The positives
The negatives
Outlook
FY18 outlook remains positive. We expect a pick-up in alcoholic beverages sales volume in FY18 after the effect of mourning period in Thailand subside in Oct-17.
In near term, we expect 4Q17 demand for alcoholic beverages to remain slow as we enter the dry season in the fourth quarter (Jul-Sep). However, the excise tax hike in 16 Sep-17 could lead to a volume spike in early-Sep as retailers build up inventories two weeks prior to the tax hike. Details of the impending excise tax has yet to be disclosed.
Maintained Accumulate with unchanged SOTP-derived TP of S$1.05
We remain optimistic of a recovery in consumer sentiment in Food & Beverages in Oct-17. On-trade consumption should turnaround after the impact of mourning period is over and a broader economic recovery takes effect in Thailand. We are also positive that the Group could expand its margin during the impending excise tax levy in Sep-17.
Other Updates
Competition remains intense with new rival entering the White Spirits market
Carabao Group Plc, a leading energy drink company has entered into the Thai spirits market under the company name, Tawandang 1999, to produce and distribute a full suite of spirits over the next three years.
Tawandang has invested THB3bn to build a fully automated distillery with production capacity of 54.75mn litres per annum in Chai Nat, a central province in Thailand. Taawandang commenced operation in Apr-17 with 50% utilization. It has recently introduced its first white spirit brand into the market and plans to capture 10% of Thailand white spirits market by next year, with a 10-20% lower selling prices compared to peers, via its over 200,000 points of sale throughout Thailand.
We believe ThaiBev will remain the dominant player. It has the competitive advantage of (i) strong brand equity and pricing power in Thai spirits market, (ii) economies of scale from its 18 local distilleries, and (iii) strong distribution channels, covering over 400,000 points of sales in Thailand.
Additional 2% of excise tax to be allocated to the Elderly Fund in 2018
Notwithstanding the Sep-17 excise tax levy, the Thai cabinet has recently approved an additional 2% increase on excise tax from liquor, tobacco and beer sales. The proceeds will be earmarked for the Elderly Fund. The tax increase should take effect in 2018 after the National Legislative Assembly enacts the bill.
Currently, there are three government agencies receiving 1.5% to 2% of the alcohol excise tax, i.e. the Thai Health Promotion Foundation (2% of excise tax), the state-owned TV Thai Public Broadcasting Service (1.5% of excise tax), and the National Sports Development Fund (2% of excise tax).
Growing its wholly-owned Food business at home
ThaiBev has entered into an asset sale and purchase agreement with Yum Restaurants International (Thailand) Co., Ltd. (“Yum”) to acquire more than 240 existing and a number of developing KFC stores in Thailand.
ThaiBev first venture into Thailand’s food market in 2008 via its 89.9% stake in Oishi Group Plc. Ltd. Oishi Group key product offerings are the Japanese Restaurants and ready-to-cook or eat food products in Thailand.
In 2016, ThaiBev decided to invest further into food retailing. Its wholly-owned subsidiary and food product group flagship company, Food of Asia Co., Ltd., has been actively expanding the range product offerings since its incorporation in early-2016.
These somewhat completes the suite of foodservice market – quick service restaurants, full service restaurants, bakeries, as well as ready-to-eat or cook segments. Food of Asia’s vision is to be the leading quality food company in ASEAN with various foods for every lifestyle and occasion.
Background of Yum’s KFC sales
In Jan-16, Yum has announced its intention to sell all its self-managed restaurants (Pizza Hut stores and KFC stores) so it could focus on product development. The move would also enabled Yum to accelerate global growth through franchise partnerships. According to Yum, the franchisee strategy may boost KFC in Thailand to 1,000 stores in the near future, increasing from its earlier plan of 800 stores within 2020. Yum has successfully converted all KFC outlets as franchise model, with ThaiBev being the third and last franchisee in Thailand.
Acquisition of 240 existing KFC stores
KFC has been in Thailand for more than 30 years and has been the No. 1 quick service restaurant brand in Thailand in terms of brand share and number of outlets. There are c.600 KFC outlets run by Yum and two franchisers in Thailand. The two franchisers are Central Restaurant Group (224 branches) and Restaurant Development Co Ltd (128 branches).
Details of the franchise rights or the locations where it will operate have yet to be disclosed. However, from the media, ThaiBev’s competitors, Central Restaurants Group has the right to open KFC branches across the country and some locations in the South, while Restaurant Development Co holds the rights to open KFC in the South and Bangkok.
Yum will work together with its franchisees via ‘Brand Council’, which comprises executives from all three franchisees, to create identical experiences at all KFC restaurants and to avoid business conflicts between three franchisee partners.
The acquisition is expected to be completed by end-2017
The preliminary amount in consideration for the existing KFC stores is about THB11.3bn, including value added tax, and an additional amount in consideration for the KFC stores under development will be determined at closing. We expect ThaiBev to fund the acquisitions via borrowings and internally generated fund. Notwithstanding its yearly cash-flow generation of over THB20bn, its gearing ratio currently stood at 0.47x, i.e. a THB67.65mn debt headroom before reaching 1.0x.
Potential synergies with partnership with Yum
Leveraging on the partnership with Yum, ThaiBev could accelerate KFC’s further expansion in Thailand and enhance its Food business’ operations. KFC’s extensive network in Thailand will provide the Group direct access to multiple customer touch points across the country. This is also in line with ThaiBev’s expansion strategy for sustainable long-term growth.
As KFC is bonded by its international contract with PepsiCo as the official drinks supplier, ThaiBev may not be able to leverage on KFC’s distribution strength in Thailand to boost the sales and exposure of est Cola. Nonetheless, we do not discount the possibility of having Oishi beverages or even Chang beer on KFC’s tap in Thailand.
Note that there are exceptions where non-Pepsi branded soft drinks are being served in KFC outlets. E.g. Barbados, Greece, New Zealand, the Philippines, Romania, South Africa, and Turkey, serve Coca-Cola. In addition to soft drinks, beer is even offered in some European outlets.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
Lin Sin has been an investment analyst in Phillip Securities Research since June 2014, where she started as an economist, focusing on China and ASEAN macroeconomics. Currently, she covers primarily the Consumers and Healthcare sectors in Singapore equities market.
She graduated with a Bachelor of Science in Mathematics and Economics from NTU.
