Updated: Mar 23
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ThaiBev is a leading beverage company that owns the Chang Beer brand
Its FY20 earnings have remained resilient in spite of the pandemic
Potential BeerCo IPO is a strong re-rating catalyst
Benefits from the post-pandemic recovery of Thailand and Vietnam
Vietnam's increasing income per capita will support Sabeco's sales growth
SOTP fair value estimate of S$0.81, representing a possible upside of 12.5%
I first became interested in ThaiBev in August 2020 when it reported resilient 3Q20 earnings but the market was not pricing it in. I thus accumulated a position and played the waiting game until it rose together with the broad SG market in Nov 2020 on the Pfizer vaccine announcement. Hence, when its share price retraced after earlier rising on the announcement of BeerCo IPO intentions, I thought it would be interesting to re-visit ThaiBev.
ThaiBev is a leading beverage company that is involved in 4 business segments - spirits, beer, non-alcoholic beverages, and food. It has been expanding business operations through the introduction of new products as well as strategic acquisitions such as its 53.6% stake in Sabeco in Dec 2017.
In 1Q21, ThaiBev derived 90.5% of its revenue from Spirits and Beer and 9.6% from its non-alcoholic beverages and food. Even though spirits’ revenue is only 15.0% higher than that of Beer, Spirits NPAT is 317.1% higher due to its significantly larger gross margins - Spirits NPAT margin (20.7%) is 15.1% pts higher than Beer (5.6%).
Its sales are predominantly generated from Thailand and Vietnam but it has been expanding its international presence through increased international distribution and strategic acquisitions (i.e. acquisition of 75.0% stake in Grand Royal Group, Myanmar’s largest whisky player, in 2017)
1. Total Revenue and NPAT change
From FY16 to FY20, total revenue grew at a CAGR of 16.2% while NPAT fluctuated between THB 17.9 and 34.5 billion.
Total revenue increased from a low base in FY16 as the Thai economy's private and public spending recovered and was boosted by key acquisitions in FY18 - a 53.6% stake in Sabeco, Vietnam's largest beer brewery, and a 75.0% stake in Grand Royal Group, Myanmar's largest whisky player. In addition, the roll-out of product refreshes and the introduction of new alcoholic beverages supported growth.
However, FY20's total revenue and NPAT declined by 5.1% and 2.2% YoY respectively. This was mainly due to the pandemic causing increased inaccessibility to ThaiBev's alcoholic beverages (i.e. Thailand alcohol ban from mid-April to early May) and reduced purchasing power as the Thai economy contracted and Vietnam economy's slowed in growth.
Despite the unfavorable economic conditions, the bottom-line showed little YoY change as demand for its spirits' products remained resilient and management focused on cost-efficiency through actions like lowered marketing spend.
2. Spirits' Revenue and NPAT
Spirits revenue grew YoY from FY17 to FY20, except FY18 which mgmt pointed to a slowdown in consumption, as demand remained strong and ThaiBev rolled out new products.
The growth was helped by the strategic acquisition of a 75.0% stake in Grand Royal Group, Myanmar’s largest whisky player, whose results were consolidated in FY18.
Despite the pandemic causing lockdowns in Thailand and Vietnam, FY20’s top-line improved 2.0% as spirits are more often consumed via off-trade channels and NPAT increased 14.7% as management tightened cost control measures. (AR20,pg103)
3. Beer Revenue and NPAT
From FY17 to FY20, beer revenue increased by 86.4% as purchasing power in Thailand and Vietnam strengthened and Sabeco's revenue consolidated post-acquisition in FY18. However, net profit only increased by 12.4% due to weak growth of ex-Sabeco beer sales and increased advertising and finance costs.
Despite the pandemic causing 1Q21 (ended 31 Dec 2020) revenue to decline 9.0% YoY, NPAT increased 91.2% on stricter cost control which decreased SG&A by 26.5% YoY on lower advertising, promotion expenses, and staff costs.
Compared to spirits' 1Q21 results, beer’s top-line experienced a larger drop-off as it has a greater on-premise consumption proportion. In addition, stricter drink driving laws in Vietnam starting in Jan 2020 caused Sabeco’s revenue to decline.
ThaiBev initially acquired a 53.6% stake in Sabeco in Dec 2017 to tap onto the fast-growing Vietnam alcohol market and diversify its geographic revenue sources and aimed for international revenue to account for half of the overall revenue.
