Elevator Pitch
I maintain my "Neutral" rating on Singapore-listed alcoholic drinks company Thai Beverage Public Co., Ltd. (OTCPK:TBVPY) (OTCPK:TBVPF) [THBEV:SP].
Thai Beverage's 53.6%-owned Vietnamese beer company subsidiary Sabeco saw its sales decline in 1QFY2020 due to fake rumors regarding sales of the company's shares to Chinese investors, with further headwinds expected from a new drink-driving law in Vietnam which came into effect on January 1, 2020. The coronavirus outbreak is will also be negative for sales volumes of beer in Thailand, given a drop in tourist arrivals and an increasing number of people staying indoors.
On the flip side, Thai Beverage's core domestic spirits business, which accounted for two-thirds of the company's 1QFY2020 EBITDA, is expected to be relatively more resilient during the current coronavirus outbreak. This is because approximately 80% of spirits sales volumes are attributable to domestic consumption at home (versus on-trade channel) in Thailand.
However, a "Neutral" rating is warranted, as Thai Beverage's current valuations are not sufficiently attractive. Thai Beverage traded as low as 10 times forward P/E during the 2008-2009 Global Financial Crisis, which implies significant downside from the stock's current 17.2 times consensus forward FY2020 P/E, if the current coronavirus outbreak takes a longer-than-expected time to be contained.
This is an update of my prior article on Thai Beverage published on December 6, 2019. Thai Beverage's share price declined by approximately -12% from S$0.89 as of December 4, 2019 to S$0.78 as of March 6, 2020 since my last update.
Readers are advised to trade in Thai Beverage shares listed on the Singapore Stock Exchange with the ticker THBEV:SP where average daily trading value for the past three months exceeds $10 million and market capitalization is above $14 billion. Investors can invest in key Asian stock markets either using U.S. brokers with international coverage such as Interactive Brokers, Fidelity, Charles Schwab or local brokers operating in their respective domestic markets.
Headwinds For Vietnam Beer Business
Thai Beverage released its 1QFY2020 (YE September) financial results on February 14, 2020, which were better than expected. The company's revenue was up +4.2% YoY at Bt75.7 billion in 1QFY2020, while its net profit attributable to shareholders grew +13.6% YoY to Bt8.4 billion in the most recent quarter.
Thai Beverage's international business was the weak spot in 1QFY2020, as the segment's revenue declined -11% YoY to Bt18.6 billion in the last quarter. This in turn was mainly attributable to the poor performance of Thai Beverage's 53.6%-owned Vietnamese beer company subsidiary, Saigon Alcohol Beer & Beverages Corp. or Sabeco.
Sabeco's sales were down -6% YoY in 1QFY2020 (or 4Q2019 in calendar year terms). The Vietnamese beer company's sales were negatively impacted by fake rumors regarding the sale of Sabeco's shares, as per Thai Beverage's comments at its 1QFY2020 earnings call on February 14, 2020. In early October 2019, Deputy Minister of Industry and Trade Do Thang Hai clarified that rumors that Sabeco's shares have been sold to Chinese investors are "baseless and inaccurate" at a media conference, as reported by The Saigon Times. Apart from majority shareholder and parent Thai Beverage, Vietnam's Ministry of Industry and Trade is Sabeco's second largest shareholder with a 36% equity interest.
The negative effects of fake rumors on Sabeco's sales should be only temporary in nature, but a new drink-driving law which came into effect on January 1, 2020 in Vietnam could have a much longer impact. Under the new drink-driving law in Vietnam, the penalties for drink-driving are much harsher. For example, motorcyclists caught for drink-driving in Vietnam now face twice the amount of fines, while the maximum driver's license suspension period is increased from five months to two years.
According to a Bloomberg article titled "Vietnam’s Tough New Drunk-Driving Law Is Hurting Beer Sales" published on January 21, 2020, Vietnam beer sales dropped by more than -25% YoY in the first half of January 2020 since the new drink-driving law was implemented. The Vietnamese authorities showed that they were serious about battling drink-driving in the country, with over 6,000 fines having been issued against drivers who violated the new drink-driving law over the same period. The fine is significant, as it is equivalent to approximately 70% of what an average Vietnamese earns in terms of monthly wages.
