TRIS Rating has removed the CreditAlert with “negative” implication placed on the company rating of Thai Beverage PLC (ThaiBev) since 20 July 2012. At the same time, TRIS Rating has downgraded ThaiBev’s company rating to “AA-” from “AA”, with “stable” outlook. The rating action reflects ThaiBev's weakened financial position, now that it has acquired a 28.6% stake in Fraser and Neave Limited (F&N), a Singapore-based conglomerate. The transaction was worth S$3,600 million, funded by debt. ThaiBev plans to make a lump sum prepayment, by utilizing cash received from F&N’s capital reduction. The prepayment will reduce refinancing risk of the outstanding acquisition-related loans. ThaiBev is expected to maintain a moderate level of leverage, since it intends to continue its high dividend payout. The “stable” outlook is based on the expectation that ThaiBev will make no other large investment during the medium term. The “stable” outlook reflects the expectation that ThaiBev could maintain its cash flow generative ability and its strong positions in the Thai alcoholic beverage market. TRIS Rating does not take into account any other large investment in the near future.
ThaiBev is the leading producer and distributor of alcoholic and non-alcoholic beverages in Thailand. As of October 2012, the Sirivadhanabhakdi family was the major shareholder, controlling about 68% of ThaiBev’s outstanding shares. ThaiBev’s product portfolio covers spirits, beer, non-alcoholic beverages, and food. The key contributing brands are Ruang Khao, Hong Thong, and Blend 285 for spirits; Chang beer; Oishi green tea; the Oishi Japanese restaurant chain, and newly launched Est carbonated drinks. ThaiBev’s business profile is considered strong. The company has dominated roughly 90% share in the Thai off-trade whiskey market and roughly 50% share in the Thai ready-to-drink (RTD) tea market in 2012. However, ThaiBev’s market share in the beer segment has continued to weaken, standing at 30% of total beer market in 2012.
ThaiBev has various production facilities in Thailand, including 18 distilleries, three breweries, 10 non-alcoholic beverage plants. Moreover, the company owns five Scotch whisky distilleries in Scotland and one distillery in China. ThaiBev’s sizable production base and its extensive distribution network allow it to benefit from economies of scale and offer a diverse portfolio of products nationwide. However, ThaiBev faces challenges from intense competition, plus tightened regulations and restrictions for the alcoholic beverage business.
ThaiBev’s financial strength is characterized by strong sales growth, increases in cash flow, and adequate liquidity. However, ThaiBev’s huge debt-financed investment has significantly weakened its balance sheet. The softened financial position is not expected to rebound within the near term, considering the planned capital expenditures, high dividend payout, and committed schedule payment.
ThaiBev’s total revenues reached Bt161,044 million in 2012, a 22% increase from the previous year, partly driven by the recognition of the performance of Sermsuk PLC (Sermsuk). In 2012, sales from spirits contributed about 58% of total revenue, beer sales generated 21%, and the non-alcoholic beverages and food segments combined made up 21%. The revenue for the first three months of 2013 was Bt39,154 million. ThaiBev’s operating margin before depreciation and amortization as a percentage of sales has been fairly stable in a range of 15%-16% since 2010. Spirits segment is the key driver of ThaiBev’s profitability and is expected to gradually grow, backed by moderate-growth demand. Non-alcoholic beverage and food segments have fairly thin margin by their natures, while beer segment still reported losses. Funds from operations (FFO) have climbed from Bt15,000 million in 2010 to about Bt19,000 million in 2012, and Bt5,400 million for the first three months of 2013. TRIS Rating estimates ThaiBev’s FFO to grow beyond Bt20,000 million per annum in the medium term. ThaiBev’s strong ability to generate cash flow has enhanced the company's financial strength and it will serve as a cushion for its investment activities. Although acceptable, ThaiBev's cash flow protection declined after the investment in F&N, as evidenced by a lower FFO to total debt ratio. The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio remained strong at 29.4 times in 2012, but it will drop to the level of over 15 times, once the company recognizes the full amount of interest incurred from the new borrowings. ThaiBev’s liquidity profile is further supported, considering a cash balance of Bt4,500 million, Bt11,000 million of spirits’ finished goods inventory, and about Bt52,000 million of undrawn credit lines available from financial institutions at the end of 2012. The company has strong banking relationships which give it easy to seek funding from banks and flexibility to access investors in the money market.
At the end of 2012, ThaiBev's total debt significantly rose to Bt104,153 million, compared with Bt18,227 million in 2011. The increase was to finance the share purchase of 28.6% in F&N. ThaiBev made a total investment of S$3,600 million (or about Bt92,000 million), which was funded by new borrowings. This investment was made in conjunction with its related party, TCC Assets Limited (TCCA), owned by the Sirivadhanabhakdi family. TCCA holds about 61% of F&N, through the share tender offering during the period from September 2012 to February 2013. According to F&N’s announcement on 10 May 2013, F&N is proposing to return S$3.28 in cash for each share held by its shareholders. This cash distribution is in connection with the last year sale of F&N’s interests in Asia Pacific Breweries Limited and Asia Pacific Investment Pte. Ltd. (APB). ThaiBev is expected to receive approximately S$1,352.75 million in cash from F&N in the third quarter of 2013. ThaiBev will use all of cash it receives from F&N’s capital reduction to repay debt including the outstanding acquisition-related debt. The prepayment will reduce the balloon payment scheduled at maturity. As a result, ThaiBev’s debt to capitalization ratio weakened from 22.4% in 2011, to 55% in 2012, and is estimated to stay in a range of 35%-45% in the medium term. Total debt is not estimated to significantly decline as ThaiBev plans to spend Bt12,000 million in capital expenditures during 2013-2014. The schedule of debt repayments spread out for five years with back-loaded. In addition, a high dividend payout could slowdown the deleveraging.
ThaiBev expects its acquisition of F&N will benefit the company in two ways: expanding international market base and cross-selling its products across F&N’s distribution network. However, the synergies with F&N in terms of cost saving as well as product and geographic diversity may take time to materialize. During this period, ThaiBev is assumed to receive only dividends from F&N.
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