• Thai Beverage's FY20 net attributable earnings down just 2.2%; above expectations.
• Spirits segment stronger than expected; other segments showed sequential improvements.
• Deleveraging faster than expected on robust cashflow; loan agreements for refinancing should allay concerns.
• Still a good BUY with value in counter.

Thai Beverage's FY20 Attributable Profit Only Dipped Marginally by -2.2% on Resilient Operations

• Thai Beverage (SGX:Y92)’s FY20 attributable net profit declined 2.2% y-o-y decline to Bt22.8bn on the back of a 5.2% dip in sales revenue to Bt253.5bn. This was above our expectations. We were expecting a steeper dip of 9%/ 7% in revenue and net profit to Bt243bn/ Bt21.7bn respectively. It would seem that the impact of COVID-19 was mitigated by the resilience of its operations and good cost control by the management team.
• Despite the pandemic challenges, the credible results were largely driven by;
  1. Spirits segment achieving a attributable net profit growth of 15.4% to Bt21.9bn;
  2. Non-Alcoholic Beverage (NAB) segment posting a turnaround with attributable net profit of Bt306m, from a loss of Bt1.02bn.
• These were offset by weaker contribution from the Beer segment with attributable net profit down 13.5% y-o-y to Bt825m, loss from the Food segment at Bt38m, from profit of Bt418m and weaker contribution from its associates.
• In addition, Thai Beverage recognised a deferred tax expense and non-recurring costs arising from the restructuring of its beer business amounting to Bt2.66bn. Without the non-recurring items, attributable profit from normal operations would have been Bt25.4bn (+9.2% from FY19).

Sequential Improvement in 4Q20

• On a quarterly basis, Thai Beverage's revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) improved sequentially. We estimate that 4Q20 revenue grew 2.1% y-o-y. This was on the back of y-o-y declines in 2Q and 3Q at 12.3% and 15.4% drop respectively. A stronger trend was seen in its 4Q20 EBITDA which surged by 31% y-o-y to Bt11.5bn.

Final Dividend of Bt0.36 Proposed, a Tad Higher Than Expected, Bringing FY20 DPS to Bt0.46 Per Share

• A final dividend per share (DPS) of Bt0.36 per share was proposed (FY19: Bt0.23).
• Including the interim DPS of Bt0.10 paid, Thai Beverage's total dividend for the year is Bt0.46 (FY19: Bt0.48). The payout ratio of 51% is in line with its dividend policy of paying out not less than 50% of profits.
• This final dividend is marginally higher than our expectations of Bt0.33/share, given better than expected results. We believe this continues to demonstrate the management and Board’s confidence in Thai Beverage’s cashflow and financing. The final dividend, after approval at the Extraordinary General Meeting (EGM), is expected to be paid on 25 February 2021.

Spirits

• Strong spirits warded off COVID-19, profit up 15.4%. Thai Beverage’s Spirits segment warded off the effects of COVID-19 and posted a strong attributable profit growth of 15.4% y-o-y to Bt21.9bn, while revenue was up by 2.2% to Bt117.3bn.
• Sales volume for FY20 inched up by 0.2% to 667.9m. This includes sales volume from Grand Royal (GR) (sales performance of GR has not been separately disclosed since the start of FY20). Along with a shift in product mix and cost control in advertising and promotion (A&P) expenses, EBITDA margins expanded to 24.3%. The performance was largely attributed to the Group’s strong product portfolio, coupled with its high off-premise consumption.
• In 4Q20, Spirits continued to its recovery with revenue up by 11.3% y-o-y to Bt28.8bn. This was after two quarters of decline in 2Q and 3Q brought about by disruptions arising from COVID-19.

