• A good start; Thai Beverage’s 1Q19 headline profit jumped 151% on low base, improving operations and associates' contribution.
• Expect positive momentum to continue on lead-up to Thai election, King’s coronation along with peak consumption season in Thailand.
• Medium-term catalyst would be cost synergies, market share gain by Sabeco in Vietnam
• Maintain BUY, Target Price unchanged at S$0.87.

What’s New

Strong recovery in place; 1Q19 operational upturn boost profit growth.

• THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) posted a strong headline growth of 151% y-o-y to Bt7.4bn, on the back of 60% rise in revenue. The robust earnings growth was driven by:
  1. improvement in domestic consumer purchasing power;
  2. low-base effect compared to 1Q18 on the back of destocking by agents;
  3. absence of one-off acquisition transaction fee of Bt2.45bn the same period a year ago; and,
  4. strong associates' contribution.
• Excluding the one-off items seen in 1Q18, core net profit still rose by a strong 37%. 1Q19 is tracking ahead of our forecasts and accounts for 32% of our FY19F net profit estimates.

Maintain BUY, Target Price: S$0.87.

• Our investment thesis remains intact, and the latest set of 1Q19 results has helped to vindicate our view that the downturn in its Thai domestic operational results seen in FY18 was temporary.
• On the back of its performance thus far, it has helped provide a momentum in improvement, particularly with Thai general elections to be held on 24 March 2019, coupled with the King’s coronation in May, amid its peak selling season for Songkran in April.

Medium-term catalyst

• Medium-term catalyst would come from operational improvement and increased contribution from Sabeco, as well as the deleveraging of the group. While share price has increased by 25% since the recent low seen in December 2018, upside catalyst could come from EPS upgrades on better-than-expected operational performance.
• Group revenue was Bt72.6bn, an increase of 59.7% y-o-y, helped by improved contribution from all its segments – arising from spirits’ sales (+28.6% y-o-y), increased contribution in beer (+128.6%) due to acquisition and consolidation of Saigon Beer (Sabeco), food business (+63.9%) and Non-Alcoholic Beverages (1.1%).
• More notably, management’s commentary on its results announcement indicated that the Thai domestic beverage market has showed signs of recovery. This was on the back of private consumption pick-up partly due to farmers’ income levels and government’s welfare card policy. This helps vindicate our view that the weak operational performance in FY18 was temporary and behind us.

Spirits post a strong comeback with segment net profit up by 41.5% y-o-y.

• Spirits sales volume posted a strong growth of 25.7% y-o-y to 181.9m litres, contributed by continued strong performance from Grand Royal Group (in Myanmar), improved consumer purchasing power and a low-base effect in 1Q18.
• On the back of improved domestic volumes, Spirits’ operating margins increased to 22.3%, up by 200bps from 1Q18. Grand Royal Group also posted strong sales volume of 25% y-o-y growth. As a result, net profit from Spirits surged by 41.5% y-o-y to Bt5.69bn in 1Q19.

Beer registered volume growth though net profit affected by higher opex.

• Revenue for Beer segment continued to be helped by consolidation of Sabeco financials, leading to a surge in revenue to Bt33bn (+128.6% y-o-y). Excluding Sabeco, beer sales volume also saw an improvement of 7.8% y-o-y. The improvement was not surprising on the back of Thailand beer production statistics registering growth of 10-13% in the months of October-December 2018. Though this was a tad below industry statistics, we note that there could be some timing difference between production and sales.
• That said, arising from higher advertising and promotional expenses, staff costs, the Beer segment posted a lower net profit of Bt410m, a decline of 53.7% y-o-y.

Non-Alcoholic Beverages revenue improved by a marginal 1.1%.

• Total sales volume increased by 3.6% y-o-y, but revenue growth was partially negated by product mix. The segment was impacted by increase in costs due to the new sugar excise tax and higher material costs. As a result, net attributable losses from this segment widened by 18.7% to Bt292m.

Food segment revenue benefitted from acquisitions.

• Revenue for Food segment jumped to Bt3.6bn (+63.9% y-o-y), largely arising from Spice of Asia and The QSR of Asia (QSA) managing KFC stores in Thailand.
• That said, attributable net profit contribution remained relatively small at Bt151m, an increase of 2.7% y-o-y.

Our Views

Maintain BUY, Target Price: S$0.87.

• We maintain our BUY recommendation with an unchanged Target Price of S$0.87.
• Our investment thesis remains intact, and the latest set of 1Q19 results has helped to vindicate our view that the worst is behind. We believe the strong set of 1Q19 results should provide confidence and a re-rating catalyst for the counter. In the near term, we believe the momentum will continue.
• Further re-rating catalysts could come from improved contribution from Sabeco, gradual deleveraging of the group, as well as regionalisation efforts to be the leading beverage player in ASEAN.

Source: DBS Research - 15 Feb 2019