• Thai Beverage's share price has fallen by 11.8% YTD on the back of market volatilities amidst the COVID-19 outbreak. We believe the decline in share price is unjustified, as we estimate 60-70% of Thai Beverage’s products are consumed off-premise – so it is less likely to be affected by the virus outbreak.
• Due to its strong 1QFY20 results, we upgrade our call to BUY.

1QFY20 Results Are in Line

• Thai Beverage (SGX:Y92) registered a healthy 1Q20 PATMI of THB8.4bn (+13.6% y-o-y). This made up 33% of our FY20F estimate, in line with the historical trend of a seasonally strong 1Q.

Revenue Grew 4.2% Y-o-y

• Revenue grew 4.2% y-o-y, mainly from higher sales volumes across the spirits, beer and non-alcohol segments in its Thai domestic market (see Figure2 in attached PDF report for segmental breakdown). We note that the government stimulus package bolstered consumption during the quarter.
• Also, the group benefited from price increases on certain stock-keeping units (SKUs) within the brown spirits segment, while the beer segment gained a 2% market share since April 2019.

PATMI Grew 13.6% Y-o-y

• PATMI grew 13.6% y-o-y largely due to lower advertising and promotions (A&P) expenditure in 1Q20, but we expect A&P expenses to normalise over the next three quarters.
• The spirits segment booked a wider GPM, held up by an increased sales mix in brown spirits and low molasses costs from the previous crop. We expect the GPM to taper off slightly this year, when the group depletes its low-cost molasses inventory.
• The non-alcoholic beverages segment also turned around, and registered a profit of THB125m in 1Q20 – due to a shift in distribution channels to general trade which offered better margins.

Moving Into FY20F, the Outlook for Vietnam Is Likely to be Less Rosy

• The Vietnam government has banned driving under the influence of alcohol, which took effect on 1 Jan. Fines have doubled and could result in the suspension of driving licenses. The tough stance on drunk driving has led to a significant drop in alcohol sales volume since the start of this year.

Changes in Earnings Estimates and Target Price

• We expect Sabeco earnings growth to decelerate to the mid-to-high digits in FY20. However, at the PATMI level, the beer segment (inclusive of Thailand) only constituted 2% of the group total.
• In terms of valuation, Sabeco accounts for 17% of our SOP-derived value of SGD0.92 for Thai Beverage (SGX:Y92). As such, the downtrend in share price is unjustified.
• We trim FY20-22F earnings by 2%, as some of the on-trade alcohol and food consumption could be affected by the COVID-19 outbreak. This, together with some decline in Sabeco’s valuation, lowers our target price.
• Upgrade to BUY.

Source: RHB Invest Research - 17 Feb 2020