From 2017 to 2019, Sabeco enjoyed YoY revenue growth supported by Vietnam’s growing average income per capita and increasing legal-to-drink population.
However, a combination of the zero-tolerance drunk driving law imposed in Jan 2020 and the pandemic caused 2020 revenue to drop by 45.4%. A Bloomberg report stated that the new ruling was purported to have caused sales to decline by at least 25.0% in January even before the full-force pandemic kicked in.
On the contrary, 2020's NPAT was resilient and 1Q21 NPAT (ended 31 Dec 20) was 40.6% higher YoY on 'lower raw material, transportation, and administrative costs'. In addition, the negative effects on Sabeco's top-line seem to be waning out as 1Q21 revenue increased 60.2% from 2Q20 (ended 31 Mar 20).
Its Thailand beer sales are led by its flagship Chang Beer brand.
The Thai beer market is dominated by a duopoly - Chang and Singha Beer, which have a combined 93.0% market share by volume. This has remained high due to policy regulations that limit the beer production of other companies and the high import taxes.
Despite the overall sales decline in FY20 due to the pandemic, there was a silver lining in its market share gain as stated in ThaiBev‘s AR2020. I speculate that it was a result of Chang beer’s greater proportion of Thai factories which would have less effect on supply chain disruptions compared to other import-reliant brands.
4. Food and Non-Alcoholic Beverage
ThaiBev has been expanding its non-alcoholic segment through the introduction of new products and franchise acquisitions.
In 2018, it doubled its scale of food operations by ‘acquiring the rights to more than 250 branches of the KFC franchise in Thailand’. (AR18,pg11)
In addition, it has stakes in Fraser and Neave, Limited (F&N) and Oishi Group which focus on non-alcoholic beverages.
Net debt spiked 582.5% in FY18 as ThaiBev took on debt mainly to finance the approximately THB 156,000.0 mil Sabeco acquisition. In addition, it acquired a 75.0% stake in the Grand Royal Group acquisition.
It has been paring down its debt 'using cash flows from its operations and has also been exploring plans to further lower its debt level via other avenues'. (AR2020,pg127) Its current ratio stood at 1.02 as of 1Q21 and it has boosted its liquidity by 'entering into bilateral loan agreements with a combined Baht 40,000.0 million loan amount on 30 October 2020'. This should quell investor worries over its short-term debt position.
In addition, if its BeerCo IPO were to go through, it could provide up to US$2.0 bil in cash to repay its debts.
1. Unlocking value through BeerCo IPO
On 4 Feb 2021, ThaiBev announced its intent to IPO its BeerCo unit - Chang Beer and Sabeco. According to Bloomberg, it is aiming to fetch a US$10.0 bil valuation and sell up to a 20.0% stake in the offering.
In its announcement, it listed 3 benefits of the IPO - (a) Clears overhang regarding Sabeco’s valuation, (b) Use part of IPO cash proceeds to pare down debt, and (c) Significant growth potential.
(a) Clears overhang regarding Sabeco’s valuation
I believe this is the key reason for spinning off as it gives a transparent valuation benchmark of ThaiBev's beer companies, specifically Sabeco.
There is currently an overhang on ThaiBev’s stock due to uncertainty over the valuation to assign to Sabeco. ThaiBev originally bought it at a S$6.4 bil valuation which implied 36x 2017 core earnings. However, Sabeco's Vietnam-listed stock (SAB VN) price has fallen 43.8% from ThaiBev's buy-in price due to factors like possible overvaluation, stricter drunk-driving laws, and possible offload of 36.0% stake by the Vietnam Govt.
Thus, the BeerCo IPO will serve to revalue the Sabeco and Chang Beer stakes and be a clear signal of their market valuation.
(b) Use IPO cash proceeds to repay its debt
If ThaiBev sells 20% of BeerCo at a US$10.0 bil valuation, the current ratio will increase to 1.76. Assuming 100.0% of IPO proceeds is used to pare its debt, 1Q21 net debt will decrease by 35.6%. This should address investor worries that ThaiBev is over-leveraged as a result of its acquisitions.
On top of improving the balance sheet, the IPO will reduce interest payments and give it more headroom to conduct value-accreditive expansion as stated in the announcement.
(c) Significant growth potential
By spinning off, BeerCo will no longer be sandwiched between ThaiBev's 3 other business segments and instead, have its own board of directors giving it increased decision-making freedom. This should increase the productivity of BeerCo as management can solely focus on its operations.
