledge and expertise we have derived from our experience in the spirits business in Thailand and Scotland,” he says. Grand Royal commands a 60% share of Myanmar’s whisky market.
In fact, sundry acquisitions since its listing in 2006 have made ThaiBev a much bigger company. And investors may be undervaluing the group’s increasingly regional nature. According to Bloomberg data, ThaiBev trades at just 16 times earnings — significantly below the valuation of many of its peers. Carlsberg trades at 24 times, Suntory Beverage & Food at 33 times, Asahi Group Holdings at 20 times and Tsingtao Brewery Co at 54 times. Only Kirin Holdings has a similar valuation.
Where has ThaiBev been active over the past year? And how are these additions likely to boost shareholder value?
Adding value
Last month, ThaiBev won a bid to acquire 343.6 million shares, or a 53.6% stake, in Saigon Beer-Alcohol-Beverage Corp, better known as Sabeco. The bid of VND320,000 a share, or VND109.97 trillion ($6.46 billion), was placed by Vietnam Beverage, in which ThaiBev has an indirect 49% stake. Sabeco produces a variety of beer products under the Saigon brand, which is popular among locals.
Also in December, ThaiBev acquired more than 240 existing and developing KFC stores in Thailand for THB11.4 billion ($474.9 million). In October, the company acquired a 76% stake in Spice of Asia for THB114.5 million. Spice of Asia operates a chain of 10 restaurants under four brands, serving hotpot and Thai food. They are Cafe Chilli, Chilli Thai Restaurant, Eat Pot and Pot Ministry.
ThaiBev has also tightened its grip on Sermsuk, buying 31,666 shares in Sermsuk for THB53.50 apiece on the open market, according to an April filing. This raised its direct interest in Sermsuk to 64.67% from the initial stake of 64.66% it had acquired in 2011. Sermsuk’s brands include carbonated drink brand est and Crystal drinking water.
Collectively, these acquisitions are part of ThaiBev’s six-year strategic roadmap outlined in 2014. Dubbed Vision 2020, the roadmap includes a diversification of ThaiBev’s revenue beyond the sale of alcoholic beverages in Thailand. It aims to have more than 50% of its revenue derived from the sale of non-alcoholic beverages by 2020. It also targets to have over 50% of revenue coming from the sale of products beyond Thailand.
Historically, inorganic growth has been the preferred path to scale for ThaiBev. Notably, the acquisition of a 79.7% stake in Thailand’s largest green tea company Oishi Group in 2008 enabled ThaiBev to expand significantly into the non-alcoholic beverage segment. The company’s acquisition of Sermsuk three years later allowed it to tap the latter’s wide distribution network in Thailand. ThaiBev acquired its first stake in F&N in 2012, enlarging it in 2013, which allowed it to expand into the Singapore and Malaysia markets.
Today, ThaiBev’s portfolio is extensive. Beyond its flagship Chang beer, it sells a variety of spirits, brandies, whiskies, vodkas and gins. The non-alcoholic beverage segment consists of carbonated, isotonic, soya and tea-based drinks, as well as dairy beverage products. Notable brands include 100PLUS, NutriSoy, Farmhouse and F&N. ThaiBev also produces frozen foods and ice creams.
For FY2017 ended Sept 30, the company reported earnings of THB34.51 billion on the back of revenue of THB189.99 billion. This compares to earnings of THB12.03 billion and revenue of THB132.19 billion in FY2011 ended Dec 31. ThaiBev changed its financial year in 2016 to achieve better efficiency and reflect seasonal sales of each business.
Mixed reviews
Analysts, however, have had mixed opinions about the value that these acquisitions will have for the stock. OCBC Investment Research says the Myanmar deal is “positive and important for ThaiBev as part of its plans under its Vision 2020 to diversify away from business concentration in Thailand”. However, analysts Eugene Chua and Low Pei Han also think the price tag for the acquisition seems high.
“Based on our estimation, we believe this acquisition was done at about 36 times earnings, and will be funded with both internally generated cash flow and external bank borrowings,” they write in a November report. OCBC has a “buy” call on ThaiBev, with a fair value of $1.07.
DBS Group Research has similar concerns about the Sabeco deal, which it says looks “rich” at over 38.4 times FY2018 consensus earnings. The acquisition bodes well for ThaiBev in its bid to regionalise its operations, and ties in well with F&N’s existing 19.2% stake in Vietnam Dairy Products, better known as Vinamilk. DBS cites Euromonitor data as according Sabeco the biggest market share of 41% in Vietnam, ahead of Heineken’s 23% and Habeco’s 18% in 2016. Assuming that the Sabeco transaction -materialises, DBS reckons Vietnam will be the second-largest market for the ThaiBev group of companies.
However, DBS analysts Andy Sim and Alfie Yeo have concerns about the valuation. “We estimate that at this multiple, the acquisition is likely to be barely accretive immediately, if at all, depending on funding costs and structure,” they say in a December report. DBS has a “buy” call on ThaiBev and a target price of $1.07.
Meanwhile, CIMB Research highlights the potential for ThaiBev’s acquisitions to weigh on its balance sheet. It forecasts net gearing will inflate to 1.5 times in FY2018, from 0.2 times at present, post the Sabeco, KFC Thailand and Grand Royal acquisitions. CIMB thinks ThaiBev may embark on funding exercises to re-optimise its balance sheet. Among the options available to the company are a sale of its stake in property company Frasers Centrepoint and an equity fundraising exercise.
CIMB has recently downgraded ThaiBev to a “hold”, with a lower target price of $1. The research house says uncertainties arising from the Sabeco deal — which may negatively impact its balance sheet and returns — may cap near-term interest in the stock.
Brighter prospects ahead
A few analysts see brighter prospects ahead. Phillip Securities expects on-trade consumption to improve this year, following the end of a mourning period for Thailand’s late king, Bhumibol Adulyadej, and as a broader economic recovery takes effect in the country. The brokerage is forecasting y-o-y earnings growth of 14% to THB29.7 billion in FY2018 — excluding F&N fair-value gains of THB8.497 billion in FY2017 — and revenue growth of 7.9% to THB205 billion. It has upgraded the stock to a “buy” and has a higher target price of $1.18, from $1.05 previously.
Prior stockpiling by agents to beat an excise tax hike implemented in September may dampen demand, but UOB Kay Hian thinks this impact will be muted. “This is not a big concern, given the high seasonality of 1QFY2018 on the Christmas and New Year festivities, which should mitigate the impact,” say analysts Thai Wei Ying and Andrew Chow.
UOB Kay Hian has a “buy” call on the stock. It recently raised its sum-of-the-parts target price to $1.11, from $1.09 previously. The research house says the higher valuation is due to higher market values of associates and a higher price earnings multiple for the spirits business at 18 times, from 16 times previously.
Based on its Jan 11 close of 93 cents, ThaiBev is up 11.2% over the last 12 months.
