ThaiBev earnings forecasts cut by Morgan Stanley amid surprise weakness in alcohol sales

Thai baht notesThai baht notes

Morgan Stanley cuts its earnings forecasts for Thai Beverage, pointing demand weakness for its domestic spirits and beer business.

“The magnitude of weakness in domestic alcohol volumes continues to surprise us. As such, we struggle to have conviction in our assumed upturn in volumes in fiscal 2019,” the investment bank said in a note on Wednesday. “It’s still early days in driving improvement in Sabeco and there may be pain before gain.”

Thai Beverage reported on Tuesday that its fiscal third quarter net profit fell 56.5 percent on-year to 8.646 billion Thai baht amid a lower contribution from the spirits business, a wider net loss from the non-alcoholic beverage business, a sharp decrease in contribution from F&N/FPL and the lack of year-earlier fair valuation gains.

Morgan Stanley lowered its earnings before interest and tax (EBIT) estimates 13 percent of fiscal 2018 and by 8-10 percent for fiscal 2019-20.

“The cuts are driven largely by lower volume growth assumption owing to ongoing weakness in demand for the domestic spirits and beer business. We have also lowered our operating margin assumption to reflect weaker volumes driving operating deleverage as well as heightened A&P spending,” it said, noting “high” competitive activities in the beer segment.

It noted that domestic demand weakness could linger, with management pointing to poor purchasing power among consumers dependent on farm incomes.

“While rice prices have increased, prices of other key crops like sugar, rubber, and tapioca remain very weak. The company doesn’t see any structural shift in consumer behavior,” Morgan Stanley said. “The weakness continued in July and management hopes election-related spending could support an improvement next year.”

It slashed its target price for Thai Beverage to S$0.75 from S$0.90 in its base case. Its bull case target is S$0.90, while its bear case is S$0.56.

It kept an Equal-weight call on ThaiBev, noting the stock has corrected around 10 percent recently, underperforming the STI, indicating some of the ongoing weakness is already priced in.

“In the medium term, we are positive on ThaiBev’s recent acquisitions in Myanmar and Vietnam, both of which are high-growth markets (unlike Thailand) and could boost the company’s growth prospects assuming good execution,” it said.

Shares of ThaiBev ended Wednesday down 2.86 percent at S$0.68.

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