• 2Q19 drop in headline profit may raise concerns, but delivered credible 1H19.
• 2Q19 impacted by high base from trade loading on Elderly Fund tax and lower associates; interim DPS unchanged at Bt0.15.
• Expect earnings growth to sustain, projecting 12%/13% increase in FY19F/20F; BUY, Target Price: S$0.91.

Maintain BUY With S$0.91 Target Price

• Despite Thai Beverage share price's YTD strong performance, we maintain our positive stance on the counter premised on:
  1. earnings growth of 12%/13% in FY19F/ FY20F driven by volume recovery and domestic consumption;
  2. improvements in operations of Sabeco;
  3. optimism of gradual deleveraging on the back of strong and stable cashflow.
• We maintain our BUY recommendation on Thai Beverage (SGX:Y92) with a revised Target Price of S$0.91, as we shift our valuation base to FY19F/20F. While 2Q19 seemed weak, the strong 1Q19 performance led to robust earnings growth of 40% in 1H19.

Where We Differ? High Gearing Mitigated by Strong OCF

• The market could be skeptical of its high gearing after a series of acquisitions. Based on our estimates, we believe management has termed out its borrowings and will be able to repay/ refinance its obligations with its strong cashflow.
• Our FY19F earnings forecast is 4% below consensus.

Potential Catalysts

• Stronger volume picks up in Thailand, better performance from Saigon Beer Alcohol Beverage Joint Stock Company (Sabeco), faster turnaround in non-alcoholic beverages, and monetisation/partial divestment of its stake in Frasers Property Limited (SGX:TQ5).

Valuation

• Our Target Price is revised to S$0.91 as we shift our valuation base to FY19F/20F. Our Target Price is based on sum-of-parts valuation, derived via discounted cashflows of its core operations, and fair values for stakes in listed associates.

Key Risks to Our View

• Expectations of continued upturn in demand misplaced. Our thesis is premised on continued demand recovery on the back of an uptick in farm income, rising consumer confidence post elections and King’s coronation; and if this is not sustained or misplaced, it could present downside risks.

What's New - Spirits Growth Should Normalise in 2H19

Maintain BUY with higher Target Price: S$0.91.

• Despite Thai Beverage share price bouncing up strongly by C.45% from a low of S$0.57 late last year, we maintain our overall positive stance on the counter. This is premised on:
  1. our expectations that earnings recovery remains on track to register net profit growth of 12%/13% in FY19F/ FY20F;
  2. improvements in operations of Sabeco;
  3. optimism of gradual deleveraging on back of strong and stable cashflow.

2Q19 down, though 1H19 tracking well.

• While headline 2Q19 bottomline performance seems weak, posting 12% y-o-y decline, 1H19 is tracking well within our expectations at 56% of our FY19F forecast. Benefitting from a strong 1Q19 performance, 1H19 net profit registered strong growth of 40% to Bt13.2bn.
• Our FY19F/20F earnings remain largely unchanged. We have rolled over our valuation base to FY19F/20F and coupled with a revised fair value for Frasers Property Limited (see report: Frasers Property Limited - DBS Research 2019-05-06: Asset Recycling To Drive Growth), we raised our Target Price slightly to S$0.91, implying 11% upside.

2Q19 Results Weaker Affected by High Base Last Year

2Q19 slacked off from trade load last year; strong 1Q19 saved the day.

• Thai Beverage’s 2Q19 net profit declined by 12% y-o-y to Bt5.79bn, while revenue increased by 4% y-o-y to Bt70bn. The drop in net profit was due to
  1. lower net profit contribution from its Spirits segment, down 14.8% y-o-y to Bt5.15bn;
  2. drop in associates’ contribution of 36% to Bt675m; and,
  3. its food business.
• This was partially mitigated by increased contribution from its Beer (+69%) and Non-Alcoholic Beverage (NAB) (+77%) segments.

DPS of THB0.15 declared, similar to 1H18.

• An interim dividend per share of THB0.15 was declared, similar to 1H18.
• While 1H19 profits were robust, up by 40% y-o-y, we believe management is cognizant of its high gearing and has taken a conservative stance on its payout. We continue to expect full year dividend payout ratio of around 50%, equating to a yield of 2.6% for FY19F.

