• Key growth driver from Beer
• Look out for M&A and corporate restructuring
• But limited upside at current level

Fixating on beer and NAB for the coming years

Post 1Q16 results, Thai Beverage’s (Thai Bev) share price has done well thus far. The group’s 1Q16 results served as a testament to the success of its new marketing strategy for Chang Beer, and suggested that the beer segment’s impressive growth would likely be sustainable. Recall that the market share for beer had increased from 30% to ~40% and ASP, volume and net profit had improved significantly.

Thai Bev also continues to dominate the domestic spirits market with an 82% volume share (2015) according to Euromonitor. But due to the maturity of the industry, we expect ~1% revenue growth here and believe that the beer segment will help to drive growth in the coming years. The Non-Alcoholic Beverage (NAB) segment could narrow its losses this year, but high SG&A expenses would still have to be incurred whenever new products are launched.

M&A and corporate restructuring to expedite vision2020

In view of their Vision2020 strategic roadmap towards having 50% revenue contribution from countries outside Thailand as well as from NAB, this would potentially be accelerated by M&A as well as corporate restructuring involving the entities (TCC, F&N, FCL, Thai Bev).

We also like that F&N has S$700m available for M&A. Notably, Vietnam looks to be a potentially important market, with SABECO (Saigon Beer Alcohol Beverage Corp) reportedly seeking official approval to sell 53% of its stake through public auction. In addition, Vinamilk, in which F&N holds an 11% stake, had also removed its foreign ownership cap.

Turning neutral for now due to share price run up

Based on sum of the parts (SOTP) valuations and rolling our valuation to one-year forward, our fair value estimate for the stock is lifted from S$0.83 to S$0.89. However, following the share price run up and in view of the limited upside at current levels, we are downgrading the stock to a HOLD for now.

We remain positive over the group’s growth prospects in the years ahead, thus we advocate longer term investors to consider accumulating at S$0.85 and below. We have not incorporated the possibility of M&A into our assumptions.

Source: OCBC Research - 16 Jun 2016