• Share price recovery since post-2Q decline
• Valuations not compelling yet
• F&N acquires Starbucks Thailand

Total Returns of -1.6% Since 2Q19 Results

Since our downgrade to Hold (on 13 May) till 27 May’s close, Thai Beverage PLC (ThaiBev) has posted total returns of -1.6%, vs. the STI’s -2.9%. Notably, the stock declined -7.3% on the first day post ThaiBev’s 2Q19 results before reclaiming lost ground.

We believe the initial share price softness is likely due to two reasons. First, expectations for growth in the domestic spirits segment were revised downwards after the latest set of results. Recall that domestic spirit volumes for ThaiBev fell 5.3% YoY in 2Q19, in contrast to the +24.3% domestic volume growth shown in 1Q19.

Looking ahead, aside from the coronation-related celebrations in May, we expect more muted performance from the domestic spirits segment in the coming quarters. Second, ThaiBev had experienced an especially sharp rally YTD prior to the 2Q19 results release – ThaiBev had posted total returns of 37.2% YTD, vs. the Straits Times Index’s 8.6% as at 10 May’s close – and the sharp decline seen on the first day post results is perhaps in response to the strength of that rally.

Is It Worth Collecting ThaiBev Shares Now?

Valuations look reasonable but are not particularly compelling to us, as at 27 May’s close. According to Bloomberg consensus, ThaiBev is currently trading at a blended forward P/E of 17.8x which is near its 5-year average of 18.2x. While valuations are undemanding, we note that regional economic growth remains an important variable for the company’s outlook given its discretionary consumer product portfolio.

We continue to monitor the US-China trade tensions and its ramifications for global growth closely. On the bright side for ThaiBev, we expect the positive synergies from the Sabeco acquisition to flow through to its bottom line, though this will take time.

F&N Acquires Starbucks Thailand Through Partnership

Separately, associate Fraser and Neave (F&N) announced that it has, through a partnership with Maxim’s Caterers Limited, entered into an agreement to acquire the entire issued share capital of Starbucks Coffee (Thailand). Maxim’s has a long-standing partnership with Starbucks, having been operating and developing Starbucks retail coffee stores as Starbucks’ licensee since 2000.

F&N expects the acquisition to be earnings accretive for the current financial year ending 30 Sept 2019 and to be funded from a mix of debt and equity financing. The acquisition is expected to be completed by end-May. We see this development as a positive for ThaiBev, as it extends its presence and product portfolio through the collaboration with F&N.

After updating our cost of equity, our fair value dips from S$0.88 to S$0.86. We maintain HOLD on ThaiBev.

Source: OCBC Research - 28 May 2019