2. Recovery of Thailand's and Vietnam's Economy
Since the pandemic first hit Thailand in 2Q20 (end 31 Mar 2020), it has mostly kept its daily new cases in the single digits until the 2nd wave hit in mid-Dec 2020 when it spiked to a high of 959. Through further restrictions like curfews, the number has declined to 92 on 18 Mar 2021. Vietnam has kept its case numbers in the double digits from the start.
As case numbers subside, Thailand and Vietnam are relaxing certain regulations like lockdowns and ban of the sale of alcoholic beverages in Thailand which lasted from the second week of April until early May. This gradual resumption of regular activities will continue to benefit ThaiBev directly through measures like the start of on-premise dining and indirectly through income improvement from the reopening of the economy.
According to Bloomberg’s vaccine tracker, Thailand currently has an extremely low inoculation rate of 0.1 doses per 100 people but is expected to allocate 63.0m doses in 2021 with the majority arriving in 2H21. This represents 79.0% of eligible residents or 45.2% of the total population. The hope is that Thailand's private hospitals which are eligible to import vaccines will boost the inoculation rate and lead to herd immunity by 1H22.
According to Bloomberg's vaccine tracker, Vietnam currently has an inoculation rate of fewer than 0.1 doses per 100 people but the govt has said that it will receive 60.0m doses in 2021 with the majority arriving in 2H21 as well. This represents just 31.2% of the population but it should increase as vaccine orders are confirmed given that the health minister said 'it may reach a deal to secure 30 million doses of the Pfizer vaccine this year'.
The combination of a low number of cases and rising inoculation rates should lead to increased domestic activity through relaxation of social distancing restrictions (i.e. Bars reopened in Bangkok in Feb 2021) which will benefit beer’s on-premise sales.
In addition, as global inoculation rates rise, with Israel leading at 53.1% of the population covered, tourism will restart. IATA's director said that 'personal and travel will return from the second half of this year'.
As tourism indirectly and directly accounted for 22.0% of Thailand's 2019 GDP and the purchasing power per tourist is expected to be high as saving rates in developed countries have reached highs - the US personal savings rate reached a record 33.0% in Apr 2020, the tourist dollar is expected to improve ThaiBev’s top-line significantly as sales volume increases.
3. Vietnam's Increasing income per capita
Vietnam, ThaiBev's 2nd largest geographic revenue contributor, has grown its average monthly income per capita at a CAGR of 11.7% from 2010 to 2020. This strong growth signals a transition into economic prosperity and highlights the opportunity for sales expansion and premiumization.
(a) Sales growth
A key reason for the Sabeco acquisition was to tap into Vietnam's fast economic growth which has shown resilience as its GDP continued to rise 2.9% even in 2020.
In addition to increased purchasing power, Vietnam's young population means a sustainable increase in the legal-age-to-drink population which will continue to increase the TAM and serve as a tailwind.
(b) Affordable premiumization
Sabeco is working on its affordable premium segment which should benefit from continued average income increase as consumers look for premium options. In addition, ThaiBev's Vietnamese spirits could benefit as consumers look for premium alternatives to beer.
ThaiBev's premium beer brand, Federbräu, is currently mainly sold in Thailand but could be distributed to Vietnam to ride the uptrend in premium beers.
The increased demand for premiumization will benefit both ThaiBev's top-line and gross margins.
ThaiBev's spirits' peers trade at an average of 36.8x NTM P/E. However, given that ThaiBev has a significantly higher Net D/E of 98.5%, I will assign a 40.0% discount to the peer average which gives it a P/E of 22.1x.
The US$10.0 bil IPO valuation of BeerCo implies an FY20 P/E of more than 60.0x which is more than double that of the peer average. The valuation seems steep in my opinion but if it is fetched, it will be a strong re-rating catalyst as shown in the valuation slide below.
However, if the IPO does not go through, I will assign the same 40.0% discount to the overall peer average NTM P/E which gives a ratio of 13.7x.
I used a sum-of-the-parts valuation and illustrated the 2 scenarios - No BeerCo IPO and Successful BeerCo IPO (US$10.0 bil valuation and 20.0% stake sold).
