We reiterate our Buy recommendation on Thai Beverage (THBEV SP) with an unchanged target price of SGD1.26, implying 83% upside.
We are bullish for the following reasons:
1) Spinning off its beer business
On 5 May, Thai Beverage announced that it is renewing plans to spinoff its beer business in an IPO. The entity would be called BeerCo. The IPO could raise US$700-800mn, with the listing taking place in July or August.
The beer listing could be accretive from a SOTP valuation basis.
2) Timing of the beer IPO
A heady brew of factors makes the timing of the beer IPO ideal. The beer segment is recording higher volumes than in the pre-pandemic era. Beer volumes in Thailand and Vietnam rose 10% and 27% yoy, respectively, in April.
The reopening of both countries to international tourism is likely to be a key driver. From this month, tourists can enter Thailand with proof of a Covid vaccine, and Vietnam has also opened its doors to tourism again.
Almost a third of the consumers of beer are tourists in both countries. And in addition to the return of tourism, bars are also reopening.
3) High chance a restructuring would cut debt
Thai Bev has been under pressure from rating agencies to cut leverage. It financed its acquisition of Vietnam's Sabeco with US$-denominated debt financing.
We expect a value-enhancing restructuring, where TCC injects Fraser and Neave (FNN SP)’s F&B business into Thai Bev in exchange for divesting its associate stake in FNN SP.
4) THBEV SP is trading at a 14% discount to SAB VN's valuation
One-third of Thai Bev’s earnings growth will be driven by Sabeco, but investors would be better served by investing in the parent, in our view.
Thai Bev is trading at just 12.7x FY 23F EV/EBITDA, which is 16% below the Asian peer average.
On a historical basis, Thai Bev is at the bottom end of its 10-year PE and PB valuations.