Thai Beverage

Credit Suisse Research, Jan 15

WE initiate coverage on Thai Beverage (ThaiBev) with an "outperform" rating and a target price of S$0.60 per share.

Most businesses are currently under pressure. Spirits sales in Thailand are the largest revenue and earnings contributor for ThaiBev, and are likely to remain so even if ThaiBev ends up with all the group's shares in Fraser & Neave (FNN). We believe the spirits business can grow earnings near-term as: (1) it has been hurt by consecutive tax increases recently, which should not recur; and (2) spirits sales are inversely correlated to Thailand's GDP (which makes ThaiBev a strong defensive investment, given the currently weak outlook of Thailand).

While beer sales volumes continue to slip, gross profits have held up. The termination of the arrangement with Pepsi has hurt sales of non-alcoholic drinks, but with the integration of FNN, ThaiBev can become a meaningful regional drinks company; providing the much sought-after long-term growth.

The ongoing unrest can impact ThaiBev's sales in the near term, and can hurt its quarterly numbers. Beyond that, we believe ThaiBev should be able to recoup some of the volume and margin losses in spirits sales, stem beer losses and improve non-alcoholic segment sales. Risks include: (1) increased competition in non-alcoholic drinks (lower margins), (2) further tax hikes, and (3) sustained political uncertainty in Thailand. Our target price of S$0.60 implies 13.6 times Ebitda for the core spirits and beer segments, broadly in line with headline Thai staples valuations, while ThaiBev is more insulated from any economic slowdown. There is improved visibility of medium-term growth, though non-alcoholic drinks sales can lead to further upside to both earnings and multiples.

OUTPERFORM