This is fourth in the series of our hunt for multi baggers. For the others in our series, please refer to these links:
Thai Beverage Public Company LimitedDominant Regional F&B Conglomerate Poised to Benefit from ASEAN Growth
With a high level of human development, the second-largest economy in Southeast Asia, and 20th-largest by PPP, Thailand is a newly industrialized economy, with Manufacturing, Agriculture, and Tourism being leading sectors.
Thai Beverage (THBEV SP), better known as ‘ThaiBev’ (Thai: ไทยเบฟ) (SGX: Y92), is Thailand’s largest and one of Southeast Asia’s largest beverage companies, with distilleries in Thailand, Scotland, and China.
ThaiBev was established in 2003 to consolidate a number of leading spirits and beer businesses in Thailand. The company subsequently expanded to the non-alcoholic beverage and food sectors to diversify its product portfolio, enhance logistics efficiency, and mitigate business risks. Today, the business consists of four segments – Spirits, Beer, Non-Alcoholic Beverage, and Food.
ThaiBev has an international presence in over 90 countries. The Group has 5 production facilities in Scotland which are known for producing single malt scotch whiskies such as Balblair, Old Pulteney, as well as Speyburn; has interests in two production facilities in Myanmar which produce the top-selling whisky in the country; and owns one distillery in China which produces the famous Yulinquan Chinese Spirits.
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ThaiBev’s most recognized spirits brands include Ruang Khao, SangSom, Mekhong, Hong Thong, and Blend 285, as well as GRG’s iconic Grand Royal whisky; and the Group’s Signature beer, Chang, is very popular among Thai beer drinkers, while Sabeco’s Bia Saigon and 333 are the top-selling beer brands in Vietnam.
In the non-alcoholic beverage space, ThaiBev’s leading brands include Oishi Green Tea, est cola, and Crystal drinking water, as well as F&N’s sparking drinks and 100PLUS Isotonic Drink.
In addition, the Group operates Japanese restaurants, as well as ready-to-cook and ready-to-eat food businesses through its subsidiary Oishi Group Public Company Limited.
But ThaiBev has also started branching out from these well-established Japanese restaurants and food products, and is accelerating expansion of its food business by leveraging its subsidiary Food of Asia and its franchise outlets under KFC, the most popular quick service restaurant brand in Thailand.
In recent times, ThaiBev has made some large acquisitions, deploying its retained earnings accumulated to drive ROE for its shareholders.
- In 2013, Thaibev added Fraser and Neave(F&N), Limited, a food and beverage, brewing, property, and publishing industries conglomerate in Singapore, to its drinks and property empire.
- In 2017, ThaiBev acquired Saigon Beer Alcohol Beverage Corp (“Sabeco”), one of Vietnam’s largest Beer and Beverage companies. Sabeco carries brands that are highly popular in Vietnam, such as Saigon Beer & 333 beer.
ThaiBev also makes a couple of small acquisitions or expansions every year. For example in May 2019, ThaiBev, through a joint venture with Hong Kong-based Maxim’s Catering, won an exclusive deal to operate and further develop Starbucks Coffee’s retail presence in Thailand.
As mentioned earlier, ThaiBev splits its business units into 4 core operating segments – Spirits, Beer, Non-Alcoholic Beverages and Food.
In total, Thaibev has 6 listed companies under its umbrella – OISHI:BKK, SSC:BKK, FNN:SP, FPL:SP, FCT:SP, FCOT:SP. The company is also a subsidiary of the TCC Group which also has businesses in Industrial and Trading, Finance and Insurance, Property and Real estate, and Agricultural and Agro-Industrial.
2. Brief Review of Financials
In FY19, ThaiBev recorded Increased Revenues of ฿$267.4b and Gross Profit of ฿77.4b, representing a Gross Profit Margin 28.9%.
- Revenue and Gross profit was ฿37.7b and ฿10.5b higher than the previous year.
- Gross profit margin shrank by 0.2%.
- Despite ฿7.2b of finance cost which was ฿2.2b higher than the previous year, ThaiBev recorded a core operating profit of ฿24.6b which was ฿4.7b higher.
- Share of profits from associates/JV increased 27% to ฿4.8b leading to a net profit for the year of ฿26.1b which was 33% higher than last year, 2018.
- Profit attributable to ThaiBev increased by 30% to ฿23.3b which translates into Earnings Per Share of ฿0.93 and NAV of ฿4.61.
- ThaiBev also recorded significant translation losses in its foreign operations due to the strengthening of the ฿aht against most currencies.
