TRIS Rating Co., Ltd. has affirmed the company rating of Thai Beverage PLC (ThaiBev) at “AA” with “stable” outlook. The rating reflects ThaiBev’s leading position in the Thai alcoholic beverage industry and ready-to-drink (RTD) tea segment, its ability to generate cash flow, resilient operating performance, as well as ample liquidity. ThaiBev’s sizable production base and an extensive distribution network allow it to benefit from economies of scale and offer a diverse portfolio of products nationwide. These strengths are partially constrained by intense competition, pressure on profit margins, and tightened regulations and restrictions for alcoholic beverage business. The “stable” outlook is based on the expectation that ThaiBev will continue to maintain its strong positions in the Thai alcoholic beverage market. TRIS Rating expects ThaiBev will maintain its operating strength, improve the performance of the beer segment, and demonstrate ample liquidity at all time.
TRIS Rating reported that ThaiBev is the leading alcoholic and non-alcoholic beverages producer and distributor in Thailand. ThaiBev’s product portfolio is diversified, including spirits (both white and brown spirits), beer, non-alcoholic beverages, and food. The key contributing brands are “Ruang Khao” for white spirits; “Hong Thong”, and “Blend 285” for brown spirits; “Chang” beer; “Oishi” green tea; and the “Oishi” Japanese restaurant chain.
TRIS Rating said, ThaiBev is among the biggest alcoholic beverage manufacturers in Thailand and in Southeast Asia with its total revenues of Bt90,819 for the first nine months of 2011. Revenue from spirits segment was Bt59,715 million, accounting for 66% of total revenue. In terms of profit, the spirits segment contributed over 90% of total earnings before interest, tax, depreciation and amortization (EBITDA). ThaiBev has dominated the Thai spirits market with 85%-93% market share during the last five years. For the beer segment, ThaiBev’s market share declined from 36% in 2010 to 32% for the first nine months of 2011. Beer sales accounted for 25% of total revenue, but the yearly EBITDA margin has been a loss of 1%-2% since 2009. The non-alcoholic and food segment are mainly operated by its subsidiary, OISHI Group PLC (OISHI). These two segments contributed around 9% of total revenue and 5% in terms of EBITDA for the first nine months of 2011. ThaiBev also commands a strong market position in the Thai RTD tea market, claiming over 50% of total market.
In Thailand, ThaiBev’s production base comprises 18 distilleries, three breweries, and two green tea factories. Moreover, the company has five Scotch whisky distilleries in Scotland and one distillery in China. The sizable production base benefits ThaiBev on the competitive production costs and having purchasing power for the raw materials. The diversified sites help mitigate the risk of finished goods shortages. Moreover, ThaiBev’s nationwide distribution network incorporated with the facility of Serm Suk PLC (SSC), a newly acquired company, is considered one of the strongest networks with the widest coverage in Thailand. ThaiBev has three core distribution centers and more than 6,000 distribution vehicles. The sales activities are channeled through 500 active agents and more than 1,300 sales persons, to serve more than 400,000 retail outlets throughout the country. Its diverse range of products and extensive distribution network has ensured the stability of its business and supported its ability to generate cash flow. ThaiBev is now focusing its effort on increasing its presence in the non-alcoholic beverages market. The acquisition of SSC, one of largest producer of and distributor of carbonated drinks in Thailand, could enhance product development efforts. ThaiBev’s increasing footprint in the non-alcoholic beverage markets partly counterbalances the weakening performance in the beer segment.
The operating margin before depreciation and amortization as a percentage of sales over the past three years ranged from 16%-18%. The profit margins are pressured by rising raw material costs, operating losses in the beer segment since 2009, and the growing food segment which yields a lower profit margin. In the last quarter of 2011, TRIS Rating views earnings from the non-alcoholic beverages segment to fall because sales volumes dropped due to the severe floods occurring in late 2011. The full year margin may be weaker still. Cost control initiatives and new product introductions remain the key focus for ThaiBev to improve profitability.
Funds from operations (FFO) have been stable, at Bt14,000-Bt15,000 million per annum during the past three years. However, the level of leverage rose significantly from Bt9,362 million in 2010 to Bt21,253 million at the end of September 2011, to finance the acquisition of SSC. Cash flow protection, as measured by the FFO to total debt ratio, softened from a very strong level of 160.3% in 2010 to 49.9% (non-annualized) at the end of September 2011. The EBITDA interest coverage ratio remained very strong. The leverage ratio increased from 13.9% in 2010 to 26.1% at the end of September 2011.
As ThaiBev purchased SSC at the end of September 2011, only the assets and liabilities of SSC have been consolidated for nine months book closing. The operating performance of SSC will be consolidated into ThaiBev’s financial statements from the fourth quarter of 2011 onwards. Sales of SSC’s products will likely add more cash to ThaiBev. However, SSC’s operating margin is about 5% of total revenue, lower than the operating margin of ThaiBev. The blended operating margin will be somewhat pressured down, once the operating performance of SSC is combined into ThaiBev. Over the medium term, the spirits segment is expected to remain the major profit and cash flow contributor. TRIS Rating expects ThaiBev to demonstrate its high credit quality with strong financial cushion, especially during the investment period.
Alcoholic beverage consumption in Thailand during the past three years has been driven primarily by the stable growth and the popularity of domestic spirits. In contrast, beer consumption has been falling since 2008. Alcoholic beverage consumption in 2012, particularly beer consumption, is expected to continually being pressured by strict regulations and restrictions. Intense competition, plus tighter regulations and restrictions, including excise tax increases, advertising limits, and sales restrictions, remain key burdens for all brewers and distillers, said TRIS Rating. - End
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