TRIS Rating removes the “negative” CreditAlert implication placed on the company rating of Thai Beverage PLC (ThaiBev) since 20 December 2017. At the same time, TRIS Rating downgrades ThaiBev’s company rating to “AA” from “AA+”, with a “stable” outlook. The rating action reflects the recent increase in ThaiBev’s financial leverage in relation to its acquisition of a 53.59% equity interest in Saigon Beer-Alcohol-Beverage Joint Stock Corporation (Sabeco), the largest beer producer in Vietnam. The acquisition was wholly funded by new borrowing.
ThaiBev aims to gradually reduce the newly elevated leverage by internally generated cash over the next few years. Based on its business strengths, we expect ThaiBev will be able to significantly reduce its leverage in the next three to four years.
The rating continues to reflect ThaiBev’s robust competitive position in the domestic beverage market, extensive distribution network, and ongoing efforts to diversify its sources of income.
KEY RATING CONSIDERATIONS
Strong position in domestic beverage market
ThaiBev is the largest beverage company in Thailand. It has dominated the alcoholic beverage industry for years, with a market share exceeding 90% for spirits and nearly 40% for beer, based on sales volume. It is also the market leader in the ready-to-drink (RTD) tea segment, and is a major producer of carbonated drinks and other beverages.
Extensive distribution network
ThaiBev has an extensive distribution network, which covers more than 400,000 retail outlets in Thailand, using four large distribution centers and 7,300 delivery vehicles. ThaiBev’s sales are also channeled through about 300 active agents and more than 1,300 salespersons. Through its affiliated companies, ThaiBev extends its market coverage across the ASEAN region. Fraser and Neave Ltd. (F&N), an important affiliate, has strong position in its home market in Malaysia and Singapore. The recent other acquisitions further extend its distribution network to Myanmar and Vietnam.
Potential growth in domestic market is constrained by government regulations
The sale of alcoholic beverages is subject to the strict government oversight and control. Regulations abound, such as limits on advertising and promotional activities, restricted hours for sale alcoholic beverage, and minimum age requirements. The regulations make it difficult to boost sales or penetrate new market segments, despite numerous marketing campaigns. Excise taxes are another measure imposed by the government to discourage the consumption of alcoholic beverages. Hikes in the excise tax rates are frequent. For example, the Thai government has raised the excise taxes on alcoholic beverages five times over the past 10 years. In the past, ThaiBev could maintain its profit margin by passing on the higher taxes to consumers, with only temporary decline in sales volume. However, given the relatively low price elasticity of demand, either ThaiBev’s profit margin or its sales volume could potentially be higher than it is should there be less frequent hikes in excise taxes.
Ongoing efforts to diversify sources of income
ThaiBev has made a series of strategic acquisitions over the past decade. One key objective of the acquisitions is to diversify ThaiBev’s sources of income in two dimensions: product mix and geography. In 2017, ThaiBev made three major investments in Thailand and other ASEAN countries. The company acquired 252 KFC outlets in Thailand from Yum Restaurants International (Thailand) Co., Ltd. Next, ThaiBev bought a 75% stake in the Grand Royal Group, the largest maker and distributor of spirits in Myanmar. The most recent transaction is the acquisition of a 53.59% stake in Sabeco, the largest beer producer in Vietnam.
The acquisitions yield a number of benefits such as higher cash flow, a broader brand portfolio, and an expanded market presence in ASEAN. Revenue from abroad is expected to increase from 3% of sales in fiscal year (FY) 2017 to around 20% in FY2018. These strategic moves help ThaiBev reduce business concentration risk tied to the domestic market and make its operating performance less susceptible to event risk.
Recent acquisitions raise leverage
ThaiBev’s total debt is expected to peak at approximately Bt200 billion in FY2018, compared with Bt40.6 billion in FY2017. The ratio of total debt to earnings before interest, tax, depreciation and amortization (EBITDA) is projected to increase to 4.5 times in FY2018, from 1.1 times in FY2017.
The base case assumptions in TRIS Rating’s forecast have not yet factored in potential synergies from the recent acquisitions or efficiency improvements presumed to be achieved at Sabeco. Nonetheless, ThaiBev’s EBITDA is projected to rise above Bt50 billion in FY2020, compared with Bt36.6 billion in FY2017. Our projection assumes no additional, large, debt-funded acquisitions over the next three years as the company’s management has indicated its commitment to deleveraging. The total debt to EBITDA ratio is projected to decline to around 3 times by FY2020.
RATING OUTLOOK
The “stable” outlook reflects TRIS Rating's expectation that ThaiBev will maintain its dominant position in the Thai alcoholic beverage market and continue to deliver strong cash generation, which will be applied to bring down financial leverage over the next three to four years.
RATING SENSITIVITIES
ThaiBev's rating and/or outlook could be revised upward, should the total debt to EBITDA ratio fall below 2.5 times on a sustained basis. On the contrary, the rating and/or outlook could be revised downward if ThaiBev's financial profile weakens further, caused by either a significant deterioration in profitability or a significant further rise in financial leverage.
COMPANY OVERVIEW
ThaiBev was founded in 2003 and listed on the Singapore Exchange (SGX) in 2006. At the end of May 2017, the Sirivadhanabhakdi family was the major shareholder, controlling about 68% of ThaiBev’s outstanding shares. ThaiBev is a leading beverage and food company in Thailand. ThaiBev has expanded its presence in the Southeast Asian region through mergers and acquisitions.
ThaiBev’s total revenues were Bt190 billion in FY2017. Spirits were the key revenue contributor, comprising 57% of total revenue and over 80% of EBITDA.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2098-3000/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2018, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.