Beer

• Beer impacted by on-premise consumption; Thailand beer less affected. Thai Beverage’s Beer segment was less than stellar given the effects of the pandemic on on-premise consumption. Topline dipped by 11.3% to Bt106.9bn, while attributable net profit declined by 13.5% to Bt825m.
• Overall beer sales volume dropped by 12.7% to 23.6m hectolitres (hls), contributed largely by a decline in Vietnam. Excluding Vietnam (Sabeco), we estimate that Thailand beer sales registered a marginal 1% dip in sales volume. Sabeco’s sales volume saw a 17.6% drop in volume to 15.6m hls, arising from stringent drink and driving regulations earlier in the year and impact of COVID-19.
• While the Beer segment’s EBITDA margins improved to 12%, from 10.3% a year earlier on cuts in advertising, promotion and staff costs, attributable net profit for the segment still saw a 13.5% decline due to lower top line. That said, as lockdown restrictions were lifted the business started to recover. Tracking its sequential quarterly segment performance, its Beer segment posted only a marginal -1.5% y-o-y dip in revenue in 4Q20, from 23.5%/ 21.3% y-o-y drops in 2Q/3Q respectively.

Non-Alcoholic Beverages

• Turnaround as per Vision 2020 target. The NAB segment posted a 3.1% dip in sales revenue to Bt16.3bn with sales volume dropping by 3.8%. The drop was driven by decrease in carbonated soft drinks (CSD) (-12.3%), drinking water (-0.8%), ready-to-drink (RTD) tea (-1.8%), Jubjai (-36.2%) and 100Plus (-23.4%).
• Despite the decline in sales volume, gross profit and EBITDA improved mainly due to lower cost of sales. In addition, with a decrease in A&P expenses, staff costs and other income, attributable net profit was Bt306m, a turnaround from loss of Bt1.3bn in FY19. The turnaround is a testament to the continued efforts of the management team, and its target to achieve this goal set about 5 years ago.

Food

• Food segment most impacted, similar trend seen in 1H20. Continuing from the trend in 1H20, its Food segment was the most impacted by COVID-19. Revenue for FY20 dropped by 15.4% y-o-y respectively, arising from the prohibition of dine-in at restaurants and food outlets in Thailand.
• While measures such as cost savings, optimization of supply chain and cuts in expenses were taken, the segment still saw a net loss of Bt38m, from profit of Bt418m a year ago. That said, along with the easing of restrictions, the revenue drop seems to be gradually narrowing.

Gearing

• Thai Beverage’s net debt to equity continued to improve towards 1.01x as of 30 September 2020, down from 1.3x a year ago. Net interest bearing debt to EBITDA also improved to 3.91x, from 4.33x a year earlier. This direction is in line with our expectations, though the pace is slightly faster given a better operating performance and cash control. This is a positive sign.

Loan agreement for Bt40bn should allay refinancing concerns.

• On 30 October, Thai Beverage entered into bilateral loan agreements with six banks for a combined amount of Bt40bn. This is for the Group’s financial flexibility and in preparation for two of its debentures that are coming due in March 2021 totaling Bt42.8bn (Bt11.2bn and Bt31.6bn). The remaining Bt2.8bn will be repaid with its internal cashflow. This is within our expectations and we believe the eventual draw down of the loans may eventually be less, with a larger portion being repaid with its cashflow.
• Going forward, we continue to believe that its management is likely to look at deleveraging options and monetisation of its assets could be one avenue.

Valuations and Forecasts

• Our Thai Beverage's FY21F/22F forecasts are raised slightly by 2%/1%. We project EPS (pre-exceptional) growth of 11%/ 12% respectively, on the back of improvement in the global economy as we gradually move past the effects of COVID-19.
• Despite Thai Beverage share price appreciating by 24% since our last note Thai Beverage - DBS Research 2020-10-20: Toast For Higher Returns! we believe there is still upside potential for the counter. Its FY21F forward PE valuation at 15.8x is just at -1.3SD and -0.5SD below its historical 5-year or 10-year valuation respectively.

Source: DBS Research - 26 Nov 2020