Thai Beverage - Seasonally slow, transformation costs

■ 3Q15 core net profit was below our expectations, on weaker-than-expected spirits sales and accentuated beer margin squeeze (re-branding initiative).

Headline net profit (Thb8bn) includes Thb3.8bn gains from F&N’s divestment of Myanmar Brewery. Ex-gains, 9M15 core profit was only 68% of full-year forecast.

■ Beer profitability was poor as the group slowed sales in August, prior to the launch of a new bottle packaging on 19 Aug. It is optimistic on stronger 4Q beer sales.

Spirits weakness is a new concern. Management alluded to weak white spirits sales as farmers income tightened post-rice subsidies.

■ We reflect the weak 3Q core and divestment gains in FY15F. We trim FY16-17 earnings by 3%. Our sum-of-parts target price falls slightly. Maintain Add.

Seasonally slow, compounded by beer re-positioning
Summer months (2Q-3Q) are typically slower for Thai Beverage. The weather is hot, it is not the peak tourist season. 4Q is typically a much stronger quarter. That said, 9M15 core net profit still fell short of expectations, coming in at 68% of our full-year forecasts, vs. an average of 72% in previous years. This was part attributed to a re-positioning efforts in beer, partly to weak spirits performance. The latter is a new worry to us.

Beer: when four become one 3Q beer sales and margins was weak
3Q beer sales was only +5% yoy, after a strong 1H15 (+9% yoy). Thai Beverage culled four sub-brands in mid-August, to consolidate into a common Chang Classic brand. In the two weeks prior, it pulled back sales to clear channel inventory. Management believes beer market share was maintained, and 4Q could see market share gains, on the back of the new packaging. 3Q beer margins was also affected by the need to use 100% new bottles, but in 4Q, Thai Bev is progressively using a mix of recycled bottles now i.e. margins will improve ahead.

Spirits is a new worry
We are less worried on beer than spirits. The ill winds in beer seem more like transition effects. Spirits, however, showed signs of weakness. For a consecutive quarter, Spirits sales and EBITDA saw yoy declines. Management has changed its prior guidance tone, from highlighting white spirits as a staple that can shelter the group from weak brown spirits sales (weak tourism) to admitting that white spirits sales had declined, as farmers household income faced pressure, after the withdrawal of Thailand’s rice subsidies.

Technical Analysis
Daily Chart
Expansion plans ahead
The EBITDA decline in Spirits is slight (-1.5% yoy), hence, not a big concern for now. Spirits was never meant to be a growth engine. Management sounded optimistic on beer contributions in 2016, highlighting the new packaging as part of plans to make Chang Classic a more global brand. There are plans to launch Chang Classic in Singapore and Hong Kong (Jan-16), the UK and Australia (Mar-16) and the US (Apr-16). Domestically, Oishi and tea products are also doing well. Ahead, beer looks like the battering ram to drive earnings growth in 2016. (Read Report)

Read Related Reports
1) Thai Beverage Public Company - Positioning to be a regional player by DBS Group Research, published on 13 November 2015

2) Thai Beverage PLC- Results within expectations by OCBC Investment Research, published on 13 November 2015

Source : CIMB Research

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