ThaiBev performed well in FY19, with most segments performing better than the prior year. Revenue and EBITDA was higher YoY across all 4 segments, while the food segment was the only segment that recorded lower net profits.
When analysing the net profit (excluding non-recurring costs incurred in FY18 relating to the acquisition of Sabeco), Profits increased YoY due to higher revenue and gross profit, offset by higher expenses across all categories.
This was largely due the spirit segment and also the outperformance in F&N/FPL which forms a significant part of the higher share of profits from associates.
Since the major acquisition of Sabeco was completed in FY18, ThaiBev has completed only smaller bolt-on acquisitions as it seeks to integrate new investments and drive returns to reduce its debt load.
Consequently, the balance sheet and key financial ratios were largely unchanged from FY18, with changes mainly arising from the maturity dates of its borrowings and working capital movements. The current ratio decreased from 2.01 to 1.59 due to higher current liabilities as a result of the timing of maturity of its borrowings. The D/E ratio is at 1.46 which has ticked down from 1.49 due to net repayment of borrowings.
ThaiBev’s dividend policy is to distribute not less than 50% of net profit after deducting all appropriated reserves and investments, subject to availability of cash flow. The actual quantum paid has varied in accordance with its profitability.
In FY19, ThaiBev has declared a total dividend of ฿0.48, comprising an interim dividend of ฿0.15 and a final dividend of ฿0.33 which represents a Payout Ratio of 51.61%.
In comparison, ThaiBev distributed a total of ฿0.39 of dividend in FY18, comprising an interim dividend of ฿0.15 and a final dividend of ฿0.24 which represents a payout ratio of 54.93%.
We can see that ThaiBev’s payout ratio is lowest in the past 10 years as it conserves cash to repay is borrowings obtained as part of the Sabeco acquisition.
3. Investment thesis
Vision 2020 is ThaiBev’s strategic roadmap. Driven by 5 strategic imperatives outlined below, ThaiBev seeks to provide customers with even better products, create greater value and deliver more sustainable returns to shareholders, and enlarge opportunities for our employees:
- Growth: ThaiBev aims to solidify ThaiBev’s position as the largest and most profitable beverage company in Southeast Asia.
- Diversity: To support and sustain ThaiBev’s growth, diversify revenue streams, increasing revenue contribution from non-alcoholic beverages and the sale of products outside of Thailand.
- Brands: By streamlining ThaiBev’s businesses into 3 product groups (spirits, beer, and non-alcoholic beverage) and identifying core brands within each, as well as focusing on primary and secondary markets with the greatest growth potential, we look to expand the business via a consumer- and market-driven approach.
- Reach: To realise the potential of ThaiBev’s core brands, robust and efficient routes to all markets are required.
Accordingly, ThaiBev seeks to build on its market-leading business processes and supply chains to strengthen existing distribution networks, establish new ones, and also enter into partnerships with third-party distributors when appropriate.
- Professionalism: ThaiBev strives to ensure a diverse and high-performance workforce, and that the teams behind all product groups work together seamlessly, leveraging cross-product group synergies where applicable, further strengthening our long-term potentials.
(ii) Diversified Business with Market Leadership
ThaiBev has a business model that is diversified into not only different F&B products, but also in multiple segments of the value chain, from manufacturing, logistics and point of sales operations.
The company also diversifies into property via indirect stakes through the F&N acquisition.
ThaiBev is also the market leader in multiple countries and product types and has succeeded in gaining the economic scale required.
(iii) Growth Levers
ThaiBev is taking a multi-prong approach to drive ROE. This includes organic growth, acquisitions, integration and cost efficiencies.
By expanding its product offerings, ThaiBev is also able to cross sell its products which leads to revenue growth and also synergies.
(iv) Track Record of Successful Acquisitions
As a listed company, developing capital management capabilities is of exceptional importance so as to drive a certain level of ROE to shareholders. Where leverage is utilised, there is also a need to minimise a risk of mismatch of the asset/liability duration.
To this note, ThaiBev has demonstrated an ability to secured continued funding, managing liquidity and maintaining flexibility.
(vi) Track Record of Delivering ROE
In FY19, ThaiBev delivered 20% in ROE. They have, in the past 10 years, delivered ROE between 15 and 39%, with an average ROE of 23%. They have constantly reinvented themselves, set new growth targets and achieved them.
As investors, we like companies that have the ability to generate at least 10% average ROE in the longer term. We believe ThaiBev to be one of them because the company has been able to increase profits over the years.
