Better Days Ahead In FY22 As International Tourism Returns And Restrictions Ease Attractively priced with a stable core business in spirits, we view THBEV as an undervalued and overlooked COVID-19 recovery play. Higher consumption volumes driven by international tourism and the easing of social-distancing measures are expected to boost earnings moving forward. Maintain BUY with a lower SOTP-based
target price of S$0.85 (S$0.92).
WHATS NEW
• Restart of international travel. With COVID-19 cases falling, Thailand has reopened its international borders to fully-vaccinated travellers starting 1 Feb 22, after suspending its initial quarantine-free visa programme in Dec 21 for seven weeks due to an ongoing Omicron variant outbreak. Starting 1 Feb 22, fully-vaccinated international travellers are now able to enter Thailand quarantine-free upon a negative pre-departure/on-arrival PCR swab test and another PCR test on the fifth day of travel. Also, the “Sandbox” programme has now been extended to include the popular beach destinations of Pattaya and Koh Chang.
• Relaxation of alcohol consumption rules. As of 24 Jan 22, restaurants in Thailand’s blue zones are allowed to serve alcohol till 11pm, extended from 9pm previously. Blue zones include popular tourist destinations such as Bangkok and Phuket. Although bars, nightclubs and other entertainment venues are not legally allowed to open, Thailand’s authorities have allowed these entertainment venues to temporarily reopen as restaurants, allowing the sale of alcohol but only after meeting strict COVID-19 guidelines.
• Pent-up tourism demand. Tourism data released from Thailand’s Ministry of Tourism and sports showed a sharp surge in tourist arrivals due to the quarantine-free programme. Total number of international arrivals in Dec 21 came in at 230,497, a sharp increase from 91,255 in Nov 21 and 20,272 in Oct 21. Jan 22 international arrivals are expected to soften slightly due to the brief suspension of the quarantine-free programme. However, according to the Thai Hotel Association, 200,000-300,000 international travellers are forecasted to arrive in Thailand in Feb 22 with better numbers expected in Mar 22.
STOCK IMPACT
• Spirits: Reliable and consistent segment… For FY22, we expect Thai Beverage’s (THBEV) revenue and EBITDA from the spirits segment to grow 3.0% yoy and 4.7% yoy respectively. This is on the back of relaxed domestic COVID-19 restrictions, higher foreign tourist arrivals and the off-trade consumption nature of the white spirits segment. According to data from Thailand’s Office of Industrial Economics (OIE), domestic volume sales of white spirits in Thailand grew by 1.3%, 30.6% yoy and 10.0% yoy in Oct-Dec 21 respectively, in sync with the reopening of Thailand’s international borders in Nov 21.
• …that is poised for a strong quarter. In 1QFY22, white spirits sales volumes grew by 13.9% yoy while mixed spirits volumes softened by 11.1% yoy. Underperformance by the mixed spirts segment was largely due to a underperforming Oct 21 (-50% yoy) but supported by strong yoy volume growth in Nov 21 (+43.8% yoy) and Dec 21 (+3.31% yoy) respectively. Given that THBEV commands 90-95% of the domestic spirits market share, we estimate that 1QFY22 spirits revenue and EBITDA would grow by 4-5% yoy, forming roughly 30% of our FY22 forecasts. Potential upside may come from white spirits ASP hikes, barring any large increase in material costs.
• Beer: On track for recovery… Entertainment venues in certain provinces across Thailand are now allowed to reclassify as restaurants and serve alcohol. Vietnam, a key market for THBEV, has also allowed restaurants and bars to reopen in low-risk areas since Nov 21. Due to the on-trade consumption nature of the beer segment, we expect FY22 revenue and EBITDA for the beer segment to grow 3.0% yoy and 7.8% yoy respectively based on better consumption volumes.
• …but delayed till 2QFY22. As most of COVID-19 guidelines were relaxed only in Nov 21 and tightened temporarily in late-Dec 21, we reckon that the beer segment’s performance would be muted in 1QFY22. Data released from Vietnam’s General Statistics Office has shown domestic beer production volumes for Oct 21 dropped 14% yoy before growing in Nov 21 (+3.9% yoy) and Dec 21 (+6.5% yoy), right after social distancing measures were relaxed in Nov 21. Data from Bank of Thailand also showed that beer production decreased 11.3% yoy in Oct 21 before posting positive 2.7% yoy growth in Nov 21 (data for Dec 21 has not been released). Therefore, for 1QFY22, we expect revenue and EBITDA to post minute 0-1% yoy growth. Potential upside would come from better-than-expected volumes from international arrivals.
• Non-alcoholic beverages and food: Easing of social restrictions. We opine that THBEV’s ongoing digital efforts and prudent cost management strategy for its non-alcohol beverages (NAB) segment would continue to pay off with restaurants also starting to reopen. For the food segment, the easing of COVID-19 restrictions and the reopening of restaurants would help boost customer footfall. We expect FY22 EBITDA for NAB and food segments to grow by 4.2% yoy and 14.2% yoy respectively.
EARNINGS REVISION/RISK
• We lower our FY22-24 net profit forecasts slightly by 1-1.5% on lower consumption volumes caused by an Omicron outbreak and temporary closure of Thailand’s international borders in 1QFY22.
VALUATION/RECOMMENDATION
• Maintain BUY with a lower SOTP-based target price of S$0.85 (from S$0.92). The lower target price is due to a lower 13X EV/EBITDA multiple for the beer segment, in line with global peers. We reckon THBEV remains attractively priced at below -1SD to its mean PE, backed by an expected earnings recovery underpinned by favourable tailwinds. THBEV’s potential 3Q/4QFY22 IPO of its beer business may also unlock value for the group. Conservatively, we value the beer business at roughly US$5b (13X FY22 EBITDA), dwarfed by similar competitors such as Tsingtao Brewery Company (US$16b), Budweiser Brewing
Company APAC (US$35b) and Asahi Group Holdings (US$21b).
SHARE PRICE CATALYST
• Potential spin-off listing, full reopening of bars in Vietnam and Thailand.