Thai Beverage Public Company: Load up before price increase
- Valuation unjustifiably low, near -2SD of 15-year historical forward PE low, despite consistent earnings growth
- Resilient spirits segment offsets weak Vietnam beer
- Gearing continues to taper on strong cash flow, well-managed debt profile with THB-denominated debentures
- Return to bottom-line growth in FY24F helped by spirits and project recovery in Vietnam post a dismal year; reiterate BUY, TP revised to S$0.75 equating to 15-yr average PE
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- Attractive valuation in terms of both peer and historical valuation; cheapest regional alcoholic beverage counter, at <11.5x PE, almost -2SD below its historical 15-year average
- Pessimism of Vietnam beer, leaving room for an upside surprise based on early export economic data
- Post-Vietnam acquisition, the company has been consistently deleveraging, positioning to support dividend growth
2H23/FY23 earnings preview: Spirits strength likely to mitigate weakness in Vietnam
Retaining FY23F and FY24F forecasts; spirits remain anchor to earnings. ThaiBev is due to report its 2H23 and FY23 results on 22 Nov (after market close). We expect earnings to remain resilient – FY23F net profit should see only a marginal decline of 3.8% y-o-y from a high of Bt30.1bn in FY22, even though the read through from its Vietnam beer business (Sabeco – Saigon Alcohol Beer Corporation) shows that sentiment in the country remains weak. Note that despite businesses being impacted by Covid in the past three years, ThaiBev’s profits have remained strong and are ~30% higher in FY22, compared to FY19.
For 2H23, our expectations are that the slack in Vietnam beer (i.e., Sabeco) is likely being picked up by its Thailand spirits and beer business. We relooked at our forecasts and retained our net profit expectations of c.Bt29.0bn for FY23F, though the profit mix should be skewed more towards the spirits segment. We project earnings to return to growth in FY24F/25F of 7%/6%, helped by all segments, and Vietnam in particular, after a dismal year in 2023, in which we saw an overstocked situation amid an unexpected slowdown in the economy and consumption.
Higher contribution from higher value mixed (brown) spirits; industry data shows Thailand spirits down 5.5%, mixed spirits +14%, white spirts -14%. While industry data in terms of volume shows total liquor volume for Thailand declined by 14% from Sep 2022 to Sep 2023 (based on ThaiBev’s FYE), the contribution has changed drastically in the past year. For the 12 months ending Sep 2023, the higher priced mixed liquor accounts for almost 40% of total volume, compared to 33% in the prior period a year ago (as of Sep 2022). This is also higher than the past five-year average of 34.5%.
Trading at near -2SD of historical average. We believe the current share price looks very attractive in terms of both its historical and peer valuations. Looking at its historical forward PE valuation, the company is trading at near -2SD of its 15-year average forward PE, close to an all-time low. Back in 2008/09, the lows seen were during the global financial crisis. Turning our attention to its peer valuation, we also see a similar story with the company being the cheapest in the region. Against this backdrop, while the market could be concerned about its growth prospects, we believe the group should register growth going into FY24F.
Why is the market pessimistic about Vietnam beer?
Sabeco, ThaiBev’s Vietnam subsidiary, saw 9M23 YTD sales and earnings decline by 12% and 24%, respectively. This was largely attributable to a collapse of consumer demand for beer on deteriorating macroeconomic conditions. The key driver was weak global demand for goods, which disproportionately impacted Vietnam, an export-orientated country.
During the recent Sabeco 3Q23 earnings call on 10 Nov 23, management highlighted that the current weakness in the beer industry could extend into 4Q24, and competition has been aggressive. Unsurprisingly, the market continues to take a pessimistic view on Vietnam beer.
Earnings call from Sabeco on 10 Nov for its 3Q23 results. We attended the earnings call on 10 Nov 23. Key takeaways are below:
- Vietnam’s beer industry continues to shrink, with a 21% YTD decline in terms of production, but Sabeco has likely declined less than the industry (in sales volume) due to its market position in the mainstream segment
- Competition is aggressive, with likely high A&P spend by competitors to secure as much volume as possible in the declining market with expensive promotions like giveaways
- Margin has been adversely impacted by aluminium and malt prices, which were hedged at higher levels last year
- Hopeful for a turnaround in 2H24 with the objective of improving earnings y-o-y by optimising A&P spend without resorting to giving away products (which can be very costly) and maintaining prices
Why do we believe the current pessimism could present an opportunity?
