• Thai Beverage (SGX:Y92)'s 3QFY19 tracking ahead on margins, and associates’ contribution.
• Spirits’ earnings back on a growth path, allaying concerns of weak consumption.
• Reiterate our view that Thai Beverage’s earnings will be driven by domestic recovery and improvements from Sabeco.
• Maintain BUY, Target Price unchanged at S$0.91.

What’s New

3QFY19 tracking ahead on better margins, and associates’ contribution.

• THAI BEVERAGE (SGX:Y92) posted a relatively strong net profit increase of 22% y-o-y to Bt6.65bn in 3Q19. This was on the back of higher margins across its segments as well as better than expected contribution from its associates. As a result, 9M19 profit of Bt19.86bn was up 14.3% y-o-y from Bt17.4bn (excluding exceptionals) for the same period last year and accounted for 84% of our full year forecast.
• Group revenue was Bt62.7bn, an increase of 3% y-o-y, led by improvements across all segments, except beer. Spirits’ sales revenue accounted for the bulk of the increase, rising by 6.9% y-o-y to Bt26.3bn, while Non-Alcoholic Beverage (NAB) and Food posted increases of 0.5% and 11.8% y-o-y to Bt4.25bn and Bt4.05bn, respectively. Beer, on the other hand, recorded a marginal dip of 0.3% y-o-y to Bt28.2bn.
• In its results commentary, it stated that while the Thai economy expanded at a slower pace, domestic demand and government spending continued to grow. In addition, farm income has also risen slightly. These factors contributed to the improvement for the food and beverage industry and reaffirm our earlier views of a recovery ahead. See Thai Beverage's announcements.

Spirits’ returns to growth; net profit contribution up by 13.1% y-o-y.

• Spirits sales volume was 2.1% y-o-y higher at 145.5m litres, contributed by Thai domestic volumes on improved consumer purchasing power, while Grand Royal Group’s volumes dipped.
• On the back of improved domestic volumes, higher gross margins and lower selling and distribution expenses, Spirits’ operating margins increased to 21%, up by 100bps from 3Q18. As a result, attributable net profit from Spirits improved by 13% y-o-y to Bt4.44bn in 3Q19.

Beer revenue dipped slightly.

• Revenue for Beer segment dipped marginally by 0.3% y-o-y to Bt28.2bn, on the back of lower sales volume from Sabeco (-1% y-o-y). Excluding Sabeco, beer sales volume improved by 3.2% y-o-y to 193m litres for the quarter. Gross margins for the segment improved to 23%, from 22% last year, on the back of lower costs of sales.
• Along with lower SG&A-to-sales for the segment at 13.8%, which is down from 15% a year ago, operating margins for beer increased to 8.6% with operating profit at Bt2.4bn, up from Bt1.99bn. However, given higher interest costs, attributable net profit slid 39% y-o-y to Bt267m.

Non-Alcoholic Beverages posted lower losses on better product mix.

• Total sales volume increased by 10.6% y-o-y, but revenue growth was partially negated by a less than optimal product mix. Sales revenue for the segment inched up slightly by 0.5% y-o-y to Bt4.25bn. The segment benefited from lower COGS, leading to an improvement in margins and hence attributable net loss narrowed to Bt190m, from Bt316m loss a year earlier.

Food segment revenue tracking well.

• Revenue for Food segment increased to Bt4.05bn (+11.8% y-o-y), attributed to Oishi and The QSR of Asia (QSA) managing KFC stores in Thailand. As a result of lower COGS and SG&A, attributable net profit jumped 218% to Bt159m.

Our Views

Maintain BUY, Target Price: S$0.91.

• We maintain our BUY recommendation with an unchanged target price of S$0.91.
• Looking ahead, 4Q tends to be a seasonally slower quarter. That said, we maintain our positive stance on the counter, premising on:
  1. earnings growth of 12%/13% for FY19F/ FY20F driven by volume recovery and domestic consumption;
  2. improvements in operations of Sabeco;
  3. optimism of gradual deleveraging on back of strong and stable cashflows.

Source: DBS Research - 15 Aug 2019