• Revenue was below our forecast. Net profit beat our estimates due to strong associate contribution. Frasers Property (FPL) reported significant property gains this quarter.
• Beer earnings dropped almost 40% as Sabeco volumes were down 2.5% YoY in 3Q19 due to destocking of brand relaunch.
• Higher margin brown spirits demand in Thailand recovered from last year post excise duty.
• Maintain NEUTRAL. We keep our SOTP-derived TP to S$0.83. Our earnings forecast is unchanged. We lowered revenues and incorporated the severance provisions but raised our associate earnings. Outlook for Thai Beverage earnings in FY20e will be highly dependent on the passing of agriculture support prices by the government. Excluding these measures, our expectations are for lacklustre earnings growth in FY20e.

The Positives

+ Brown spirits demand jumped YoY. Spirits demand in Thailand rose 4.5% YoY. There was double-digit revenue growth in the higher price and margin brown spirits. Comparables were better because a year ago, there was a collapse in volume post excise duty hike in February 2018. Underlying brown spirit industry growth is still around 3%. On the flip side, volumes in Myanmar were down 23% YoY. There were issues in production but it will be resolved in 4QFY19.

+ Better margins. Gross margins at the spirits division also improved 1.6% points to 67.1% due to the lower molasses cost. Material cost is measured on a weighted average basis. Molasses is only purchased in the November to April sugar harvesting period. With the drought conditions in Thailand, molasses cost is expected to rise.

+ Losses at non-alcohol beverages (NAB) continues to narrow. The losses at NAB division continues to fall. The company is moving more volume away from modern to traditional channel. The current momentum in margins and sales could translate to profitability in FY20e. Modern trade channel demands more discounts plus higher promotional funds.

The Negatives

– Beer profits dropped almost 40%. Net profit from beer fell almost 40% YoY. Beer revenues were down 0.5% yoy. There was a 2.5% decline at Sabeco due to destocking before the brand relaunch with new packaging.

– Lumpy wage expense. Effective May 2019, severance pay for employees who worked for 20 years or more will be raised to 400 days of their most recent salary. Thai Beverage took a Bt798mn charge for this change in labour law.  The expense will drop in the following quarters.

Outlook

The upcoming 4QFY19e will register impressive YoY headline earnings due to the drag post excise duty in 2018. Despite the earnings boost this quarter by property gains at associate Frasers Property, the outlook for Thai Beverage is dependent on government stimulus. The government of Thailand is looking at subsidies for farm prices such as rubber at Bt60 per kg, rice prices at Bt10,000 to 14,000 per MT and palm oil price at Bt4/kg. Without these subsidies, the outlook for FY20e will be lacklustre.

Maintain NEUTRAL with SOTP-derived TP of S$0.83

Maintain NEUTRAL. We keep our SOTP-derived TP to S$0.83. Our earnings forecast is unchanged.  We lowered revenues and incorporated the severance provisions but raised our associate earnings. Outlook for Thai Beverage earnings in FY20e will be highly dependent on the passing of agriculture support prices by the government. Excluding these measures, our expectations are for lacklustre earnings growth in FY20e.