THBEV held a virtual annual information meeting for shareholders in Singapore, sharing updates on its operations in Thailand and Vietnam. Despite facing stiff competition, the beer business is gaining market share in both core markets. THBEV is exploring possible ASP increases in the following 12 months due to rising operating costs from inflation. Also, rising interest rates and a weakening Thai baht have minimal impact on the group. Maintain BUY with a slightly lower SOTP-based target price of S$0.87.

WHAT’S NEW

• Recovery underway. With increased social activity due to the removal of most COVID-19 measures, Thai Beverage (THBEV) expects consumption of both alcoholic and non-alcoholic beverages to improve, in line with our expectations. Nightlife entertainment venues such as bars and nightclubs have reopened while international tourist arrivals have been improving. Resumption of dine-in restaurants has also led a recovery to the group’s food business.

• Fighting to be number one. THBEV’s beer businesses are gaining market share in both Thailand and Vietnam, driven by increased advertising and promotional activities. In Thailand, THBEV has the second largest market share at around 40% (similar to 3QFY22), closing in on the number one spot. It was noted that the market share gap has been closing and is at the narrowest in 13 years. This is largely due to improved quality coverage over the domestic market, backed by a robust and efficient route-to-market strategy. For Vietnam, second-placed Sabeco faces strong competition from its nearest competitor. As Vietnam’s economic activities continue to recover, management expects Sabeco to outperform moving into 4QFY22 and beyond, catching up to its closest competitor.

• Possible additional ASP hikes. Facing record-high inflation, THBEV has increased ASPs twice for both its beer and white spirits respectively since 1QFY22. To combat rising inflation, management noted that the group is exploring adjusting its ASPs higher for its alcoholic beverages moving forward in the next 12 months and believes that there will not be negative pushback from the group’s customers. In our view, ASP hikes for THBEV’s white spirits seem more likely than for its beer products, given falling operating margins for its spirits segments in the last two quarters. Assuming a 3-4% increase in spirits ASPs in 1QFY23, this would boost our FY23 annual revenue forecasts by around 2%. To offset higher import costs due to the sharp depreciation of the Myanmar Kyat, the group also plans to lift ASPs for its international spirits business (around 10% of total spirits revenue) in Myanmar as well.

• Unaffected by rising interest rates and exchange rates. As interest rates rise, management noted that most of THBEV’s interest-bearing debts have fixed rates, long tenures and are denominated in Thai baht. As such, any movements in interest rates and a weakening baht against the Singapore dollar would have minimal impact to the group. THBEV plans to continue deleveraging, with net gearing dropping from 0.86x in 4QFY21 to 0.71x in 3QFY22.

• Deferred BeerCo IPO. THBEV decided to defer the IPO of its beer business due to prolonged challenging market conditions, just three months after reviving plans for the listing. The group maintained its position that it would continue to monitor market conditions and review the proposed listing again in the future. As a recap, THBEV was seeking to sell as much as 20% of the beer business, raising between US$800m-1b which values the beer business at around US$4b-5b (9x-11x FY22F EV/EBITDA), a reasonable valuation in our view given that peers’ average is 13.8x FY22F EV/EBITDA. Given the uncertain global macroeconomic conditions, we reckon that the IPO was shelved due to liquidity concerns and expect THBEV to revive the IPO plans once market conditions improve.

• Divestment of non-core assets. Management noted that there are currently no plans to expand or dispose of its stake in Frasers Property (FPL) and Fraser and Neave (FNN).

STOCK IMPACT

• Gradual recovery in tourist arrivals. Thailand’s international tourist arrivals continued to grow in Aug 22, reaching a pandemic high of 1,174,743, up 4.5% mom. This was driven by the removal of most COVID-19 restrictions in Jul 22 and the return of international travel. We now expect around 8m-9m tourist arrivals in 2022, up from our previous expectations of 6m- 7m tourist arrivals. However, this is still a fraction of the 40m arrivals pre-pandemic.

• Double-edged sword. Thailand’s Director-General of the Excise Department noted that the kingdom is considering increasing taxes on six products in 2023, including non-alcoholic beer and liquor to combat rising alcoholism. This is in line with the department’s ESG strategy on increasing taxes on products that are deemed harmful to the environment and personal health. A decision would be decided in 2023 but may be implemented at a later time. If implemented, this would lead to higher prices for non-alcoholic beer and liquor which we reckon may lead to a shift in demand back to alcoholic beverages. Although beneficial to THBEV, this may also lead to future possible excise taxes on alcoholic beverages, given the department’s original aim to combat alcoholism.

EARNINGS REVISION/RISK

• No change to earnings.

• Potential downside may come from higher-than-expected raw material costs.

VALUATION/RECOMMENDATION

• Maintain BUY with a lower SOTP-based target price of S$0.87 (S$0.89 previously). The lower target price is largely due to lower market valuation for THBEV’s stake in FPL. We still reckon THBEV remains attractively priced at below -1SD of its five-year mean PE, backed by an expected earnings recovery underpinned by favourable tailwinds.

SHARE PRICE CATALYST

• M&As.

• Better-than-expected consumptions volumes.

Source: UOB Kayhian Research - 30 Sept 2022