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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