Every one of us has our go-to drink and often times we build some habits around them. For example, many working adults do not start their day until they have had their hot cup of coffee.

Riding on the Thai’s love for alcoholic beverages, Thai Beverage Public Company (ThaiBev) that is listed on the Mainboard of the Singapore Exchange (SGX), grew into one of the largest beverage producers in the world with a market capitalisation of $22.5 billion. As the largest food and beverage (F&B) counter on SGX, ThaiBev is also one of the constituents of the Straits Times Index (STI).

ThaiBev was a stock darling in the last decade. Investors have bid up its share price, as it grew from about $0.25 per share in 2007 to $0.895 per share today. That translates to about an average growth of 25.8 percent per annum in the last 10 years. But in the current year, ThaiBev’s 4.1 percent gain in share price could be said to be rather underwhelming compared to STI’s 11.1 percent rise.

The recent bearish sentiments reflected by ThaiBev’s share price could largely be attributed to the late Thai King Bhumibol Adulyadej’s passing which precipitated a one-year mourning period in Thailand. But could the share’s underperformance be overshadowing any buying opportunities?

Business Overview

Officially founded in 2003, 58 related companies in the production and distribution of alcoholic and non-alcoholic beverages merged into the group we know as ThaiBev. Today, the group is a leading producer of spirits and beer in the world, with notable brands such as “Mekhongand” rum and “Chang Beer”. As of FY16, the group also own stakes in Fraser and Neave (F&N) and Fraser Centrepoint (FCL).

According to ThaiBev’s FY16 results, a nine-month period due to a change in financial year, revenue from Thailand accounted for almost 96.2 percent while the remaining 3.8 percent came from oversea markets. By business segment, alcoholic beverages are the main revenue generators, with spirits accounting for 55 percent of revenue while beer made up 31.9 percent; non-alcoholic beverages made up 9.5 percent while the remaining 3.6 percent was contributed by its food business.

Source: FY16 Annual Report

Source: FY16 Annual Report

Binging Thai Market

For the Thai men, alcoholic beverages are arguably their preferred choice. In a study titled “2014 Global Report on Alcohol and Health”, the World Health Organisation (WHO) found that about only 30 percent of Thai population were alcohol consumers. By gender, 14.9 percent of Thai women and 45.4 percent of Thai men identified themselves amongst them. Nothing too out of the ordinary.

What was alarming though, was that the proportionally small number of Thais that consume alcohol more than made up for the country’s total alcohol consumption. Based on WHO’s estimation, the pure alcohol consumed in Thailand by each adult averaged to about 7.1 litres between 2008 and 2010, higher than the global average of 6.2 litres of alcohol consumed per capita. Meanwhile, Thailand’s alcohol consumption rate was almost twice the Southeast Asian average of 3.4 litres per capita. This consumption trend makes Thailand a huge alcohol market which has boded well for established local players like ThaiBev and Boon Rawd Brewery (Boon Rawd).

Domination Of Thai Market

Obviously, taste and preferences are the main demand characteristics for the F&B industry. ThaiBev-produced Chang beer is generally cheaper than market-leading Singha beer, which is the priciest among local beer choice. Furthermore, Chang beer offers a little more bite both in taste and alcohol-by-volume (abv) which measured 6.4 percent against Singha’s 5 percent.

This was why Chang beer quickly displaced Singha as the go-to beer amongst many locals and tourists when it began distributing in 1995. Today, Chang beer is the top contender for the number one spot in Thailand’s beer category and the group is aiming to push its market share from about the current 40 percent to 45 percent by 2020.

That said, the spirits business is where ThaiBev really shine with its flagship “Mekhong” rum. The group dominates the segment by commanding a market share of over 90 percent in Thailand, where spirits are overwhelmingly more popular than beers. According to WHO, spirits accounted for 73 percent of total alcohol consumed while beer only accounted for 27 percent.

Latest Financial Performance

Thailand went into a year of mourning when the late Thai King Bhumibol Adulyadej passed away on 13 October 2016. Adjustments were made to major Thai festivals while many restaurants, bars and stores restricted the sale of alcoholic beverages in Thailand. As a result, ThaiBev’s financial performance in 1H17 was dampened and revenue fell 8.4 percent to THB106.1 billion.