Spirits

Drop in 2Q19 performance due to trade load last year.

• After a strong 1Q19 performance (net profit +41.5% y-o-y), Spirits profits slacked off in 2Q19, dropping by 14.8% y-o-y to Bt5.15bn on the back of lower domestic sales volumes (-5.3% y-o-y). This was attributed to a high base in March 2018 where agents and retail shops increased orders in lieu of price increases following the implementation of Elderly Fund tax.
• Overall (including volume from Grand Royal in Myanmar), Spirits sales volume dropped by 2.9% to 181.3m litres. Grand Royal Group continued to post decent volume growth of 10% y-o-y to 30m litres.
• On the back of lower domestic volumes, Spirits’ operating margins dipped to 21.1%, down by 160bps from 2Q18, arising from higher selling, general and admin expenses. As a result, net profit from Spirits fell in the quarter, though 1H19 Spirits’ net profit still registered growth of 7.7% y-o-y to Bt10.8bn.
• We believe the dip in Spirits’ performance is likely temporary arising from effects of the price increase, and this should normalise in ensuing quarters.

Beer

Domestic volume growth in line with market; Sabeco improvements underway.

• Beer segment’s 2Q19 net profit increased by 69% y-o-y to Bt1.09bn on the back of higher sales volume. Overall, sales volume (including Sabeco) increased by 10.6% to 662.7m litres. Excluding Sabeco, beer sales volume increased by a slower 3.6%, which was attributed to weaker export sales.
• Management indicated that the Thai beer market grew by around 9%, and its volume growth was in line with the market. Thai Beverage beer’s market share remains at 40% as per the previous quarters.

Sabeco.

• Based on Sabeco’s reported earnings, its performance in the quarter ending March was relatively robust with net profit up by 10%. At its AGM, it had guided for full year targets of 8%/ 7% topline and net profit growth.
• The management explained that while its net profit growth for the March quarter was stronger vis-à-vis its full year target, there was a need for brand investment to ensure acceleration of growth in the future.

Non-Alcoholic Beverages

Registered positive EBITDA.

• Non- Alcoholic Beverages performance was robust, which saw the segment registering positive EBITDA of Bt308m, from EBITDA loss of Bt405m in 2Q18. This was on the back of higher sales revenue growth of 9% y-o-y to Bt4.46bn and total sales volume growth of 3.1% to 432.2m litres. EBITDA margins improved to 6.9% from -2.4%.
• Management has taken conscious effort to focus on its more profitable products, and has made a shift towards traditional trade, from modern trade channels. The carbonated soft drinks (CSD) and green tea segments registered sales growth of 16.4% and 17.1%, respectively, while drinking water declined by 1.2%.

Food

Higher revenue, though bottomline impacted by start-up costs.

• Food segment revenue benefitted from outlet expansion and revenue increased by 10.5% to Bt3.78bn. Management indicated that same-store-sales growth (SSSG) was robust, at 10%/ 9% for Oishi and KFC. However, net profit declined to Bt102m, down by 51% y-o-y arising from costs associated with the expansion KFC outlets. Thai Beverage currently has 285 KFC outlets.

Valuations and Forecasts

Maintain positive view on counter, Spirits performance should normalise.

• We maintain our BUY recommendation on Thai Beverage, as we continue to believe in the recovery in the Thai domestic market, coupled with the drive towards regionalisation and diversification of the Group over the medium term. While 2Q19 saw a dip in performance, we believe investors should not view this data point as a trend.
• Note that we saw a very robust previous quarter in 1Q19, with Spirits volume jumping by 25% y-o-y. Looking into 2H19, we expect Spirits volume growth to normalise. With that, 1H19 performance is still on track against our expectation of earnings recovery in FY19F, from a weak FY18.
• We continue to project earnings growth of 12%/ 13% in FY19F/ 20F, on the back of sales volume growth in Spirits and Beer, coupled with lower losses in NAB segment.
• Our Target Price is raised marginally to S$0.91, as we roll over our valuation base to FY19F/20F, coupled with a higher estimated Target Price for Frasers Property Limited. 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 - 13 May 2019