• Revenue and earnings were below our forecast. Earnings suffered from less fair value gains in associate Frasers Property (FPL) and loss in the beer division.
• Volumes were healthy for spirits and beer but gross margins suffered. More than 100% of 4Q19 PATMI is from the spirits division.
• Dividends for the year raised by 23% to Bt0.48 (S$0.021).
• Downgrade to REDUCE. We lowered our SOTP-derived TP to S$0.80 (previously S$0.83) as we cut FY20e earnings by 5%. We lowered our margins and raised interest expense estimates. Outlook for FY20e is dependent on government support for farm income. Earnings from Sabeco will be under pressure from interest expenses and contribution to the group will be minimal.

The Positives

+ Healthy volumes for spirits and beer. Spirits volume jumped 14% YoY (Thailand +11.7%, Myanmar +29.1%).  Thailand recovered from an exceptionally weak quarter a year ago where volumes plunged 26%. Myanmar recovered from supply chain and bottling issues in 3Q19. These issues have been resolved. Beer volumes in Thailand jumped 17.3% YoY, whilst Sabeco’s volume rose 9.2% YoY.

+ Higher dividends. The company continued with its committed dividend payout policy of not less than 50%.  

The Negatives

– Beer under pressure from interest expenses. Despite the improvement in volumes and revenues, gross margins fell from 23.1% to 21.5%. Earnings were further suppressed by the 8% rise in net interest expense of Bt965mn in 4Q19. Highest level of interest since the acquisition. The higher interest expense was due to refinancing from lower variable rates to higher fixed rates.

– Less fair value gains from FPL. Another driver of weaker earnings in 4Q19 was lower earnings at FPL. We estimate FPL recorded net FV gains (after exceptionals) of S$119mn in 4Q19 versus S$440mn a year ago.

Outlook

The company has a strong market share in their respective products and possess the ability to raise prices especially in Myanmar and Vietnam. In the medium term, we are negative for two primary reasons – (i) Sabeco will remain an earnings drag to the group due to high-interest expenses; (ii) Soft consumer spending in Thailand that will be dependent on government support. Furthermore, we view spirits consumption in Thailand to have reached maturity.

Downgrade to REDUCE with SOTP-derived TP of S$0.80

We downgrade our recommendation to REDUCE. Our lower SOTP-derived TP of S$0.80 (previously S$0.83) was due to a 5% cut in our FY20e earnings forecast. We lowered our margins and raised interest expense estimates. Outlook for FY20e is dependent on government support for farm income. Earnings from Sabeco will be under pressure from interest expenses and contribution to the group will be minimal.

Source: Phillip Capital Research - 26 Nov 2019