With growing regional consumer demand as the backdrop, Thai Beverage, the leading maker of drinks from white spirits to green tea, has been rated favourably by analysts for its strong base and growth potential. Last year, the company is estimated to have cornered more than three quarters of the spirit and one third of the beer sales respectively in its home market.
ThaiBev's successful bid for control of Singapore-based drinks and property company Fraser & Neave with the help of TCC Assets, the investment holding company owned by ThaiBev chairman Charoen Sirivadhanabhakdi, also made the company a larger and stronger regional player in the F& B field.
This is the reason why, from the start of the year till July 17, all five recommendations of ThaiBev had either been " buy" or " overweight" , with target prices ranging from 75 to 80 cents.
However, in a contrarian call made on July 18, UBS Investment Research analyst Chirag Saglani figured that ThaiBev, which closed 0.5 cents lower at 56 cents on July 19, is worth only 51 cents, because of a looming downturn in Thai consumer sentiment and possible risks in the restructuring process of F& N.
For one, spirits, which accounted for 58% of the company's revenue and a bigger proportion of its earnings in FY2012, could see weakening demand from the main customer segment of lower income workers. " Rising household debt and government tightening of populist subsidy schemes is likely to affect purchasing power," writes Saglani, referring to the government's decision to lower the minimum guaranteed price of rice from 15,000 baht per tonne to 13,000 baht per tonne from November.
Then there was also the excise duty hike last year that made alcohol more expensive. And prices of soft commodities like rubber and palm oil produced by Thai small holdings have also softened. With incomes affected, demand will shift from ThaiBev's relatively premium products to cheaper alternatives, says Saglani. As such, he predicts that ThaiBev's sale of spirits will drop 5% by volume this year and remain flat in 2014.
UBS estimates that ThaiBev, trading at 19 times 2013 P/E, is going to post an underlying earnings compounded annual growth of just 5.3% for FY2012 to FY2015 and believes " valuation is expensive" for the stock.
Then there is the looming restructuring of F& N's property, publishing and beverage businesses by the new owners. Saglani believes ThaiBev might have to cut its dividend payout ratio to 40%, from the current 50%, as it tries to pay down $3.3 billion in debt incurred from the acquisition.
The restructuring could involve some kind of swap between ThaiBev, which owns 28.6% of F& N, and TCC Assets, which owns 61.4%. Saglani believes ThaiBev would sell its share of the non-beverage business to TCC Assets, and TCC Assets, in turn, would sell its share in the beverage business to ThaiBev. The net effect would result in ThaiBev and TCC Assets owning both 90% each in the beverages, and non-beverages business, respectively. However, the key risk for ThaiBev shareholders is: At what value would the different businesses change hands?
Under the first of two scenarios floated by Saglani, both the property and publishing business would be transacted at book value. This would result in TCC Assets paying ThaiBev $475 million. The second scenario involves the possibility of the property business transacted at 0.7 times book and publishing at 0.8 times book. This would result in ThaiBev paying TCC Assets $839 million. The total of $1.3 billion from these two scenarios is worth 5 cents per share, or 10% of the price target, calculates Saglani. There is also a third scenario. " It is also possible that it completely divests the stake in the publishing business to a third party," writes Saglani.
In an announcement by F& N on July 18, the company states that TCC Assets, because of " unfavourable" market conditions, has not sold enough shares to increase the free float above the 10% level. On July 19, SGX agreed to give F& N an extension till end of the year for a more thorough review on what to do next.
Nevertheless, there are analysts who are more optimistic than Saglani. Nirgunan Tiruchelvam of Standard Chartered, in a July 5 note, believes that ThaiBev will unleash 8 billion baht ($326 million) worth of synergy when F& N's drinks business is consolidated within the company. In this scenario, ThaiBev would be trading at 16.1 times forward earnings post-restructuring, compared to 20.3 times in the " base scenario" and regional peer group's average of 23 times. That makes ThaiBev a much more attractive stock for Nirgunan who has a " buy" call and price target of 75 cents.
