UOB Kay Hian is keeping its “buy” recommendation on Thai Beverage (ThaiBev) with a target price of 87 cents, lower than its previous target price of 89 cents. The lower target price is largely due to lower market valuation for ThaiBev’s stake in Frasers Property.
Analyst Llelleythan Tan’s Sept 27 came on the back of the group’s virtual annual information meeting for shareholders in Singapore, as it shares its updates on its operations in Thailand and Vietnam.
The way Tan sees it, ThaiBev’s recovery is certainly underway.
Thanks to the removal of most Covid-19 measures, social activities have increased and ThaiBev expects consumption of both alcoholic and non-alcoholic beverages to see an improvement, in line with Tan’s expectations.
Already, nightlife entertainment venues such as bars and nightclubs have reopened, while international tourist arrivals have been improving. The resumption of dine-in restaurants has also led a recovery to the group’s food business.
Despite the reprieve from the reopening, Tan notes that the group is facing stiff competition and ThaiBev is fighting hard to be number one. Its beer businesses are gaining market share in both Thailand and Vietnam, driven by increased advertising and promotional activities.
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In Thailand, ThaiBev has the second largest market share at about 40% (similar to 3QFY2022 ended June), and Tan sees it closing in on the number one spot. “It was noted that the market share gap has been closing and is at the narrowest in 13 years. This is largely due to improved quality coverage over the domestic market, backed by a robust and efficient route-to-market strategy,” adds Tan.
As for Vietnam, Sabeco also holds the second place, but faces strong competition from its nearest competitor. As Vietnam’s economic activities continue to recover, management expects Sabeco to outperform moving into 4QFY2022 and beyond, catching up to its closest competitor.
Meanwhile, inflation has no doubt affected the group. With inflation at record-high, it has already increased its average selling price (ASP) twice for both its beer and wine spirits respectively since 1QFY2022.
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With inflation expected to continue rising, management has mentioned that it is exploring adjusting ASPs higher for its alcoholic beverages moving forward in the next 12 months and believes that there will not be negative pushback from its customers.
“In our view, ASP hikes for ThaiBev’s white spirits seem more likely than for its beer products, given falling operating margins for its spirits segments in the last two quarters. Assuming a 3-4% increase in spirits ASPs in 1QFY2023, this would boost our FY2023 annual revenue forecasts by around 2%,” says Tan, who has forecasted FY2023 revenue to come in at 298.6 billion baht.
To offset higher import costs due to the sharp depreciation of the Myanmar Kyat, the group also plans to lift ASPs for its international spirits business (around 10% of total spirits revenue) in Myanmar.
Overall, the group is not that much affected by the rising interest rates and exchange rates. As interest rates rise, management noted that most of its interest-bearing debts have fixed rates, long tenures and are denominated in Thai baht. As such, any movements in interest rates and a weakening baht against the Singapore dollar would have minimal impact to the group. ThaiBev plans to continue deleveraging, with net gearing dropping from 0.86x in 4QFY2021 to 0.71x in 3QFY2022.
While the cards may look good for ThaiBev, its spin-off listing of BeerCo has been deferred once again, due to prolonged challenging market conditions, just three months after reviving plans for the listing.
The group maintained its position that it would continue to monitor market conditions and review the proposed listing again in the future.
To recap, the group was seeking to sell as much as 20% of its beer business, raising between US$800 million to US$1 billion which values the beer business at around US$4 billion to US$5 billion (9x-11x FY2022 EV/EBITDA), which Tan deems as a reasonable valuation given that peers’ average is 13.8x FY2022 EV/EBITDA.
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“Given the uncertain global macroeconomic conditions, we reckon that the IPO was shelved due to liquidity concerns and expect ThaiBev to revive the IPO plans once market conditions improve,” says Tan.
Overall, Tan views ThaiBev’s current share price as attractive as it is trading below -1 standard deviation of its five-year mean P/E, backed by an expected earning recovery underpinned by favourable tailwinds.
As at 12.00pm, shares in ThaiBev are trading at 62 cents.
