• Thai Beverage's share price has been weak YTD, possibly on concerns of flagging growth in Thai economy and the impact of drink driving laws in Vietnam. With a strong start to FY20 with robust 1Q20 results, we believe this should allay concerns of weak growth. We maintain our BUY recommendation and retain our positive stance on the counter.
• Our thesis is premised on:
  1. expectations of net profit growth of 11% in FY20F;
  2. improved contribution from Sabeco and lower losses from Non-Alcoholic Beverages (NAB); and,
  3. continued deleveraging from its strong and stable cashflow, as well as potential monetisation of assets and corporate restructuring.
• Valuation is reasonable at 17.1x FY20F PE, which is below its historical 5-year forward average PE of 22x.

1Q20 Tracking Ahead of Expectations; Post Robust Growth Despite a High Base in the Same Period Last Year

• Thai Beverage (SGX:Y92) reported a strong 1Q20, with core attributable net profit growth of 14% y-o-y to Bt8.4bn, while revenue was up 4% to Bt 75.7bn. This came ahead of our expectations, and a pleasant surprise came largely from strong volume growth in Thai domestic spirits and beer, at 7% and 13.5%, respectively. In addition, the Group enjoyed better tax rates on the back of better tax management and benefits from regional headquarters status.
• In terms of segmental performance, it follows largely that of FY19. 1Q20 net profit growth was driven by
  1. Spirits segment, which posted segment attributable net profit growth of 25.6% y-o-y to Bt5.62bn;
  2. NAB segment turning in a small attributable net profit of Bt27m, a reversal from net loss of Bt253m in the same period a year ago.
• This was partially offset by lower attributable net profit contribution from Beer segment (Bt178m, down by 56.6% from Bt410m) and Food (Bt131m, down 13.2% y-o-y from Bt151m).

Spirits: Surprising Robust Thai Domestic Volume Growth

• Total Spirits sales volume grew by 4.2% y-o-y to 189.4m litres, contributed by both Thai domestic volumes (+7%) but offset by decline in Grand Royal Group (GRG) and its international scotch whisky sales. Thai domestic sales volume increased by 7% y-o-y to an estimated 169m litres helped by both robust sales in brown and white spirits.
• The growth has been consistent with the trend seen in FY19 – posting volume growth of 8%. The performance could be attributed to the resiliency of alcohol consumption and support from the government stimulus package. Management shared that third-party industry data has shown brown spirits grew by 6-7%, while its white spirits also registered good growth and “was one of the best quarters”.
• Grand Royal Group (GRG) in Myanmar saw slight decline in volumes due to slower sell-in volumes to distributors. Management explained that stock levels were slightly higher back in Sep 2019 and this affected volume in 1Q20 as normalisation was underway. Management also stated that GRG maintained its market share, and that expectations were for single digit growth in Myanmar market in 2020.
• Spirits operating margins improved to 23.8%, or by 150bps from 22.3%, arising from better product mix and lower selling and admin expenses (SG&A) as a percentage of sales. Management highlighted that some modest price increases were implemented during Dec-Feb for several of its stock keeping units (SKUs), and while there has been some stock up for these products, inventory levels at agents/ distributors were not particularly high. In particular, inventory levels of its main product, Hong Thong, were healthy.
• Looking ahead, we expect margins should remain healthy on the back of its price increase, effective spend and higher mix of recycled bottles, offset partially by higher raw material price, e.g. molasses.

Beer: Thai Beer Shows Good Growth, Gain in Market Share; Sabeco’s Beer Volume Affected by Market Rumours

• The Beer segment’s volume registered 0.1% decline to 7.31 m hls (hectoliters). Overall, Beer operating margin improved to 6%, from 4.2% a year ago, due to better gross margin, product mix, and reduction in A&P expenses. In this quarter, Thailand domestic beer performed well, while Vietnam dipped slightly.
• Thai domestic volumes posted a robust 13.5% increase to 2.53m hls. Management attributed the results to previous marketing campaigns (focusing on consumer experience via various platforms such as music, sports, food, etc), coupled with its recent push to work closely with its trade partners in focusing on weaker areas.
• Thai market share improved by 2ppts; Vision2020 goal to be market leader is a high target and cannot be ruled out given current momentum. Management shared that its market share has improved by 2ppts since April 2019. Based on its past market share data which has hovered around 40%, this puts its market share at 41%-42% currently.
• We believe the team is still gunning to achieve its Vision 2020 goal of being the market leader (c.45% market share) by this year. It seems a high hard to achieve given the limited timeframe, but given the momentum achieved, we are not ruling it out.

