• Thai Beverage reported FY20 net profit of Bt22.8b, down 2.2% y-o-y, above expectations. Full-year dividend is Bt0.46/share (FY19: Bt0.48). Spirits volume grew by a strong 9% y-o-y in 4QFY20.
• Thai Beverage benefitted from well-managed SG&A costs, which look set to continue in the near term, given lower levels of on-premise activities. We also look forward to a gradual recovery at Sabeco.
• Maintain BUY with a 9% higher target price of S$0.85.

Thai Beverage's FY20 Earnings Above Expectations

• Thai Beverage (SGX:Y92) reported 2HFY20 net profit of Bt9.4b, down 6.8% y-o-y. FY20 net profit was Bt22.8b (-2.2% y-o-y), or 105% and 100% of our and consensus forecasts respectively. Results were above our expectations.
• Thai Beverage declared a final dividend of Bt0.36/share, which brings full-year dividend to Bt0.46/share (FY19: Bt0.48) with total payout ratio at 51%, similar to FY19’s.
• Thai Beverage also recorded Bt2.6b in expenses relating to the internal restructuring in its beer business.

Resilient Amid Pandemic

• In spite of the COVID-19 impact, 2HFY20 net profit of Bt9.4b was only down 6.8% y-o-y. 4QFY20 turnover increased to Bt63.4b (+2.1% y-o-y), reversing from the dip in 3QFY20 (-15.4% y-o-y).
• Thai Beverage’s core markets in Thailand and Vietnam have seen COVID-19 cases largely controlled in their general population.

Cost Mitigation

• Thai Beverage has taken steps to control costs and adapt to the pandemic, which largely protected its profitability. SG&A expense-to-revenue ratio fell to 15.9% in FY20 (-1.1ppt y-o-y) as the group reduced advertising and promotional expenses.

Spirits: 4QFY20 Saw Solid Growth

• For FY20, spirits volume was flat (+0.2% y-o-y) while revenue increased slightly (+2.2% y-o-y). We estimate volumes had risen 9.0% y-o-y in 4QFY20 (3QFY20: -6.3% y-o-y). Management noted that this could be due to the higher rural population from out-of-work labourers on the back of the pandemic.
• Margins eased slightly in 2HFY20 but were still relatively high as selling and distribution expenses fell. EBIT margin was at 21.9% in 2HFY20 (1HFY20: 22.8%).

Beer: Ticking Up

• For FY20, total beer volume was down 12.7% y-o-y while revenue fell11.3% y-o-y. Overall, we estimate beer volumes had recovered substantially (-3.8% y-o-y) in 4QFY20 (3QFY20: -19.9% y-o-y).
• In Vietnam, even with a resurgence of COVID-19 in late-Jul 20, the government managed the situation with a partial lockdown of isolated areas or districts.
• Since the lockdown restrictions were lifted, Sabeco continues to show good recovery and we opine that volumes will likely continue to recover as COVID-19 restrictions are gradually eased. EBIT margin rose to 11.3% in the 2HFY20, (1HFY20: 8.0%) on lower SG&A expense.

Food: Cost Management; NAB: Profits Improved

• FY20 revenue was Bt13.2b, down - 15.4% y-o-y, and the segment slipped into a small net loss. The recovery does not appear to be as quick as the alcohol business’ and THBEV has implemented cost-saving measures such as negotiating for lower rents, optimising its supply chain and deployment of employees.
• For the non-alcoholic beverage (NAB) business, revenue dipped 3.1% y-o-y with a net profit of Bt0.7b, reversing from a net loss of Bt1.0b in FY19.

Strengthening Financials

• Thai Beverage has been deleveraging its balance sheet using cash flows from its operations, with net gearing pared down to 1.01x as of FY20. The group has available credit facilities of Bt40b to refinance its existing bonds due in Mar 21, if required.

Curtailing SG&A Spending

• Advertising and promotions (A&P) spending in areas such as premise activities in bars and concerts has been reduced from the onset of the pandemic. While post-pandemic A&P could normalise as restrictions ease, management noted limited opportunities to spend on A&P thus far.

We Raise Thai Beverage's FY21-22 Net Profit Forecasts

• We raise Thai Beverage's FY21-22 net profit forecasts by 6% and 3% respectively on lower SG&A expense in the near term until on premise activities return to a larger scale.
• Maintain BUY with higher SOTP-based target price of S$0.85.
• We value:
  • the spirits business at 17x EV/EBITDA, in line with global peers’;
  • the beer business at 15x EV/EBITDA, in line with peers’ average;
  • the NAB business at 2.5x EV/sales, a discount to peers’ 3.5x; and
  • the food business at 14x EV/EBITDA, in line with local peers’.
  • Frasers Property (SGX:TQ5) and F&N (SGX:F99), in which Thai Beverage owns 28% each, are valued based on market value.

Source: UOB Kay Hian Research - 27 Nov 2020