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The articles in the blog are intended for informational purposes only, with the aim of encouraging thoughtful discussions. The articles should not be relied upon as financial advice. Please read the important disclaimer at the bottom of the page before proceeding.

ThaiBev Analysis: Value Starting to Emerge


 

To begin our analysis of ThaiBev (“THBEV”), we would have to go back to 2017, when THBEV made a blockbuster acquisition of a majority stake in SABECO, Vietnam’s national brewery. The massive acquisition was largely financed by debt, much like how private equity funds use significant amounts of leverage to finance buyouts of their target companies. The deal was valued at $4.8 billion USD, and Reuters reported that this was at a valuation of about 36x core earnings. The price that THBEV paid for SABECO was steep, given that comparable publicly traded global breweries were trading at an average of less than half that earnings multiple at that time. In addition, the leverage that THBEV took on to finance the acquisition also resulted in a deterioration of the balance sheet’s quality, as their gross interest bearing debt to equity ratio rose from 0.31x to 1.49x post acquisition.

Given the steep price that they paid, as well as the huge amount of debt financing, the stock market was certainly bearish, as THBEV’s share price subsequently declined from nearly $1 to bottom out around $0.60 in late 2018. Investor interest in THBEV was revived by talk of a potential spinoff of their beer assets, which consists of THBEV’s regional beer operations. THBEV’s share price climbed to a high of more than $0.90 in late 2019, before Covid-19 hit and equities sold off sharply. From their March 2020 lows of around $0.50, THBEV’s shares fluctuated for about a year before hitting its 2021 peak of $0.85 in February. Since then, THBEV’s stock price has fallen rather significantly due to a myriad of reasons including the delay of its BeerCo IPO, Thailand’s resurgence of Covid-19 cases as well as fears of stricter alcohol laws.

Gradual improvement of financial position since SABECO acquisition

The SABECO acquisition had loaded up THBEV’s balance sheet with debt. Since then, THBEV’s leverage ratios have been gradually improving, supported by its strong cash flows from operations. From the table below, THBEV has reduced its gross interest bearing debt to equity ratio from 1.49x in FY18 to 1.21x in FY20. Net interest bearing debt to equity ratio also improved from 1.32x to 1.00x.



Even if you hold the opinion that THBEV overpaid for the SABECO acquisition (which I do), their deleveraging process over the past three years would have substantially mitigated the negative impact from that. Arguably, THBEV should be in a stronger position today than it was right after the SABECO acquisition, given its reduced leverage ratios, higher NAV and stronger cash position.

THBEV as a reopening play?

Some investors have touted THBEV as a play on Thailand’s recovery, with the reopening of Phuket to vaccinated tourists as an encouraging sign. However, it would be good to note that the majority of THBEV’s sales from its more profitable spirits segment are off-premise, which means that the majority of consumers purchase them at supermarkets rather than consuming them at restaurants. For some perspective, in a year disrupted by Covid, THBEV’s overall revenue only fell by 5.2% in FY20 compare to FY19, which shows that the company fared way better than other F&B players like restaurants or tourism dependent companies.

This is both good and bad news – the good news is that THBEV’s sales may be more resilient even if further lockdown measures are imposed. However, it also means that there would be limited upside from reopening measures too, although we may hold the view that the overall economic recovery would be positive across all of THBEV’s business segments.

BeerCo IPO

In Feb 2021, THBEV announced its intention to spinoff its BeerCo via an IPO on the SGX. Reuters reported that THBEV was seeking to sell a 20% stake in BeerCo for $2 billion, which would have placed the valuation of BeerCo at almost 40x earnings, while peers such as Budweiser and Heineken were trading at an average of 27x earnings. However, in April 2021, THBEV decided to defer its listing of BeerCo, citing the resurgence of Covid-19 in Thailand as a reason for its decision.

Although a valuation of 40x earnings may have been ambitious, given that THBEV currently trades at ~17x P/E, if they are subsequently able to fetch a valuation of 20-30x earnings for BeerCo, it should still be a net positive for the company, as its strongest segment is the Spirits segment (which should logically command a higher valuation multiple) and not BeerCo. For some context, in 1HFY21, their Spirits segment has a net profit margin of 20.1%, compared to a net profit margin 4.1% for the Beer segment. The Spirits segment contributed 48% to revenue and 84% of net profit compared to 41% and 14% for the Beer segment respectively. The BeerCo IPO could be a potential catalyst when it is back on track.

