Thai Beverage

Kim Eng on 6 Mar 2012

Background: Listed in 2006, Thai Beverage (ThaiBev) is the largest brewer and distiller in Thailand and has the largest domestic alcohol distribution network. Core products include its flagship Chang beer, distilled spirits, non-alcoholic beverages and restaurant businesses. The group also owns a Scotch whisky business and a white spirits production in China. To date, the counter is ranked among the top 30 largest market cap companies listed on the Singapore Exchange.

Non-alcoholic beverage segment affected by floods. Apart from the consolidation of its recent acquisition Serm Suk, a non-alcoholic beverage factory was affected by the Thai floods last year. However, the company was quick to outsource production to third parties. Management said that production capacity will be restored by half this month and fully operational by August.

Heavy duties on alcohol. Apart from paying corporate income tax of 30%, ThaiBev also pays an excise tax on alcoholic beverages. In 2007, the Thai government approved excise tax hikes on compound spirits and brandy, which negatively affected the profitability of the group’s largest revenue contributor. The group must also pay an additional amount of 1.5% of tax for advertising to raise public awareness about alcohol use.

Consolidation of subsidiary. ThaiBev recently acquired a 64.66% equity interest in Serm Suk Public Company, a manufacturer and bottler for PepsiCo products in Thailand, for Bt9,971.5m (171.9m shares at Bt58 per share). It took out a set of 3-5-year loans with repayment to begin three years from now. The acquisition will help transform its non-alcoholic beverage business from simple distribution to neighbourhood stores and supermarkets currently to bulk-selling, thereby achieving economies of scale.

Bold marketing campaign. To strengthen the image of its flagship product, Chang beer, ThaiBev has signed a three-year marketing pact with Real Madrid and Barcelona football clubs in Southeast Asia. In 4Q11, the group launched a new beer brand called Chang Export, priced at a 10% premium over its current brands. Chang Export is expected to become a major contributor to the turnaround of the group’s beer business in the future. In the latest quarter alone, 22m litres of Chang Export were exported compared to 10m litres for the year for Chang Draft.

Undervalued vs peers. ThaiBev has consistently paid out 60-83% of its earnings over the past several years. Its FY11 DPS of Bt0.22 implies a 3.0% yield. The counter currently trades at a steep discount to its peers’ 24x historical PER.