ThaiBev: Value Stock With A Compelling Growth Story

Thailand declared a year-long period of mourning following the passing of the late King Bhumibol Adulyadej last year, during which entertainment activities are expected to be toned down, with some bars, restaurants and clubs also shortening their operating hours. It spelt bad news for Thai Beverage (SGX.Y92), which makes its money selling mainly liquor and beer, as alcohol consumption was expected to be limited during this period of time. ThaiBev's share price has since slid by -2.1% (as of 24 July 2017), a stark contrast to the broader Straits Times Index (STI), which staged a spectacular 15.6% rally over the same period. Despite the short-term headwinds, we believe ThaiBev's investment case remains intact, with its growth story and expansion plans to drive future share price performance.

Company Overview: Revenue Streams High On Spirits

As one of the constituents of the STI, ThaiBev is certainly no stranger to investors. The blue-chip's product portfolio comprises four key segments: spirits, beer, non-alcoholic beverages and food. Its spirits business commands the lion's share of Thailand's market, and has been the main driver behind the company's performance over the years (Chart 1). ThaiBev is also the company behind the iconic Chang beer that has been synonymous with Thai culture and pride. The lesser-known mass-market Archa and premium Federbräu beer brands are part of ThaiBev's beer portfolio as well.

Chart 1: Spirits Segment Has Been The Backbone Of ThaiBev

Its range of non-alcoholic beverages includes drinking water, energy drinks, ready-to-drink coffee, as well as the Oishi suite of green tea products, while its food business consists of 244 Oishi-branded Japanese restaurants, three of which are currently operating in Myanmar. ThaiBev also owns an approximate 28.5% stake in each of Fraser And Neave (SGX.F99) and Frasers Centrepoint (SGX.TQ5), both of which contributed approximately 14.4% of ThaiBev's operating profit in 2016. Here's the low-down of our investment case for ThaiBev.

1. Alcohol Consumption Slowdown Likely A Temporary Blip

As Thailand descended into a year-long mourning period, the negative impact on alcohol consumption was felt almost instantaneously, with nationwide beer sales registering a steep -17.0% year-on-year decline in October 2016. ThaiBev's financial results were not let off the hook either, as its 2Q 2017 net profit (ending March 2017) plunged -23.5% year-on-year, weighed down by declines in revenues of both its spirits and beer segments by -7.5% and -13.9% year-on-year respectively.

The decline in alcohol consumption, however, is likely transitory as the mourning period concludes in the latter half of this year, with the resumption of nightlife activities expected to boost alcoholic drink sales. Already, beer consumption has shown signs of a recovery in recent months, as sales volume grew 5.2% and 10.4% year-on-year in April and May respectively (Chart 2), with the two consecutive months of positive growth perhaps an indication that the negative impact from the mourning period is gradually tapering off.

Chart 2: Alcohol Consumption Showing Signs Of Recovery

Moreover, an expected pick-up in economic activity over the next few years is likely to lend further support to alcohol consumption in the country, with Thailand's economy expected to grow by 3.5% and 3.7% in 2017 and 2018 respectively, an improvement from the 3.2% growth rate in 2016. While investors may reasonably be concerned about the recent decline in consumer confidence, current sentiment is still an improvement from the first half of this year, reflecting expectations of improved economic conditions for the rest of the year. Besides, the fact that Thailand's beer consumption per capita remains well below that of most developed nations also underscores the still-huge growth potential of its domestic beer market (Table 1), especially consumption habits grow closer to that of developed markets.

Table 1: Beer Consumption Per Capita In Selected Countries

2. Product Enhancements To Drive Revenue Gains And Margin Expansion

ThaiBev has been enhancing its product mix over the years, with the addition of new premium-priced offerings, in a bid to win over more consumers from the higher-end segments of the market. The launch of its up-market Scotch whisky and brandy products in 2008-09, for instance, has enabled ThaiBev to exert further dominance in the domestic spirits market (Chart 3). ThaiBev also gave its flagship Chang beer a major makeover in August 2015, with the relaunched Chang Classic proving an instant hit as ThaiBev's beer market share was lifted from 33% in 2015 to 40% in 2016 – at the expense of its closest competitor Boon Rawd Brewery (Chart 4) – despite a price increment! ThaiBev's continued product enhancements are likely to drive revenue gains and margin expansion over the next few years. If its past rebranding efforts are anything to go by, the relaunch of its premium Federbräu beer brand earlier this year is likely to bode well for ThaiBev.

Chart 3: ThaiBev Exerts Further Dominance In Sprits Market With Premium Products

Chart 4: Chang Classic Relaunch Lifts ThaiBev's Market Share And Margins

While a planned hike in alcohol excise taxes this September could dampen consumption in the short-term, a prolonged impact is unlikely. It is worth noting that ThaiBev has historically managed to increase its revenues and margins overtime after the implementation of an excise tax increase (Chart 5), highlighting its ability to pass on higher costs to consumers. Moreover, its stable margins and increasing market share over the past few years underscore its strong brand appeal in the eyes of Thai consumers, a factor that will further mitigate the negative impacting stemming from the excise tax hike.

