• Thai alcohol volumes rose y-o-y in Jul 20; we think upcoming government packages may aid consumer purchasing power in FY21F.
• The number of new daily COVID-19 cases in Thailand and Vietnam (Thai Beverage’s major markets) is dwindling. This bodes well for a recovery in those markets.
• Thai Beverage's share price is trading below its -2 s.d. levels, making it an opportune time to accumulate the stock, in our view.
• Upgrade Thai Beverage to ADD with unchanged Target Price.

Falling COVID-19 Cases and Government Stimulus Prompt Upgrade

• We think near-term conditions have improved for longer-term investors who are looking to revisit recovery plays and ride out the political uncertainties in Thailand. Thai Beverage's share price is trading below its 5-year -2 s.d. level. Furthermore, the number of new daily COVID-19 cases in Thai Beverage (SGX:Y92)’s major markets (Thailand and Vietnam) is dwindling. Thailand’s upcoming stimulus measures may support consumer purchasing power in FY21F.

Thai Volumes Pick Up in Jul While Vietnam Volumes Slow

• In Jul 20, selected Thai domestic liquor volumes increased 17.4% while domestic Thai beer volumes rose 26.5% y-o-y, according to Thailand’s Office of Industrial Economics (OIE). 7M20 volumes were still lower y-o-y (spirit consumption fell 9%; beer consumption fell 14.6%) but y-o-y declines bottomed in Apr 2020.
• In Vietnam, estimated Jul 20 industrial beer production fell by 12.6% y-o-y, likely due to the second COVID-19 wave, in our view. 7M20 Vietnam beer volumes are down by 14.6% y-o-y.
• We think volumes in both Thailand and Vietnam may improve as new daily COVID-19 cases dwindle. On 23 Sep, Thailand had three new COVID-19 cases and Vietnam had none.

Thai Stimulus May Boost Consumer Purchasing Power Akin to 2019

• In 2019, Thailand’s domestic alcoholic industries improved y-o-y due to government’s stimulus measures (i.e. state welfare smart cards, income guarantee scheme for farmers, Chim-Shop-Chai (Eat-Shop-Spend) programme). We understand that the government is drafting stimulus plans in order to boost domestic consumption (including a THB51bn cash handout stimulus plan in Oct-Dec 2020 subject to cabinet approval). This may lower cost of living and bodes well for consumer purchasing power in FY21F.

Forecast Changes

• We lift our Thai Beverage's FY20F EPS by 4.8% on the back of higher revenue assumptions as we now expect spirits volumes to only fall 3.3% y-o-y (vs. 8% previously) and beer volumes to decline by only 15.5% y-o-y (vs. 16.6% previously). We also tweak our cost structure for FY20F as we note that Thai Beverage has been optimising costs in 9MFY09/20.
• Our FY21-22F EPS forecasts are relatively unchanged. In FY21F, we assume revenue growth of 8.5% and core net profit growth of 14.3%. This is supported by total spirit (Thailand and Myanmar) sales volume growth of 9.8% and beer (Thailand and Vietnam) volume growth of 17.7%.

Thai Beverage's Share Price Back at Lower Levels

• Thai Beverage's share price is down 34.8% YTD and from its YTD peak of S$0.90 to underperform the STI’s 23.7% decline YTD. The share price is now closer to its 2018 low of S$0.575 when its Thai domestic alcohol sales volume fell on the back of
  1. weaker discretionary purchasing power,
  2. an increase in product prices after the implementation of higher excise tax rates at the end of 2017 and an elderly fund tax at the beginning of 2018.
• Subsequent to the 35% YTD fall in its share price, Thai Beverage is trading at a forward P/E of 13.9x, below its 5-year -2 s.d. level of 15.4x. We deem that the market has priced in the effects of COVID-19 on Thai and Vietnam alcohol volumes as well as the potential political instability in the Thai market.

Upgrade Thai Beverage to ADD

• We maintain our 15.8x EV/EBITDA multiple for the spirit business, i.e. an implied 25% discount to regional spirit average of 21x. We also keep our 10.5x EV/EBITDA multiple for the beer business which is an implied 25% discount to regional beer peers’ average of 14x. These are to account for the near-term political uncertainties in Thailand and the potential uneven recovery in volumes due to COVID-19.
• We also maintain our 30% discount to Thai Beverage’s acquisition price (VND320k/share) for SABECO to account for the potential sluggish recovery in the Vietnam market and delays in any M&As involving its stake in SABECO.
• Our Target Price of S$0.70 for Thai Beverage implies a target 16.7x CY21F P/E which is still s 5-year average of 21.7x. As the stock yields an upside potential of 19% to our SOP-based Target Price, we upgrade Thai Beverage from Hold to ADD.
• Potential re-rating catalysts include swifter recovery in volumes and the resumption of M&As involving SABECO, F&N (SGX:F99) and Frasers Property (SGX:TQ5).
• Downside risks: sluggish volume recovery and lower dividends.

Source: CGS-CIMB Research - 23 Sep 2020