Thai Beverage PLC – Full of spirit – A record quarter February 17, 2020 296

PSR Recommendation: BUY Status: Upgraded
Last Close Price: S$0.65 Target Price: S$0.950
  • Revenue was within our estimates but earnings beat forecast. Beer operations disappointed but spirits division performed well.
  • Spirits division net profit jumped 25% YoY in 1Q20 on higher volumes and better margins. Spirits account for 84% of group PATMI. Volumes touched a record 89mn litres.
  • Beer sales volumes was a disappointment. Sabeco volumes dropped 6% in 1Q20 due to certain publicity regarding its ownership.
  • We are upgrading our recommendation to BUY. The spirits business sales volume and margins are better than expected. Sabeco beer business should recover in the following quarters. We raised our SOTP-derived TP to S$0.95 (previously S$0.80). Our FY20e earnings is raised by 6%. We increased our margin assumption and modelled profitability for the NAB business.

 

The Positives

+ Margin expansion for spirits business. Volumes were up 4.2% in 1Q20. Sales volume of brown spirit, which have higher margin and prices, grew 6 to 7%. Prices of selected brown spirit will be raised from Dec19 to Feb20. White spirit margins were partly lifted by the change in bottles. Spirit sales in Myanmar were weaker due to a build-up of inventory last quarter, resulting in lower sell-through volumes.

+ Non-alcoholic beverage (NAB) turnaround. Hit profitability for the first time due to a large jump in EBITDA margins from negative 0.4% to a positive 10.6%. The focus on traditional channels has led to low advertising and promotion expenses. SG&A expenses declined 11% YoY in 1Q20.

 

The Negatives

– Sabeco beer volumes faltered. Sales volumes at Sabeco fell 6% YoY in 1Q20. It was due to the circulation of certain fake news, impacting sales volumes. The situation is improving with the help of press releases from the government and support from influencers. Domestic beer performed well with 13.5% YoY volume growth.

 

Outlook

We are more positive on the outlook. Our initial concerns were over consumer spending in Thailand, especially farm incomes. Thai farm income has been resilient especially with the support from the government. Not only has spirit volumes been healthy, customers are purchasing the more premium and higher margin brown spirits. Beer disappointed but we expect a rebound in volumes after the negative episode.

The unfortunate outbreak of Covid-19 will dampen sales especially for on-trade or on-premises consumption of beverages. For Thai Bev, beer is most exposed to on-trade consumption. Another category of exposure are volumes lost from the fewer tourist arrivals. The core brown spirits is relatively immune as consumption is mainly at home and by local consumers.

 

Upgrade to BUY with SOTP-derived TP of S$0.95

We are upgrading our recommendation to BUY from REDUCE. Our SOTP-derived TP of S$0.95 (previously S$0.80) is raised due to our 6% increase in FY20e earnings and lowering the valuation discount to peers.

 

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About the author

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Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has almost 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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