Sabeco’s management shared in its 3QFYE Dec 23 earnings call that, based on conversations with external parties, the consensus and market expectations seem to take the view that the recovery in Vietnam could only take place in 2H24. That said, we believe any early signs of recovery could lead to a re-rating, as there could be an upside surprise with the general consensus being more cautious. We are seeing early economic data indicating a turnaround in exports from Vietnam.
In addition, Samsung Electronics, one of the largest employers in Vietnam, guided for a recovery in smartphone demand in CY24 on the back of stabilising consumer sentiment. With the expectation of double-digit growth in annual flagship shipments, we believe this will drive new job creation and improve the overall disposable income situation in Vietnam. In the event this continues, there could be a surge in sales, given that stock levels in the trade are not high, and management did share that there is a certain level of cautiousness in the market.
We have pencilled in 8% growth in revenue for Sabeco for FY24F (adjusted to Sep year end). This is post the decline in the last 12 months, of c.5%, which follows a strong 2022. We estimate that Sabeco accounts for c.13% of ThaiBev’s net profits (post minority interest) for FY22, and this should drop to a c.9% contribution for FY23F and FY24F based on our forecasts, given the industry challenges in Vietnam.
What can investors enjoy while waiting for a valuation re-rating?
Pre-Covid and the Sabeco acquisition, the company had a track record of steadily increasing dividends. We believe the situation post the Sabeco acquisition (consummated in early 2018), which resulted in higher gearing for the group, is behind us. With Covid in the past and the company’s deleveraging progressing as planned, dividends should return to a steady growth trajectory, in our view.
Is Beerco listing needed for deleveraging? No, gearing has been steadily coming off
Market could still have misplaced perception that Beerco listing is needed for deleveraging. We believe the market is overly concerned about ThaiBev’s gearing and is thus looking at its Beerco listing for it to deleverage. This view could be misplaced. We have little doubt that a potential listing (or news of it) could stir interest and create excitement. However, given our stance that gearing has been improving and remains healthy, ThaiBev’s balance sheet remains healthy.
Net gearing and debt-EBITDA to dip to 0.5x and 2.4x by end-FY24F. ThaiBev has a good track record of deleveraging post its sizable acquisitions in the past decade. In 2012, post the F&N acquisition, net gearing (net debt to equity) crossed 1x and net debt to EBITDA shot up to 4x. As can be seen in Chart 7 in the previous page, it came off progressively, and these ratios reached lows of 0.23x and 1x in 2017, respectively.
The second example is seen currently and still playing out. Net gearing reached a high of 1.34x post the acquisition of its ~54% stake in Sabeco. Despite concerns of the high leverage, its strong cash flow has enabled it to deleverage and we project net gearing and net debt to EBITDA to trend lower to 0.5x and 2.5x, respectively, by end-FY24F.
Maturity of debentures and interest rates well managed. A further point to note is its management of debt maturities and interest costs. As can be seen in Chart 8 (previous page), the group has an estimated Bt135bn in debentures currently outstanding. The maturities are well termed out, with an average coupon rate of mostly below 4%, even in the current high interest rate environment. In addition, the debentures are denominated in THB, which matches with its main spirits business, thus removing foreign exchange risks.
Valuations & forecasts
Reiterate BUY, TP revised to S$ 0.75. Our forecasts remain relatively unchanged, and we project earnings growth of 6.9%/ 6.4% for FY24F/25F. In addition, we have pencilled in a payout ratio of 55% (marginally above its dividend policy of not less than 50%), implying gross dividend yields of 5.0%/ 5.2% in FY24F/25F. Our sum-of-the-parts TP is revised down to S$ 0.75, to account for a higher market risk premium on expectations that rates, while having tapered, may stay elevated till 2H24.
Our revised TP equates to FY24F PE of c.16x, which is in line with its 15-year historical 12-month forward PE. In our view, the current valuation, being one of the cheapest alcoholic counters, of 11.1x FY24F PE looks too attractive to ignore on the back of its steady cash flow profile, coupled with expectations of growth and higher dividends, and the eventual monetisation of Beerco when the outlook is clearer for Vietnam.
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- Thai Beverage PCL<News Alert>: Thailand alcohol tax cut a boost to booze03 Jan 2024