• Thai Beverage’s 1QFY9/19 net profit of THB7.4bn was well above our THB5.9bn estimate, at 34.9%/32.2% of our/street FY19F forecasts (THB21.3bn/ THB23.1bn).
• Management sees domestic consumption finally on the mend, especially with the upcoming elections in Mar 19. SABECO integration is still underway.
• We raise our FY19-21F EPS on heightened confidence in Thai Beverage’s recovery. Our SOP-based Target Price is raised to S$0.90 and we maintain our ADD call.

Core Net Profit Up 37% Y-o-y

• THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)'s 1QFY9/18 revenue rose 60% y-o-y as spirits (+28% y-o-y) and beer (+129%) revenues were led by a recovery in domestic volumes; and rise in Myanmar spirits volumes.
• EBIT rose 160% y-o-y, while higher associates earnings (+107% y-o-y) – growth in Vinamilk contributions for FRASER AND NEAVE, LIMITED (SGX:F99) and better Australia residential and China operations for FRASERS PROPERTY LIMITED (SGX:TQ5) (Thai Beverage owns 28.5%/28.4% respectively) - was another positive bump-up.
• Abnormally-low minority interests (-40% y-o-y) due to “house-keeping exercises” performed by SABECO in its 4QCY18 was the icing on the cake (we understand that the latter could normalise in the coming quarters).
• Overall, net profit improved 37% y-o-y.

Domestic Volumes Finally ‘up’; Myanmar Volumes Surge as Well

• In FY18, domestic spirits and beer volumes shrank by 9.4% and 11.4% respectively y-o-y; but in 1QFY9/19, Thai spirits/beer volumes rose 24.3%/7.7% y-o-y respectively. Besides the low base effect seen in 1QFY9/18 (reduced orders after the excise tax hike in Sep 17), volumes also grew due to improvement in underlying private Thai consumption. According to management, third-party data show brown spirit volumes likely grew at a normalised 5-6%, whilst white spirits grew even more.
• For beer, underlying government data showed a 7.8% y-o-y increase. Myanmar spirits volumes surged 37.4% with the relaunch of some Grand Royal Group (GRG) products that performed well.

“Feel Good” on Domestic Scene; SABECO Synergies Still to Come

• Management anticipates FY19F to be a positive for domestic alcohol consumption as government stimulus campaigns should help to sustain the recovery of private consumption, at least, until the general elections, expected in Mar 19. Thereafter, the Coronation of the King and Songkran festival are also expected to be joyous moments.
• For SABECO, optimisation of market share, production, packaging and transportation systems are still not completed, with hopes of results by end-FY19F. The calibration of joint procurement processes with Thai Beverage and their brewing capacities are also ongoing.

Confidence Re-instilled; Maintain ADD

• We are heartened by the improved domestic consumption environment; hence we lift our FY19-21F net profit on higher domestic spirit and beer volumes and higher associate expectations.
• We raise our SOP-based Target Price to S$0.90 (from S$0.83) featuring a narrower discount to its peers for its core business. Maintain ADD.
• Catalysts are higher-than-expected margins across all segments, better results from SABECO and M&A activities.

Valuation and Recommendation

• We raise our FY19-21F net profit forecasts by 6.2-8.1% mainly on higher domestic spirit and beer volumes and higher associate earnings expectations. Thai Beverage is now still trading at 18.2x CY20F P/E, still below its 5-year average mean of 20x, making it attractive, in our view.
• We reduce our discount in Thai Beverage to 5% from 10% previously for its core businesses. This and the earnings increases raise Thai Beverage’s SOP-based Target Price to S$0.90. See attached PDF report for SOP valuation details. 
• Downside risks include lower volume growth leading to lower operating margins on Thai Beverage’s domestic business; and lower SABECO market share growth which leads to a slower realisation of synergies.

Source: CGS-CIMB Research - 15 Feb 2019