• Thai Beverage’s 1QFY19 adjusted net profit increased impressively by 37% y-o-y, albeit from a low base, due to the excise tax hike in Sep 17.
• Spirits profit grew strongly due to increased volume sales. We still expect to see signs of consumption recovery due to the upcoming elections, however, current valuations appear fair and the beer segment will take time to post progress.
• We raise our target price by 8% but downgrade to HOLD following a 29% return since its last results.
• Entry price: S$0.76.

1qfy19 Results

1QFY19 adjusted net profit above expectations.

• THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) reported 1QFY19 adjusted net profit of Bt7,417m, up 37% y-o-y. This represents 29.4% and 32.1% of our and consensus full-year forecasts respectively, above expectations.

Impressive performance aided by strong spirits segment, improved associates contribution and a low base.

• Spirits sales grew 29% y-o-y on improving domestic purchasing power as well as low base effect when in 1QFY18, sales agents reduced purchases on the back of an excise tax hike.
• Associate contribution (FRASERS PROPERTY LIMITED (SGX:TQ5) and FRASER AND NEAVE, LIMITED (SGX:F99)) soared 219% y-o-y to Bt1,492m, which if excluded, net profit would have increased 25% y-o-y.

Revenue increased across all segments but margins down.

• Group turnover increased to Bt72,627m (+60% y-o-y) with beer sales rising 129% y-o-y, largely supported by Sabeco. But financing cost surged 458% y-o-y to Bt1,772m which brought down net margin to 10.2% (1QFY18: 11.9%).

Stock Impact

Stellar sprits.

• The spirits segment recorded stellar results on rising volume. Sales volume excluding Myanmar spirits, was 158.1m litres, up 24% y-o-y. Total sales volume of Myanmar spirits was 23.8m litres (+35% y-o-y).
• According to management, Myanmar’s spirits saw a good uptick due to a relaunch of products, with market share inching up slightly over the past few months. Segment EBIT margin also improved to 22.5% (1QFY18: 20.7%) on the back of lower administrative expense.

Brewing beer.

• Sales volume excluding Sabeco beer was 223.0m litres, up 8% y-o-y, and including Sabeco beer was 731.8m litres (+254% y-o-y). Due to higher advertising and promotional expenses, EBIT margin decreased to 6.2% (1QFY18: 7.3%).
• While management has seen an improvement in Sabeco since taking over, there appears to be more promotional developments on the horizon as the group looks to reposition its brand portfolio to target different customer segments, especially in Ho Chinh Minh city.

Food & NAB.

• Food revenue increased to Bt3,816m (+64% y-o-y) while the non-alcoholic beverage (NAB) segment continued to record a net loss of Bt289m (-45.5% y-o-y) with total sales volume up marginally to 422.2m litres (+3.6% y-o-y).

Domestic consumption rising, in line with expectations.

• The rise in private consumption during the quarter coincided with an expanding Thai economy and the tourism sector. We expected a strong 1HFY19 for Thai Beverage on the back of year-end seasonality and the elections, although the strength of the spirits segment came as a surprise.
• The recovery in purchasing power from rural communities seemed to be aided by stimulus, such as the government's welfare policy. Thai Beverage cited signs of increasing farmers’ income levels and with fiscal measures kicking into gear, and the worst seems to be behind for domestic consumption.

Earnings Revision / Risk

• We increase our FY19-21 net profit forecasts by up to 6.0%, factoring in better consumption volume and slightly improved margins in the spirits segment.

Valuation / Recommendation

Downgrade to HOLD but with a higher sum-of-the-parts target price of S$0.86.

• We value:
  1. the spirits business at 16x EV/EBITDA, in line with global peers’;
  2. the beer business at a revised 15x EV/EBITDA, in line with ASEAN peers’ average of 15.4x;
  3. the NAB business at 2x EV/sales, a discount to peers’ 3.0x as Thai Beverage’s 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.
• Refer to attached PDF report for details. 

Valuations appear fair; potentially more to come from the beer segment.

• The stock has done well in recent months with a 29% return since its last results. This is largely factoring in expectations of domestic consumption recovery which has been realised in 1QFY19. Current valuations appear fair at 17.6x 2019F PE, which is slightly higher than its long-term mean PE of 16.7x.
• We remain positive over the group’s potential for growth, especially in the beer segment, and note its longer-term prospects.
• We advocate longer-term investors to consider accumulating at closer to S$0.76.

Share Price Catalyst

• Successful execution of organisational restructuring.
• Gaining market share in the beer segment.
• M&A.

Source: UOB Kay Hian Research - 18 Feb 2019