• Higher associates brought Thai Beverage's 3Q19 net profit (THB6.7bn) ahead of our forecast of THB5.8bn. 9M19 net profit was 83.1%/81.5% of our/consensus FY19F.
• YTD, domestic alcohol volumes are on an uptrend. Myanmar spirits disappointed. SABECO could surpass its CY19 projections, in our view.
• Domestic business has stabilised. SABECO gains are medium-term growth drivers.
• Maintain ADD with a higher SOP-based Target Price of S$1.00 (prev S$0.96).

Stronger Spirits and Associates; 9MFY9/19 Net Profit Up 15% Y-o-y

• THAI BEVERAGE (SGX:Y92)'s 3QFY9/19 revenue rose 3% y-o-y to THB62.7bn on better spirit revenues (+7% y-o-y) Spirits’ EBIT margin of 22.5% (on better product mix with higher brown spirits and lower average molasses prices) was the main driver of the group’s 3QFY9/19 EBIT rise (+21% y-o-y).
• Higher associates on gains from Frasers Property Limited (SGX:TQ5) (~THB1bn) (+39% y-o-y) also helped lift 3QFY9/19 net profit up 22% y-o-y.
• 9MFY9/19 revenue grew 18% y-o-y on robust domestic alcohol revenues (spirits: +18% y-o-y/beer: +32% y-o-y). EBIT rose 26% y-o-y on operating leverage and cost controls leading to core net profit growth (+15% y-o-y).

Domestic Alcohol Continues Its March; International Weakens

• Domestic 3QFY9/19 spirits and beer volumes grew (+6.8%/+7% y-o-y); sluggish Myanmar spirits growth (-23.4% y-o-y) on supply chain hiccups and SABECO volumes (-3% y-o-y) due to destocking. 9MFY9/19 saw domestic volumes growing 5.7% y-o-y (spirits: +7% y-o-y; beer: +5% y-o-y), with Myanmar spirits +10% y-o-y and SABECO at +64% y-o-y.
• 9M earnings were potentially dulled by weak international volumes, in our view.

Stabilised Domestic Outlook

• Hopes are that any stimulus plans by the Thai government will provide a boost to the lower-income population. This could keep domestic alcohol volumes in a growth mode from 4QFY9/19F onwards. In the interim, Thai Beverage aims to maintain control over operating costs, and we note that beer A&P has been slightly lower.

SABECO Could Exceed CY19F Targets

• During Thai Beverage's recent 2QCY19 analyst briefing, SABECO unveiled the new packaging for its products (featuring a prominent S-shaped dragon) and revealed that it has yet to deploy more initiatives to improve market share and operating efficiency.
• We are positive on its plans to expand production capacity as this should lead to demand growth. It maintains earnings growth target of 7% in CY19, but we believe it can exceed this given the 15% y-o-y growth in 1HCY19.

Maintain ADD

• We like that Thai Beverage’s domestic business has stabilised and view SABECO improvements as the next medium-term earnings growth driver. We raise FY19-21F EPS by 2.1-2.9% namely on higher associates earnings in FY19F and better margins for SABECO.
• Stay ADD with a higher SOP-based Target Price of S$1.00 as we now raise our implied value for SABECO to be based on Thai Beverage’s acquisition price of VND320k/share.
• Catalysts are higher revenue and margins and M&As involving SABECO.
• Risks are gins for the domestic business and SABECO.

Source: CGS-CIMB Research - 16 Aug 2019