• Move to NEUTRAL from Take Profit, with higher Target Price of SGD0.95 from SGD0.92, 7% upside and 3% yield.
• Thai Beverage recorded FY19 PATMI of THB23.3bn, in line with our expectation, but 7% below consensus’ estimate. Higher finance costs dragged down earnings growth despite strong revenue.
• Thailand’s alcohol demand showed strong improvement in 4QFY19 (Sep) due to Government stimulus measures. We expect this consumption momentum to follow through in 1QFY20. As such, we increase our FY20F- 21F earnings by 2-3%, which raises our Target Price to SGD0.95.

FY19 Core PATMI Grew 14% Y-o-y

• THAI BEVERAGE (SGX:Y92)'s FY19 core PATMI grew 14% y-o-y to THB23.3bn, which was largely driven by a 16% y-o-y growth in revenue, as all segments recorded higher sales volumes in FY19.
• Core net margin was however squeezed by 0.2ppt, as finance costs jumped 20% y-o-y after the group issued longer term debentures to replace the bridging loans in 2QFY19.
• Current net gearing remains high at 1.7x. We do not expect the group to take on more borrowings in the near term and do not expect significant changes in finance costs in FY20F.

Expect Momentum in Alcohol Consumption to Flow Through to 1QFY20F

• Alcohol sales volume was particularly strong in 4Q19. Both spirits and beer volumes grew 15% y-o-y in 4Q19. Aside from the low base effect in 4Q18, management cited that Thailand’s end-consumer demand was also strong, possibly due to the stimulus effect.
• SABECO sales volumes also grew faster than its Vietnam domestic beer demand. The group does not see trade agents holding on to excessive stocks during the quarter. Thus, we expect a healthy volume growth in 1Q20 as consumption momentum remains robust, with some partial offsetting effect from the higher base in 1Q19.

Some Margin Compression in the Spirits Segment Next Year

• Some margin compression in the spirits segment next year as we factored in the cost impact of new bottles for the white spirits. Management also highlighted that it had a good price for molasses in FY19. Hence, we expect some increment in raw material costs in FY20F.

We Expect Beer and Non-alcohol Beverages to Drive FY20F Growth

• As finance cost stabilises, we expect to see growth from SABECO and Chang beer to flow down to the bottomline next year. In addition, non-alcohol beverages have shown strong improvements in volumes and margins in FY19. We expect the segment to break even some time in FY20F.
• Key risks include the ability to sustain volume growth momentum; depreciation of MMK may lower Grand Royal Group’s margins.

Source: RHB Invest Research - 25 Nov 2019