- Move Forward Party’s Progressive Liquor Bill not a certainty
- Impact of liquor liberalization could provide ThaiBev with opportunities to capitalise on
- Beer business in Vietnam continues to face consumption headwinds due to global demand slowdown
- Input raw material costs’ savings expected in FY24; Maintain BUY with TP at S$0.86.
We attended ThaiBev’s Annual Information Meeting in Singapore (on 12 Jul) which was held physically for the first time since 2019 due to the outbreak of COVID-19. Beyond updates by the senior management and respective heads of each business units (Spirits, Beer, Non-Alcoholic Beverage, Food, as well as Sustainability), we summarized the key take-aways from questions posted. Much discussion and questions centered around potential implication to ThaiBev arising from the current political landscape for Thailand.
Passing of the Progressive Liquor bill not necessarily detrimental to ThaiBev; could provide opportunities. Management shared that the potential of this bill is not new and is a topic talked about for a while (it was tabled to Parliament last year). Internally at ThaiBev, management believes it will be able to adapt to potential changes to the bill if and when implemented. They shared the main key points as follows, and opine that it may not be detrimental:
- (+) Removal of sale timing restrictions, currently sale allowed only from 11:00 – 14:00 hrs and from 17:00 – 24:00 hrs. With the removal of retail sale hours restrictions, this could potentially lead to higher sales.
- (+) Removal of online sale restrictions/ e-commerce sales channel. This could provide ThaiBev with a unique advantage to ThaiBev given its non-alcoholic beverage and food online distribution network
- (+) Removal of advertising restrictions for alcoholic beverage products.
- (-) Proposal to tier taxes based on the size of enterprises, with larger ones paying higher rates. While this could be negative for ThaiBev, the implementation could be fraught with challenges given the discriminatory nature, according to management.
Other considerations and hurdles towards actual passing of potential Bill. Overall, the message is that the passing of the expected Liquor Bill may not come to fruition, even if Prime Minister has been voted in. There are multiple hurdles to overcome such as 1) scrutiny of its far-reaching implications by various ministries including Ministry of Public Health, Ministry of Finance and Ministry of Industry, 2) other considerations such as religious motivation of respective personnel and groups within the legislation, and 3) requirement to pass House of Representative, Senate, National Assembly, amongst others.
Weakness in Vietnam business to persist for next couple of months. Economic condition in Vietnam remains dismal with increased job losses in the recent quarter due to global demand slowdown, which has translated to weak beer consumption. Management expects consumption weakness to persist into for the next couple of months, but remain optimistic of tailwinds from pick up in tourism arrivals in latter part of 2023 and into 2024, as well as increased foreign direct investment, which will be positive for Vietnam in the medium term. Growth is expected to return in 1Q24, driven by recovery in global demand.
FY24 to see higher gross margin on back of declining material costs. Management shared that cost of key input materials including malt and cans have seen substantial price decline, with the positive savings to be seen and expected to flow through to the bottom line in the next fiscal year.
Policy implementation will be a slow process and THBEV has multiple moats to maintain its market share. While the bill is expected to introduce more competition, we believe it is unlikely to materially impact THBEV’s market share. We believe the company has three key moats to maintain its market leadership: 1) production economics of scale, 2) established distribution network in modern and traditional trade, and 3) entrenched brand awareness. These moats would take significant time and funds for new entries to replicate. We believe that there is unlikely to be any player committed to such an uphill endeavour in the relatively matured Thailand market.
Potential to leverage on distribution strength. If the liberalisation does happen, management opine this could throw up distribution opportunities for ThaiBev to collaborate selectively with foreign entrants to enhance its brand portfolio, providing further business opportunities.
Business continues to be cash generative and is en-route to meet debt ratio guidance. While the market’s perception of its debt has remained an overhang on share price especially given the delay in BeerCo IPO, it remains manageable. The spirits and beer businesses are resilient businesses, which continue to be cash generative even during COVID lockdowns. As evident in the past few quarters, net debt to EBITDA has trended steadily down since the acquisition of Sabeco. Its current net debt to EBITDA has dropped to 3.0x, down from a high of 5.3x in FY18. We project that the company should be able to hit its 2.5x net debt to EBITDA by end-FY24F.
Look ahead to FY24 as a growth year. Despite near term headwinds, particularly in Vietnam, we see multiple positives for the coming fiscal year: 1) easing material costs, 2) normalisation of tourist arrivals to Thailand, and 3) rebound in global demand to support job creation in Vietnam. We believe investors are overlooking the positive rebound story by being preoccupied over potential negative impacts of a bill. The counter is trading at <13x FY23F PE, below -1SD of its 5 year historical average. We maintain BUY with TP at S$0.86.