The Positives
+ Sabeco performing better than guided. Initial guidance was for flat top line growth for Sabeco due to uncertainty over the clearance of inventory. This has been largely resolved. Sabeco revenue rose 12% YoY in 3QFY18 in local currency terms. Thai Beverage will look to extract cost synergies from procurement and implement best practices across the organization. There will be a brand portfolio review plus due diligence of production facilities.
The Negatives
– Spirit business hurt by the poor macro. Spirit business (72% of group net profit) saw sales volume down 11% YoY and net profit fell 17% YoY. Brown spirits experienced the largest weakness, whilst cheaper white spirits demand was stable. Gross profits were relatively unchanged at 33%, but operating expenses surged by 26%. The only explanation for the jump in operating expenses was there was underspend during the mourning period last year. Thai Beverage has a 90% market share in brown spirits.
– Beer sales in Thailand is similarly weak. Beer sales volume (excluding Sabeco) is down 8.9%. The recent World Cup had little impact on volumes. The late screening meant most consumption was done in homes. EBITDA margins expanded almost 4% points due to the high margins enjoyed by Sabeco. Net margins was Sabeco was 12-13% compared to Thai Beverage 5.5%. However, net profit contribution to the group from beer fell 23% due to the extra Bt1bn per quarter extra interest expense for the acquisition of Sabeco. We estimate Sabeco net profit contribution to the group income this quarter to be minimal, if any*.
*Sabeco net profit contribution to Thai Beverage = THB943b (effective PAT) less interest THB1, 006bn.
Outlook
Hurting the consumption of spirits has been the weak agriculture prices and fishery industry in Thailand. Any recovery for this rural or farming community will come from improvement in commodity prices such as rubber or tapioca. We have yet to see a meaningful improvement. The lack of disposable income is not only confined to the rural sector but also the urban areas. High household leverage plus short work times in manufacturing sector (i.e. less overtime) has translated to lower disposable income. As a result, we see trading down by consumers into lower price point, which are the white spirits. Thai Beverage has not lost market share but is suffering from the sliding macro environment.
A near-term stimulus to demand will be national elections, possibly February or April next year, as this might boost some economic activity. Seasonally, sales also improves in the October to December months.
Downgrade to REDUCE and SOTP-derived TP of S$0.62 (previously S$1.05)
Downgrade to REDUCE with lower SOTP-derived TP of S$0.62. We cut our FY18e earnings by 19%. We peg our SOTP valuations to the lower EV/EBITDA band of global peers. Our DPS for FY18e also reduced to THB0.41 (previously THB0.52).
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