The Positives

+ Sabeco the star this quarter. Sabeco volumes surged almost 15% YoY in 2Q19, due to two main reasons. Firstly, the company mentioned it is gaining market share as overall market volumes are only rising 4-5%. Volume guidance for the year is maintained at 8%. Secondly, the traditional trade load in December did not take place, therefore benefitting January volumes. The two fastest growing brands in their portfolio are Saigon Larger and Saigon Special.

+ Losses at non-alcohol beverages (NAB) segment halved. Losses for NAB halved from Bt351bn in 2Q18 to Bt128bn in 2Q19. Earnings benefited from higher sales and improved product mix. While total volumes rose only 3%, a higher volume of sales were from the higher-priced products (carbonated soft drinks: +16.4%; ready-to-drink tea: +17.1%). Total volumes were sluggish due to a 1.2% YoY decline in drinking water volumes and a 22% YoY drop in sales of the Jubjai herbal drink. Another reason margins improved is the shift from modern to traditional sales.

The Negatives

– Spirits volume down due to some front-loading last year. Spirits revenue was down 5.8% YoY. The drag stemmed from a 5.3% drop in Thailand volumes – brown spirits volume declined YoY while white spirits was flat YoY. Recall that an elderly fund tax of 2% was imposed in February 2018. This would have resulted in higher selling prices in April 2018. Therefore, customers front-loaded orders in March 2018.

Outlook

Improvement in the outlook for Sabeco should persist in the rest of 2019. Some of the restructuring efforts made by the company include:

1. Low single-digit price hike in March. Company was confident there would not be an impact on volumes.
2. At present, Sabeco has 25 breweries. The capacity is much more than required and not all plants are 100% owned by Sabeco. It plans to allocate more purchases to plants they have a higher shareholding. This can help improve gross margins.
3. Sabeco reiterated that it has not invested enough in the brands. More expenditure will be spent this year on the brands and sales force.
4. Sabeco closed one office each in Hanoi and Ho Chi Minh. As at end-2Q19, all cans are down gauged and carton box light weighted.

On the spirits business, it is a category that is still growing, at around 3% p.a. The celebration of the King of Thailand’s coronation in every province will be an extra boost to consumption.

Maintain NEUTRAL with SOTP-derived TP of S$0.83 (previously S$0.81)

Maintain NEUTRAL and increased our SOTP-derived TP to S$0.83 (previously S$0.81). Our target price had been raised as we revised our FY19e net profit forecast upwards by 6%. Growth in Sabeco has been better than expected. However, operating profits had been restrained by a 54% rise in net interest expense. Spirits still account for 80% of group net profits, with beer comprising only 7%.

Source: Phillip Capital Research - 13 May 2019