To calculate the FY21E spirits' NPAT less minority interests, I assumed that the SG&A would revert back to the FY19 figure, that Myanmar's revenue contribution (9.0% of total spirits revenue) would halve but I discounted the full 9.0% on conservatism due to operating leverage and to give a buffer for any possible surprises. In addition, I factored a 20.0% holding company discount.
This gives a fair value estimate of S$0.81 if there is no BeerCo IPO, representing a possible upside of 12.5%, and S$1.01 if there is a successful BeerCo IPO, representing a possible upside of 40.3%. This shows the possible bull case for ThaiBev should the BeerCo IPO go through.
1. No IPO/Cannot fetch US$10.0 billion valuation
It is definitely possible that the BeerCo IPO will not go through or be listed at a lower than US$10.0 bil valuation given the uncertain market environment.
However, I believe there is a probable chance that it will happen given that management announced its BeerCo IPO intent for the first time, restructured the business to allow for it to happen and received a no-objection letter from SGX.
Even if the IPO falls through, I believe that there would not be an extreme share price correction given that at the last close of S$0.72, the potential for IPO does not seem to be fully priced in as it is still trading near its 5-year historical P/E and some enthusiasm has faded as seen from the 15.3% price decline from the 8 Feb 2021 intraday high of S$0.85 after the BeerCo IPO intention announcement.
2. Resurgence in Covid-19 cases in Thailand
Thailand had kept the daily new cases in the zero to low double digits range until late Dec - Jan when new case numbers spiked to a high of 959. It has since declined significantly to 92 on 18 Mar 2021.
However, a resurgence is possible seeing that Thailand was unwilling to impose a full lockdown when the 2nd wave hit, instead, adopting various restrictions like curfews.
Despite the concerning 2nd wave, the previous financial quarters have shown that ThaiBev’s revenue is resilient despite the lack of on-premise dining, and management is able to control costs efficiently, hence, should resurgence occur, ThaiBev's bottom line should not be excessively affected.
3. Revenue contribution from Myanmar will decline
ThaiBev has a 75.0% stake in Grand Royal Group, the market leader of whiskey in Myanmar. In addition, Chang Beer is manufactured in Yangon, Myanmar. The facility has an annual production capacity amounting to approximately 500,000.0 hectolitres.
The critical situation in Myanmar will have an adverse impact on ThaiBev but given Grand Royal Group contributes less than 9.0% to total spirits revenue and Chang Beer's main production facilities are in Thailand, ThaiBev should not experience an extremely significant revenue impact.
4. The market does not take into account the new spin-off valuation
In theory, the BeerCo IPO should provide a clearer indication of its value and allow the market to price the individual business segments of ThaiBev more accurately.
However, it is possible that the market does not price in BeerCo’s spin-off valuation as was the case of Wilmar’s YKA subsidiary listing on Shenzhen Stock Exchange's ChiNext Board. Despite YKA trading at a market cap of more than double that of Wilmar, Wilmar’s share price did not catch up significantly to close the gap.
1. Lift of travel ban
As mentioned in Thesis 2, ThaiBev benefits heavily from tourism and thus, the tourism restart will add a boost to the top-line as the tourist dollar flows into Thailand and Vietnam.
In addition, I expect the positive news flow on leisure travel restart to cause increased sector rotation into the return from home stocks that have seen the cyclical-heavy STI rise 20.1% since the 9 Nov 20 Pfizer vaccine efficacy announcement.
Expected Date: 6-12 months based on the speed of global inoculation rates
2. Successful BeerCo IPO
If the IPO goes through, it will clear an overhang on the stock as mentioned in Thesis 1 and significantly increase the possible equity value.
In addition, a special dividend could be given. Assuming a 20.0% payout of the US$2.0 bil in IPO cash proceeds, the special dividend will be about SGD 2.1 cents per share which represents 2.9% of the last close, S$0.72.
Expected date: 5-12 months (Deloitte's IPO brochure)
Given that the IPO is expected to be the SGX's largest in the last 10 years, I expect the regulatory process to be on the longer end.
I believe ThaiBev is a decent re-opening proxy that offers potential upside with/without the BeerCo IPO. The business has proved its resilience during the pandemic and I expect brighter days ahead as domestic and international tourism activity picks up. In the meantime, I will closely monitor the BeerCo IPO progress and update the post should there be any major developments.
Thanks for reading,
Disclaimer: I am long Thai Beverage (SGX:Y92) at an average price of S$0.74. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.
Cover photo by Nagesh Badu on Unsplash
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