• Downgrade to TAKE PROFIT from Buy with an unchanged SGD0.92 target price, 1% upside and 2% yield.
• Thai Beverage (SGX:Y92)'s 3QFY19 (Sep) results announced on 13 Aug beat our and consensus’ expectations, driven by strong associates’ contributions. Excluding that, 9MFY19 operating profit met 79% of our full-year estimate, in line with our expectation.
• Thai Beverage's share price has since rallied 9% yesterday and outperformed the STI 45% YTD. We think the stock is fairly priced – investors can look to accumulate if the share price goes below SGD0.83.

Thai Beverage's 3QFY19 PATMI Grew 22% Y-o-y to THB6.7bn

• Thai Beverage performed well during the quarter. Aside from strong results from associates, the group delivered higher sales volumes and better margins across all segments.
• As a group, net margins improved 2.3ppts y-o-y to 12.2%

Awesome Spirits Segment in 3QFY19, But Expects Growth to Temper Down

• Awesome spirits segment in 3QFY19, but expects growth to temper down from here on. This segment delivered 7% y-o-y growth in revenue, while PATMI grew 13% y-o-y to THB4.4bn.
• We note that the improved sales and margins were largely attributed to double-digit sales growth of brown spirits to trade agents. Underlying consumer demand for such spirits only grew at 3%. Consequently, we expect volumes and margins to normalise next quarter.
• In addition, we expect gross margins to contract next year, as Thai Beverage will be changing bottles for its white spirits starting September. Management also expects higher raw material costs, particularly molasses, next year.

Finance Costs Watered Down Beer’s Contributions

• Excluding finance costs, margins from the beer segment improved due to a reduction in advertising & promotions expenditure.
• Its Vietnam subsidiary, Saigon Beer Alcohol Beverage Corp (Sabeco), posted 19% y-o-y growth in profit. But, accounting for an increase in finance costs, 3QFY19 PATMI fell 39% to THB267m.

Good News From the Non-alcohol Beverage (NAB) Segment

• Good news from the non-alcohol beverage (NAB) segment, which posted a second consecutive quarter of positive EBITDA in 3QFY19. Thai Beverage saw positive volume growth across all sub-segments – water, green tea, and soft drinks – as its pushes more sales through general trade.
• According to management, general trade also offers better margins than modern trade. With an improved cost structure, we expect this segment to turn profitable sometime next year.

High on Alcohol, Drink Again When It Is Cheaper

• Thai Beverage's share price has performed well YTD. We deem it difficult to continue rallying next year, given some headwinds in its biggest segment, spirits.
• Investors can look to accumulate at below SGD0.83, which implies 19x FY20F P/E, in line with the 5-year historical average.

Source: RHB Invest Research - 16 Aug 2019