Chart 5: Excise Tax Hike Unlikely To Have Prolonged Impact

3. Well-Positioned For Regional Market Push

In line with the company's aim of consolidating its leading position in Southeast Asia, ThaiBev is expected to continue its push into regional markets such as the fast-growing Cambodia, Laos, Myanmar and Vietnam (CLMV), all of which represent fertile ground for growth opportunities due to their favourable demographic and economic trends. Rapid economic expansion, increasing urbanisation and rising affluence are expected to drive domestic consumption in the CLMV countries, which tout a combined population that is more than twice of Thailand's (Table 2). Vietnam, in particular, is a beer-guzzling nation, whose market of more than 90 million consumers offers substantial growth ahead for ThaiBev.

Table 2: Favourable Demographic And Economic Trends In CLMV Countries

ThaiBev is certainly well-positioned to pursue its ambitious regional expansion plans due to the partnerships with its subsidiaries and sister companies. Its acquisition of Fraser and Neave (F&N) in 2012 has proved to be a strategic deal that not only gave ThaiBev a foothold in the fast-growing non-alcoholic beverage category, but it also gave ThaiBev access to F&N's distribution networks in Singapore, Malaysia, Thailand and Vietnam (F&N has a stake in Vinamilk, Vietnam's largest dairy company). It owns 64.7% of beverage company Sermsuk, which has the most extensive distribution network in Thailand. ThaiBev is also able to leverage on the sales and distribution prowess of its sister companies Big C (Thailand's second-largest hypermarket with operations in Vietnam and Laos), as well as Berli Jucker (largest bottler in Vietnam), both of which are owned by Charoen Sirivadhanabhakdi – the man who co-founded ThaiBev. The synergies achieved through the sharing of production facilities and distribution channels will help to lower production and logistics costs, giving ThaiBev an edge over its competitors in the pursuit of regional expansion.

ThaiBev is also expected to go on a buying spree to expand its business outside of Thailand. Its subsidiary F&N has recently raised its stake in Vinamilk, while ThaiBev is also expected to be in the running for the potential acquisition of Vietnam's state-owned brewer Sabeco, which commands about 40% of Vietnam's beer market. The successful acquisition of Sabeco will certainly be a potential catalyst that will drive ThaiBev's share price performance.

4. Share Price Has Further Room To Manoeuvre

While ThaiBev turned in a disappointing set of 2Q 2017 results, its bottom line is expected to recover over the next few years, with earnings growth of 9.4% and 7.8% in 2018 and 2019 respectively. ThaiBev is also a cash flow generative business with a healthy financial position relative to its competitors. Despite its solid fundamentals, however, ThaiBev currently trades at a discount to its alcohol peers (Table 3). Its price-to-earnings (PE) ratio of 19.9X (based on 2018 estimated earnings) is below that of the spirits and beer industry averages of about 22.2X and 20.4X respectively, a sign that ThaiBev's shares could potentially be undervalued.

Table 3: Valuations Of Alcohol Companies

We applied the sum-of-the-parts valuation method on ThaiBev using the assumptions in Table 4. For its spirits and beer segments, we used PE ratios of 22.0X and 20.0X that are roughly in line with the industry averages. To further simplify our analysis, we used the market capitalisation implied equity value for ThaiBev's four listed subsidiaries. With 25.1 billion shares outstanding, ThaiBev's intrinsic value is about SGD 1.025 per share (converted using exchange rate of SGD 0.04 per THB), which represents a potential upside of about 10.2% based on its last traded price of SGD 0.93 as of 24 July 2017. Its decent dividend yield of about 3.31% in 2018 also adds to its investment appeal.

Table 4: Sum-Of-The-Parts Valuation For ThaiBev

Focus On The Growth Story!

ThaiBev's continued transformation into a major regional beverage player makes it a serious contender for a place in investors' portfolios. While the company is facing short-term hurdles with respect to its alcohol business, they are likely transitory as the mourning period concludes in the latter half of the year, after which alcohol consumption is expected to normalise. ThaiBev is after all, the dominant player in Thailand's spirits market, while its beer business is likely to gain further traction, with potential market share gains and margin improvements. The strategic partnerships with its subsidiaries and sister companies – backed by an extensive sales and distribution network – also give ThaiBev an edge over its competitors in its push into regional markets. For investors who can look beyond the short-term headwinds, ThaiBev represents a compelling growth story. The good news? Its valuations are nowhere near tipsy.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

The Research Team is part of iFAST Financial Pte Ltd.