4. Major Risk Factors to Our Call
(i) Conglomerate Risk – Segmental Underperformance
With many segments and products, there is a risk that ThaiBev may not be able to deliver a respectable performance on all its segments – even though they have a proven track record so far.
(ii) Macroeconomic Headwinds Impacting Consumer Spending
With slowing macroeconomic conditions, ThaiBev may be forced to delay organic growth, via new products or acquisitions and expansions due to either company-centric or macroeconomic factors.
On impacting Consumer Spending: One may view ThaiBev’s products as ‘Discretionary Spend’ and some products may even be viewed as having a Premium-Tier pricing.
(iii) Fundamental Change or Delays in Government Policies and Infrastructure Planning
Regulatory interventions in the form of higher alcohol tax or government policies discouraging the consumption of alcohol may have both a short and longer term impact. There could be taxes levied either on revenue or profits.
In all countries, a license is required to either manufacture or sell alcohol and there are typically quotas or restrictions surrounding the ability to secure this license. Issuance of these licenses may also come with requirements for substantial upfront initial and subsequent recurring payments.
Government support is also required, especially in key markets, to secure manufacturing sites which either already has the required infrastructure or permissions to build the required infrastructure. Such infrastructure ranges from transport, logistics, to water and waste management systems.
This is dependent on ThaiBev’s continued ability to value add to the community in which it has its investments in.
(iv) Debt Profile, Funding Risks and Risk of Depreciation of Currency
ThaiBev currently has total borrowings and debt securities of ฿219.6b, which represents a D/A ratio 0.54 of and D/E ratio of 1.46. The interest coverage ratio is approximately 3.65 times.
A large portion of borrowings originated from the Sabeco acquisition which cost ฿156b. For reference, ThaiBev’s pre acquisition D/E ratio was 0.31 as at 30 Sept 2017 and 0.37 as at 30 Sept 2016.
Most of the borrowings and debt securities were originated in ฿aht for acquisitions. As a substantial portion of its debt was used to acquire Sabeco, therefore there is significant exposure to currency risk.
As the baht has strengthened by more than 10% against the Vietnamese Dong since the acquisition, this has resulted not only in translation losses, but also that foreign cashflows are not contributing as much in terms of debt repayment.
ThaiBev has ensured that a majority of its borrowings are at fixed interest rates which mitigates against interest rate risks by ensuring that future cashflows can be forecasted.
While there is no doubt that ThaiBev has demonstrated the continued ability to refinance and also to secure funding from its major shareholders and institutions, this is contingent on a few key factors including availability of funding in weakening macroeconomic conditions.
The significant level of debt can be unwieldy as well should there be a significant weakening in consumer spend. While there is no doubt that they can refinance easily, we believe they will look to reducing the debt levels as the impact of finance cost is too high.
(vi) Risks with other stakeholders
ThaiBev operates in a range of structures including sole distributorships, joint ventures and fully owned subsidiaries in many countries.
There is a risk of a multitude of issues with its JV partners ranging from disputes to cash flow issues.
5. Valuation and Conclusion
ThaiBev is currently trading at S$0.90, this represents a P/E of 21. The recent 5-year P/E range is 14 to 25. ThaiBev has a NAV of ฿4.61 / S$0.217, which represents a P/B of 4.
ThaiBev’s set of accounts are denominated in ฿aht, as a majority of its revenue and profits are derived in Thailand, a strengthening of the THB will be beneficial for the share price as the listing currency is in SGD.
However, it will be offset as a strengthening THB will lead to lower translated revenue and profits.
As ThaiBev is a widely-covered stock that is part of major indices, without a negative catalyst, it may be challenging for the share price to correct by a large amount.
We understand that some market analysts have taken the view that the FY19 results have slightly fallen short of estimates which could represent an opportunity.
Further, businesses are prone to underperformance on a quarterly basis, with an impending slowdown in the economy, we think an opportunity may surface to acquire this stock. ThaiBev also tends to have a higher volatility than some of its large cap peers.
We derive our target by applying a growth model assuming 10-15% ROE over the next decade and then reducing the P/E ratio.
As an already large conglomerate, there will be a point where growth as a % of the overall business declines and therefore ThaiBev will eventually start trading at a lower P/E ratio.
Entry price: S$0.70
Intrinsic Value for PROJECT 2025: S$2.25 providing 320% returns
(Excluding Dividends of around 2+% p.a.)
NEXT STEPS: Now that you’ve a brief idea on how we arrive at our position for ThaiBev: next you’ll want to know is how EXACTLY to invest safely & profit from stocks investing. And it isn’t as daunting as imagined.
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