by winston » Mon Jan 20, 2014 7:10 pm
Buy ThaiBev for future growth, says Credit Suisse
By Kang Wan Chern
As the political unrest in Thailand erupts into anti-government protests and threatens to derail the country’s upcoming elections, focus has centred on Singapore-listed spirits and beer maker Thai Beverage. In a Jan 15 report initiating coverage on the stock, international brokerage Credit Suisse issued an outperform call on ThaiBev, which, at 54.5 cents apiece currently, is down by about 25% from its 52-week high of 71 cents.
ThaiBev is the largest spirits maker in Thailand, with a market share of up to 76% in 2012, according to Euromonitor. The Thais also consume the largest volume of spirits in the region, with consumption rising by 6%-9% between 2008 and 2013. As such, spirits generate the bulk of ThaiBev’s revenues and contributed to about 90% of its FY2013 earnings.
However, margins from the spirit’s division have taken a hit over the past few years due to rising excise duties and higher selling costs. In FY2013, ThaiBev’s spirits margins had fallen to about 32% from 36% in FY2006, even though sales volumes were on the rise. Looking ahead though, Credit Suisse believes that further tax hikes are unlikely in the near term, giving ThaiBev pause to recover some lost margins as consumption continues to rise. The brokerage estimates that margins could climb to 34% by FY2016.
Business could also benefit from the current political turbulence, Credit Suisse notes. According to historical data, consumption of spirits typically rises when economic activity falls in Thailand. One reason is because spirits are usually seen as being “a poor man’s drink” because it is cheaper compared to other alcoholic products like beer and wine, and distributed through traditional “mom and pop” stores. “The current political uncertainties in Thailand, we believe, may provide some [shorter term] impetus to spirits consumption in the country,” writes Credit Suisse.
In contrast, ThaiBev’s beer business remains unprofitable. The company brews Chang beer, which has been losing market share to rival Boon Rawd Brewery’s Singha and Leo. Between 2003 and 2013, ThaiBev’s share of the beer market has fallen from 66% to 32%, while Boon Rawd has increased its share from 24% to 58%. Meanwhile, restrictions on alcohol advertising in Thailand have also affected ThaiBev’s efforts to market its beer.
To win back customers, ThaiBev has launched new products and overhauled its distribution channels in recent years. But while demand for beer in Thailand should rise over the longer term as income levels increase and consumers switch from spirits to beer, ThaiBev will need to reduce its fixed costs and adjust the price of its beers to stem losses, Credit Suisse says.
However, with its recent acquisition of Fraser & Neave (F&N), ThaiBev can count on its non-alcoholic beverage business to drive growth in the coming years. F&N has strong distribution networks across Singapore and Malaysia and owns leading brands such as F&N soft drinks, Seasons teas and 100 Plus, which is Malaysia’s top-selling sports drink. The acquisition also extends ThaiBev’s existing non-alcoholic beverage division, which owns Thai soft drinks bottler Serm Suk and Japanese green tea maker Oishi.
Following the spin-off of F&N’s property business in Frasers Centrepoint as a separate listing recently, ThaiBev will now gain full control of F&N’s beverage empire. “Sales of 100 Plus and beverages elsewhere should continue to help grow F&N's total EBIT. The dairies business at F&N should also be a source of steadily growing cash flows…” writes Credit Suisse. “F&N can then provide ThaiBev with medium-term growth outside Thailand."
In that light, Credit Suisse estimates that ThaiBev could be worth up to 60 cents apiece over the next 12 months, implying an upside if about 10%. “Our target price of 60 cents implies 13.6 times EBITDA for the core spirits and beer segments, broadly in line with headline Thai staples valuations. Meanwhile, ThaiBev is more insulated from any economic slowdown. Improved visibility of medium-term growth through non-alcoholic drinks sales can lead to further upside to both earnings and multiples,” writes Credit Suisse.
Source: The Edge
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