But as the mourning period draws towards the end, revenue is seeing some signs of stabilisation. In the latest 3Q17, revenue was flat at THB45.3 billion compared to a year ago. On a whole, for 9M17, revenue was down only 6 percent at THB143 billion largely due to higher sales volume from its spirits business in the latest quarter.

On the bottom line, ThaiBev’s net profit rose 44.6 percent to THB29.5 billion, inclusive of contributions and one-off gains in interest in F&N and FCL. Excluding F&N and FCL, ThaiBev’s net profit would have been down by 5.6 percent at THB17.5 billlion.

Going forward, ThaiBev would possibly experience a recovery in demand for alcoholic beverages as the temporary effects of the mourning period continue to subside. As such, a turnaround in financial performance could be expected in coming quarters.

Meanwhile, ThaiBev has been paring down its debt from THB104.2 billion in FY12 to THB38.5 billion in 9M17. Previously, ThaiBev had taken on more debt to buy a stake in F&N. After paying its due, the group’s balance sheet is now much more robust, with a total debt-to-equity of just 33.2 percent in 9M17 compared to 122.6 percent in FY12. As a result, the group has once again created significant financial headroom to perform earnings accretive acquisitions.

Double Whammy From Excise Tax?

The outlook for ThaiBev is not all unclouded. The Thailand Excise Department has just imposed higher taxes on both alcohol and sugary drinks. Furthermore, the Excise department guided to further tax hikes on beverages with higher levels of alcohol content.

Already, even without the hike, excise tax is the largest cost component of ThaiBev’s spirits and beer businesses, accounting for 52.5 percent and 57.7 percent of total revenue respectively.

Despite that though, the adverse impact of the hike in “sin taxes” might be somewhat limited for behavioural science tells us that human beings build consumption patterns and habits. More so for alcohol and sugary drinks, demands are rather inelastic and hence any increase in prices will result in a less-than-proportionate decrease in quantity demanded.

In response to the tax hike, ThaiBev could also take the opportunity to increase retail prices by a larger quantum and thereby, expand its margins and hence improve profitability.

Source: 9M17 Results

Source: 9M17 Results

Talks Of Restructuring?

Currently, ThaiBev holds 28.5 percent in F&N and 28.4 percent in FCL. Meanwhile, TCC Group (TCC) – a Thailand conglomerate – holds majority stake of 59.3 percent in F&N and 59.1 percent in FCL. TCC Group also owns 66 percent of ThaiBev.

This scenario led to speculation of the possibility that ThaiBev might swap its stake in FCL for TCC’s stake in F&N. In that event, ThaiBev’s equity interest in F&N will effectively increase to about 87.8 percent, making it a leading producer of non-alcoholic beverages as well in Southeast Asia – ThaiBev’s 2020 vision.

However, considering the economic aspect, ThaiBev would have to fork out $495 million in cash to make up for the difference in market value of its stake in FCL and TCC’s F&N. In addition, the move will likely cause some earnings dilution, given that F&N generated a lower net profit of $116.6 million (excluding one-off legal settlement of $1.2 billion) over the past 12 months, compared to FCL’s net profit of $597.2 million over the same period.

As such, we opine that ThaiBev will probably not jump the gun to acquire F&N. Instead, in the short-term, ThaiBev could just leverage on F&N’s network to expand organically while it awaits for opportunity to acquire F&N at a more reasonable price.

Valuation

Currently, the main investment thesis for ThaiBev is its dominance in Thailand’s mature alcoholic beverage business which has allowed the group to grow its dividends annually since FY06. However, with pay-out ratio at record level of almost 80 percent in FY16, dividend growth might at best be tepid given the short-term headwinds from excise tax.

That said, at $0.895 per share, shares of ThaiBev are trading at trailing 12-month price-to-earnings (T12M P/E) of 16.2 times compared to its one-year average of 21.2 times. Against a handful of international peers, ThaiBev is trading below the peer average T12M P/E of 27.1 times.

Notwithstanding that, long-term investors of ThaiBev would know that the group is a solid stock as it has a track record of rewarding its shareholders with incremental dividends through the years. In addition, the current share price also offers a decent yield of about 2.7 percent. As such, patient investors might find the current share price an opportunity to accumulate.

Source: Shares Investment

Source: Shares Investment