Sabeco saw 6% drop in volume; investors focusing on impact of drink driving laws on consumption.

• For the quarter, Sabeco registered decline in volume, which management attributed largely to unwarranted market rumours, which we understand relates to the ownership of Sabeco and the authenticity of its products. This has since been addressed.
• Likely lesser impact due to Sabeco’s skew towards off-trade consumption. With the imposition of drink driving laws in Vietnam, there has been media reports that consumption has been impacted severely. Sabeco’s management explained it supports the government’s initiative on the drink-drive regulation and that there has been knee-jerk reaction in volumes.
• For Sabeco, they opine that it should be impacted to a lesser extent vis-à-vis industry given that its consumption channel mix is skewed towards off-trade, compared to on-trade.

Consumption impact from drink driving should normalize; Philippines as case study.

• We believe near term impact on alcohol consumption arising from “drink-drive”, “smoking restrictions” regulations should normalise over time. Drawing inference from the Philippines back in 2013, when the “Anti- Drunk and Drugged Driving Act of 2013” was implemented. Based on Euromonitor industry data, we observed that total alcohol consumption volume dipped by 5% that year, while on-premise consumption declined by 3% y-o-y.
• We also note that Sin Tax Reform Law was implemented with an excise tax hike. Total volumes recovered in 2014 and has climbed steadily thereafter. Drawing inference from it, we believe alcohol consumption in Vietnam would revert to its growth trajectory after this initial knee-jerk reaction.

Non-Alcoholic Beverages: Turned Profitable in Quarter, First Since 2012

• Noteworthy in NAB performance was its turnaround, posting a net profit (not seen since 2012), albeit small, of Bt27m. This was a reversal from a loss position of Bt253m a year ago, resulting in a variance of positive Bt280m.
• Revenue grew by 4.4% y-o-y to reach Bt4.2bn, on the back of a 1.9% increase in sales volume. This was largely driven by growth in drinking water (+2.3%), ready-to-drink tea (+5%) offset by declines in carbonated soft drinks (-0.2%), Jubjai (- 12%), and 100Plus (-23.9%). We continue to pencil in continued improvements and for the segment to achieve breakeven in 2020, on expectations of better margins as it continues to focus on better margins segment and volume growth.

Food: Higher A&P Expenses; Segment Most Likely Impacted by Covid-19

• While revenue for the Food segment grew by 1.5% to Bt3.87bn, attributable net profit declined by 13.2% to register Bt131m largely arising from higher A&P expenses. In addition, we note that this segment is likely to be the most impacted by Covid-19 across the Group’s businesses). That said, we opine that the overall impact to the Group is relatively small.

Gearing: Net Debt/ Equity Improved Marginally to 1.17x

• The Group’s net debt to equity continued to improve to 1.17x as of 31 Dec 2019, down from 1.3x as of 30 Sep 2019. Net interest-bearing debt to EBITDA slipped to under 4x, to reach 3.95x, from 4.33x as of 30 Sep 2019. This trend is in line with our continued stance that the Group will see its net leverage position improve progressively over time.
• We maintain our stance, and as confirmed by management in the post-results call that deleveraging continues to be a key priority in its focus this year. As per earlier reported, the listing of its beer assets could be an option.

Valuations and Forecasts

• YTD, Thai Beverage's share price has decline by 10% on concerns of weak growth, which we believe is unfounded, based on the 1Q20 results. This set of results will provide the market with assurance that its operational performance is progressing well. Our Target Price of S$1.04 is maintained and implies PE of 22.4x, which is around its 5-year historical average forward PE.
• We continue to project earnings growth of 11%/ 8% for FY20F/ 21F on the back of growth from Sabeco, breakeven for its NAB coupled with stable growth at its Spirits operations.

Regionalisation, coupled with deleveraging as share price catalyst.

• We continue to remain positive on the counter and expect its regionalisation strategy to aid in its growth profile and re-rate the stock price.

Deleveraging and monetization of assets could be share price catalyst.

• As indicated in our previous report Thai Beverage - DBS Research 2019-11-24: Happy Hour Extends To FY20, with its Thai operations in good position, we believe the focus continues to be on the Group’s deleveraging strategy going forward and remains to be amongst the top few key priorities of management. With that, possibility of asset monetization could aid in quicker deleveraging of the group, and hence a potential share price catalyst.

Source: DBS Research - 17 Feb 2020