THBEV’s Financials



THBEV’s operating cash flows have been strong, and currently trades at ~11x P/FY20 OCF. THBEV’s dividend policy is to pay out not less than 50% of net profit annually, subject to specified reserves, investment plans and approval from the board of directors. After a slight cut in dividends in FY20, THBEV increased their interim dividend to 0.15 Baht in 1H21 from 0.10 Baht in 1H20.

Risks

1) Thailand has extremely strict alcohol laws, which bans the sale of alcohol online and even simply posting a picture of alcohol online. Any further tightening of alcohol laws would be negative for THBEV. 2) General slowdown of Thailand’s economy due to further Covid-19 lockdown measures weakening domestic demand. Bangkok and nine other provinces are entering a lockdown from 12 Jul onwards. Thailand has been reporting increasing number of Covid cases recently.

Conclusion

With THBEV’s share price declining more than 20% from its Feb 2021 peak, I see value emerging and may take a long position if more near term negatives depresses the share price closer to $0.60. As of time of writing, I do not hold a position in THBEV.

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Disclaimer: This article is intended for informational and discussion purposes only, and do not constitute financial advice. When in doubt, please contact a licensed financial adviser.

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How Much Money does Singapore Pools make?

 

It may come as a surprise to some that Singapore Pools reports its financials publicly. Perhaps you may have remarked that Singapore Pools is incredibly profitable, as seen from the long queues outside its outlets. Especially on Hong Bao draws. Out of curiosity, I decided to look at how much money Singapore Pools actually makes.

Figures from Singapore Pools' FY20 Annual Report


Singapore Pools' revenue is generated from the sale of 4D, TOTO, Singapore Sweep and Sports Betting. Singapore Pools reported gaming revenue of $8.9 billion in FY2020, compared with $7.0 billion in FY2016. That’s a CAGR of 6.2% over 5 years. They even managed to grow their revenue by 6.0%, up from $8.4 billion in FY19. Someone subsequently pointed out that Singapore Pools' FY ends in March, thus their FY20 results would not have been substantially affected by Covid-19.

Singapore Pools disclosed that for every dollar wagered by customers, 70% goes to prizes payouts, 22% goes to betting duties and taxes, 3% goes to Singapore Pools’ operating expenses (which Singapore pools stated is one of the lowest among lottery operators worldwide, and finally, 5% are surpluses channeled to the Tote Board.

While trying get a perspective of these margins, I learnt a new term today, which is “Gross Gaming Revenue (GGR)”. This is a metric used by research analysts who cover gaming companies such as casino operators and betting companies. Basically, GGR is defined as total amount wagered – winning payouts, and the GGR margin is computed by taking GGR divided by amount wagered. From this, we can calculate that Singapore Pools’ GGR stands at around 30%. This 30% GGR margin is relatively high compared to the industry average of the low to mid teens, which perhaps can be attributed to Singapore Pools’ position as the sole licensed lottery operator in Singapore.

Many people also have a misconception that lottery winnings are taxable in Singapore, perhaps due to how lottery winners in America or Europe being taxed significantly on their winnings. However, because Singapore Pools pays lottery taxes on behalf of prize winners (the 22% of their revenue mentioned above), lottery winners in Singapore are not taxed.

Note that all surpluses from their operations are channeled towards charitable purposes, which goes to funding worthy causes such as the arts, community development, education, health and sports sectors. Over the past 10 years, this has resulted in a total contribution of more than $6 billion (comprising of the Tote Board, Singapore Pools and Singapore Turf Club) towards nation building.

What if Singapore Pools was listed?

Imagine if Singapore Pools was listed on the SGX someday - how much would it be worth? I did a quick google search to see if there are other national lottery players which have been listed on stock exchanges, and found that the French government had recently listed Groupe FDJ (EuroNext: FDJ) in 2019 by selling 50% of its shares to the public. The IPO was the largest IPO on the EuroNext Paris since 2005, and raised 1.8 billion Euros (approximately 2.9 billion SGD). FDJ's shares have more than doubled since its IPO in late 2019, and currently trades at a P/E ratio of 44x. Imagine if Singapore Pools traded at a similar multiple to its "profits" (surpluses) of ~$400 million, it could be worth billions as well! An incredibly cash generative company with a strong moat. We can only wish it was.  

Lastly, if you do gamble, please gamble responsibly!

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Disclaimer: This article is intended for informational and discussion purposes only, and does seek to encourage gambling.