• 2019 looks set to be a big year for Thai Beverage, with expectations of a domestic consumption recovery along with the Thai elections. Initial signs from various internal and external factors bode well in lifting Thai Beverage’s prospects as seen in the recent price rally.
• Thai Beverage remains attractive with value to be unlocked from Sabeco as well as a decent yield of 3.3%.
• Maintain BUY and SOTP-based target price of $0.80.

What’s New

Cheering on domestic beer consumption.

• Beer volume in Thailand improved in the last quarter; increasing to 169m litres (+15.0% y-o-y) and 227m litres (+16.1% y-o-y) in October and Nov 18 respectively, according to the Office of Industrial Economics.
• Towards end of the year, volumes are usually seasonally stronger, and due to low base effect, there looks to be some festive cheer in domestic consumption.

Allaying some downside fears by farmers.

• According to the Bangkok Post, the Commerce Ministry is pledging to shore up key farm products this year if their prices fall below targets set by the ministry. These include introducing measures such as linking with fresh markets to assist in product distribution.
• While only certain farm produce are affected (such as oil palm and eggs), the measures may help alleviate fears of depressed prices plaguing farmers, and in turn slowing the slide in rural consumption.

One eye on the elections.

• The Thai elections have been earmarked for Feb 19. However, recent developments indicate that a delay can be expected with the 150-day deadline set on 5 May 19. The elections have been a key event in spurring consumption, as in the case for beer.

Restructuring Sabeco.

• THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) recently announced a loan restructuring exercise, which involves the conversion of its entire loan and interest in Sabeco (US$4.9b) into share capital.

Stock Impact

Seasonality and elections should frontload consumption.

• With strong influence from year-end seasonality as well as the impending elections, we are expecting a robust 1HFY19 for Thai Beverage. However, a structural recovery in purchasing power, especially in the rural communities, may not have rolled in yet, judging from household debt levels which remain slightly high.

Positive election impact for the industry.

• While a delay in the elections is not expected to affect consumption, the overriding sentiment may turn south if the deadline is not met. Assessing the periodic effects of Thai elections across the beer industry, sales volume generally increased before and during elections.
• On a historical average, quarterly consumption increased 3-4% y-o-y during such periods.

Loan restructuring provides transparent control.

• Given that the foreign ownership restriction had been lifted for Sabeco recently, as well as Thai Beverage controlling a majority of the board seats in Sabeco, the loan restructuring does not come as a surprise. This effectively removes the JV partners, which provides a more transparent control of Sabeco by Thai Beverage.

Earnings Revision / Risk

Earnings unchanged.

• Based on our sensitivity analysis, every 5% rise in beer sales volume may improve Thai Beverage’s 1QFY19 earnings by 0.5%.

Valuation / Recommendation

Maintain BUY and sum-of-the-parts target price of S$0.80.

• We value:
  1. the spirits business at 16x EV/EBITDA, in line with global peers;
  2. the beer business at 14x EV/EBITDA, in line with ASEAN peers’ average of 14.5x;
  3. the NAB business at 2x EV/sales, a discount to peers’ 3.0x as Thai Beverage’s Non-Alcoholic Beverage (NAB) business is still loss-making; and
  4. the food business at 15x EV/EBITDA, in line with local peers’.
• FRASERS PROPERTY LIMITED (SGX:TQ5) and FRASER AND NEAVE, LIMITED (SGX:F99), which Thai Beverage owns 28% each, are valued based on market value.

Share Price Catalyst

• Successful execution of organisational restructuring.
• Gaining market share in the beer segment.
• M&A.
• Recovery in spirits and beer volume consumption.

Source: UOB Kay Hian Research - 21 Jan 2019