In late-February 2020, new restrictions on alcohol advertising in Vietnam were put in place. Alcohol advertising on television was already restricted during the evening period starting in mid-2019, and scenes of alcohol consumption are now also disallowed in movies. The Vietnamese authorities have good reasons to be concerned about alcohol consumption in Vietnam, as drink-driving is responsible for approximately 30% of traffic accidents in the country every year.
Fitch Solutions forecasts that Vietnam's alcohol sales growth will slow from +10.3% YoY in 2019 to +6.9% in 2020, as a result of the new drink-driving law in the country. Nevertheless, Fitch Solutions still expects Vietnam's five-year alcohol sales CAGR in the 2020-2024 period to be a decent +7.8%, as the research company sees the new drink-driving law only having a short-term impact.
Negative Impact Of Coronavirus Outbreak
Adding to the woes of Sabeco and Thai Beverage on top of Vietnam's new drink-driving law, the current coronavirus outbreak is expected to be negative for beer sales volumes in both Vietnam and Thailand. At the time of writing, Thailand and Vietnam have 50 and 30 confirmed cases (cumulative) of coronavirus infection respectively.
In Vietnam, a combination of the new drink-driving law and the current coronavirus outbreak has already started to affect the sales of beer in the country in early 2020. A research report (not publicly available) titled "A Difficult Q1 2020 Expected" published by Saigon Securities Incorporation on February 12, 2020, highlighted that "many supermarkets and mom-and-pop shops had to run a huge discount to get rid of leftover stock" in late-January 2020, and that Vietnamese beer company Hanoi Alcohol Beer and Beverage Company's or Habeco's "draught beer sales volumes "declined by 30% YoY in January 2020." Habeco is Vietnam's third largest beer company after Sabeco and Vietnam Brewer.
In Thai Beverage's home market, Thailand, Thai Beverage's beer sales is expected to suffer from more locals staying indoors, and a decline in the number of tourists. Beverage giant Diageo plc (NYSE:DEO) issued a press release on February 26, 2020, highlighting that factors such as "events being postponed, a reduction in conferences and banquets, and a drop in tourism" have affected on-trade consumption of alcohol in Asian markets, including Thailand.
Tourist arrivals in Thailand dropped by approximately -40% YoY in February 2020 which was largely attributable to the current coronavirus outbreak, according to estimates by the Tourism Authority of Thailand. The Tourism Authority of Thailand expects tourist arrivals in Thailand to decline by -15% YoY to 33.8 million for full-year 2020. In addition, more locals in Thailand are expected to stay indoors, and this implies lower on-trade consumption of beer in the country.
Domestic Spirits Business Is Expected To Be Relatively More Resilient
On the positive side of things, Thai Beverage's domestic spirits business is expected to be relatively more resilient, compared to its beer businesses in Thailand and Vietnam.
At the company's 1QFY2020 earnings call on February 14, 2020, Thai Beverage disclosed that approximately 80% of spirits consumption in Thailand happens at home, as opposed to 60% for beer consumption in the country. This implies that the negative impact of tourist arrivals and more locals cutting back on outdoor activities as a result of the coronavirus outbreak will be more muted for Thai Beverage's core domestic spirits business.
Thai Beverage's domestic spirits business accounted for 45.5% and 67.8% of the company's 1QFY2020 revenue and EBITDA respectively. The domestic spirits business also performed well in the recent 1QFY2020 quarter, as the segment's revenue and net profit attributable to shareholders increased +8.8% YoY and +25.6% YoY to Bt34.4 billion and Bt7.1 billion respectively.
Valuation
Thai Beverage trades at 17.2 times consensus forward FY2020 P/E (YE September) and 15.9 times consensus forward FY2021 P/E based on its share price of S$0.78 as of March 6, 2020. In comparison, the stock's historical five-year and 10-year average forward P/E multiples were 19.0 times and 17.1 times respectively.
Thai Beverage offers consensus forward FY2020 and FY2021 dividend yields of 3.0% and 3.3% respectively.
Risk Factors
The key risk factors for Thai Beverage include a larger-than-expected negative impact of the new drink-driving law on beer volumes in Vietnam, and a longer-than-expected time for the current coronavirus outbreak to be contained.
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