Equity Analysis /

Thai Beverage: Raising our target price on Vietnam synergies

    Nirgunan Tiruchelvam
    Nirgunan Tiruchelvam

    Head of Consumers Equity Research

    Tellimer Research
    23 April 2019
    Published by
    • We raise our earnings forecasts for Thai Beverage (THBEV SP) in FY 19 and in FY 20 due to higher spirits volumes in Thailand and the increased prospect of synergy gains in Vietnam.
    • We raise our target price by 18% due to the earnings upgrade and superior terminal growth prospects.
    • THBEV SP looks cheap at just 15x 2019f EV/EBITDA, which puts it at a 35% discount to Asian peers.

    We upgrade our earnings by 38% in FY 19 and 43% in FY 20. We see higher spirits volumes in Thailand, as the operational recovery in Thailand accelerates. The elections have seen a renewal of the rice subsidy. We forecast volume growth of 5% in FY 19 and FY 20. Also, the cost synergy gains from the Sabeco deal should improve EBIT margins from 13% in FY 13-18 to 15% in FY 21f.

    We raise our DCF-derived (probability oriented) target price by 18% to SGD1.10. The operative factors are the earnings upgrade and an increase in the terminal growth rate. Thai Bev is entering an acceleration in its growth prospects after several years of poor growth in its core Thai market, as well as welcoming a new source of earnings from Vietnam.

    We expect beer EBIT margins to widen by 15% from FY 18 to FY 21 due to operational improvements in Vietnam. Sabeco (SAB VN) is in the early stages of the efficiency gains. We think there are major operational improvements to come, from lower procurement costs and operating expenses.

    Thai Bev has just appointed a new management team at SAB VN. Sabeco was previously run as a state-owned enterprise. Thai Bev took control of Sabeco’s board in August 2018. Over the past six months, it has appointed the key management personnel. This is one of the few Vietnamese privatisations where management has been handed to private sector professionals. The new management have industry leadership experience with Heineken, Fraser & Neave and Boston Consulting Group. We view this as a positive development, that should drive profitability.

    High chance a restructuring would cut debt. Thai Bev has been under pressure from equity analysts and rating agencies to cut leverage. It financed the acquisition with US$-denominated debt financing. We expect a value-enhancing restructuring, where TCC injects FNN SP’s F&B business into Thai Bev in exchange for divesting its associate stake in FNN SP.

    THBEV SP is trading at half the valuation of SAB VN, despite similar ROE. 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 17x FY 19f EV/EBITDA, which is 31% below the Asian peer average.