Thai Beverage - DBS Research 2022-11-18: Cheers To Reopening; Reinstate Coverage With BUY

• We reinstate coverage on one of the most valuable ASEAN large-cap F&B counters – Thai Beverage (SGX:Y92) with BUY, and a target price of S$0.84, implying a 36% upside. We project the upcoming 2H22/FY22 net profit to show ~4%/9% y-o-y growth.
• We expect Thai Beverage to report its FY22 (Oct 2021 to Sep 2022) earnings on or around 25 November. (See Earnings calendar of SGX listed companies.)
• We are keenly keeping a watch on its margins and looking for signs on its ability to pass on cost increases through price increases as well as its cost mitigation strategies, such as being more efficient in raw and packaging materials, energy, and A&P spending.
• Along with our expectations of a 9% net profit growth for FY22F, we are penciling in a final dividend of Bt0.40 (2H21: Bt0.35). See Thai Beverage's Dividend History. Along with the interim dividend of Bt0.15 paid, this equates to a total of Bt0.55 dividend in FY22, 10% up from FY21’s Bt0.50.

Gearing is not an issue for Thai Beverage, even without BeerCo IPO

Is the market concerned about Thai Beverage’s gearing in the face of rising interest rates?

• After Thai Beverage announced the deferment of the BeerCo listing on 11 Aug 22, Thai Beverage's Share Price corrected from S$0.68 to a recent low of S$0.565 over the span of two months, underperforming the STI by about 10% during this period. We believe part of the reason for this was concerns about Thai Beverage’s gearing without the listing to pare down debt.
• We believe these concerns may be misplaced, as we see the company’s leverage coming down, and its loans are well termed out.

Gearing has been gradually coming down; projected to reach 0.5x by end-FY24F.

• Immediately after the acquisition of its majority stake in Sabeco, Thai Beverage’s net gearing and net debt to EBITDA shot up. But this has been gradually coming down and we project its net debt to equity will decline and reach 0.5x by FY24F. This phenomenon was also observed during the period from 2012 to 2017, post its acquisition for F&N (SGX:F99).

Would rising interest and refinancing hurt Thai Beverage’s position? We believe not.

• Debenture maturities are well termed out. We also look deeper into its debt maturity profile. We note that there are three debentures due to mature each year in FY23F and FY24F, totalling Bt21.9bn and Bt26.3bn, respectively. While this looks huge, we believe this can be well covered by the strong operating cash flow of the group.
• We estimate that Thai Beverage will generate an average of about Bt36bn a year of free cash flow to firm (after capex, including dividends from associates) over the next two years. Even factoring in dividend payments, we believe Thai Beverage is able to pare down about Bt20bn to Bt22bn in debt, and refinance the remainder, which will be relatively insignificant.
• Coupon rates for the debentures have also been locked in, with average coupon rates of between 3%-4% till 2030 maturities, before rising to 4.38% for the remainder of the 10-year term for the respective debentures. We have considered these in our forecasts.

Favourable interest rates in recent debenture exercise.

• In fact, on 9 Nov 22, Thai Beverage announced that it issued a total of four debentures with maturities between 3 to 10 years, and an average weighted coupon rate of 3.55%. In our view, the rate looks favourable in light of the current rising interest rate environment.

Consumption to ride firm on reopening, despite global headwinds

• With both Thai Beverage’s main markets – Thailand and Vietnam – reopening and lifting restrictions, we expect consumption to remain robust, despite potential macro uncertainties.
• Based on forecasts from the International Monetary Fund (IMF), GDP per capita (at current prices) is still projected to show relatively robust growth of 8.4% and 12.5% in 2023F for Thailand and Vietnam, respectively.

Thailand economic recovery to extend into 2023.

• According to our DBS economist (Chua Han Teng) – Thailand: Tourism’s resiliency to global growth cycle (18 Oct 2022), the recovery of the Thailand economy, which has gained traction over the course of 2022, is expected to extend into 2023.
• The two key growth drivers are foreign tourism revival and domestic economic reopening. While there are headwinds to these due to the global slowdown, he thinks that tourism will support the current 4.2% real GDP growth forecast in 2023, though goods exports is a key downside risk. That said, this constructive view of the Thai economy provides us with reassurance in terms of consumption and thus ThaiBev for FY23F.
• With that, we have assumed 4%/2.5% volume/price growth in its Thai spirits business, with volumes recovering just 1% above pre-COVID in FY19. For Thai beer operations, we project volume/price growth of 3%/4% for FY23F, with volumes ~2.5% above pre-COVID in FY19.

Vietnam benefitted strongly from reopening in 2022 and growth to continue in 2023, albeit a tad less robust.

• In the same vein, our economist (Chua Han Teng) saw Vietnam already registering strong growth in the first nine months of 2022 and expects this to fade going into 4Q22 and 2023. In his earlier note – Asia's growth leader faces headwinds (03 Oct 2022), he also notes that Vietnam services and manufacturing growth will normalise with global external demand and reopening gains fading.
• But, with Vietnam’s reliance on Chinese tourists, a full recovery in foreign visitor arrivals is still some time away. Real GDP forecasts for 2023 were calibrated to 6% (from 6.8%) while for 2022, it was adjusted up to 7.8% (from 7%) – still robust, in our view.
• We have assumed a 7%/8% sales volume/price increase for FY23F, lower than the expectation of strong growth of 19%/12% (volume/price increase) for FY22F for Thai Beverage’s Vietnam beer operations.

Thai Beverage – Valuation & Forecasts

• We are reinstating coverage on Thai Beverage with BUY and a target price of S$0.84. We are projecting net profit growth of 9%/7%/6% for FY22F/23F/24F, expecting resilience in its earnings, even in the face of global uncertainties.
• We expect Thai Beverage’s sales to remain resilient, helped by the GDP growth of Thailand and Vietnam, which are its main markets.
• The heightened raw material price cost pressure seen in the past year may see some mitigation with the recent moderation in markets, such as barley and aluminium, and as the group’s forward hedges wear off in the latter part of FY23F. This could provide upside to our forecasts.