Thai Beverage started at Outperform by Daiwa on expected earnings recovery

Cans of Chang beer at a Singapore supermarket; taken September 2018. The Chang brand is owned, brewed and distributed by Thai Beverage.Cans of Chang beer at a Singapore supermarket; taken September 2018. The Chang brand is owned, brewed and distributed by Thai Beverage.

Daiwa started Thai Beverage at Outperform with a S$0.73 target price, pointing to expectations for an earnings recovery in fiscal 2019 and to undemanding valuations.

ThaiBev’s domestic alcohol operations saw volume decline by high single digits in the first nine months of fiscal 2018 amid farmers’ weak purchasing power, Daiwa said in a note on Monday.

“We believe subdued farmers’ incomes (given that Chang Beer is an economy beer mostly purchased by the grassroots economy) and possible elevated restrictions on night activities in the lead-up to the government elections in the first half of 2019 could be reasons for the poorer-than-expected alcohol demand post the end of the 12-month mourning period in October 2017,” Daiwa said.

It noted economy beer, such as Leo and Chang Beer, accounts for around 87 percent of Thailand’s beer market, with the rest standard beer, mainly Singha at around 6 percent, and premium beer, mainly Heineken at around 5 percent.

“However, we see light at the end of the tunnel, with year-on-year domestic alcohol volumes likely to show growth as early as October 2018, on our forecasts (after around 10 months of declines),” the note said. “This turnaround comes on the back of improving rice prices, which are generating higher incomes for farmers and hence boosting their purchasing power.”

‘Diversifying operations’

It also said it expected the momentum would ramp up ahead of the general elections due in the first half of 2019 as the government will likely dish out subsidies at the grass-roots level, while post-elections, it expected government restrictions on night activities could be relaxed.

New acquisitions, which have been earnings accretive “from the get-go,” could also provide positive earnings surprises as Thai Beverage explores cost synergies, such as combining procurement efforts for raw materials and streamlining asset use, Daiwa said.

“Despite our cautious view on Thaibev’s domestic business, we believe that management is actively diversifying its operations abroad with the acquisition of Sabeco, Grand Royal and its KFC franchise business in the second half of 2017,” the note said. “These moves should help to sustain the company’s core net earnings growth over the next two to three years, in our view.”

Valuations ‘undemanding’

The stock has fallen around 32 percent fall so far this year on weak domestic alcohol demand and credit risk concerns due to high gearing, Daiwa noted.

But it added it expected both issues to be progressively resolved from fiscal 2019.

“Thaibev’s valuation looks undemanding given our expectation the company will reverse its earnings decline spiral by end-fiscal 2018, and post a fiscal 2018-20E ebitda CAGR of 8 percent,” it said. Ebitda stands for earnings before interest, tax, depreciation and amortization, while CAGR stands for compound annual growth rate.

“We recommend long-term investors take the current share-price weakness (lowest since mid-2014) as an opportunity to partake in a low-beta defensive consumer counter that currently yields around 4 percent, amid the prevailing global trade tensions,” Daiwa said.

Shares of Thai Beverage were down 1.54 percent at S$0.64 at 11:59 A.M. SGT.

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