Fitch bestows stout ThaiBev with 'BBB'

Fitch bestows stout ThaiBev with 'BBB'

ThaiBev expo shows its non-alcoholic drinks. KRIT PROMSAKA NA SAKOLNAKORN
ThaiBev expo shows its non-alcoholic drinks. KRIT PROMSAKA NA SAKOLNAKORN

Fitch Ratings Thailand Ltd has placed Thai Beverage Plc's (ThaiBev) long-term foreign-currency issuer default rating (IDR) at 'BBB' and national long-term rating at 'AA+(tha)' on the Ratings Watch Negative (RWN) list after the company announced on Dec 18 it will buy 53.59% of the common shares of Saigon Beer Alcohol Beverage Corporation (Sabeco), the leading Vietnamese beer manufacturer.

ThaiBev, via its 49% indirect shareholding in Vietnam Beverage Co Ltd, successfully bid for Sabeco's majority shares with a total investment of 110 trillion dong (156 billion baht), with settlement by Dec 28, 2017. ThaiBev will fund the purchase through an equity injection and shareholder loan to Vietnam Beverage, which will be mainly supported by loans from financial institutions.

Fitch placed ThaiBev's ratings on the RWN pending a review of the company's operational and financing plan for the debt-funded acquisition of Sabeco.

"We expect to resolve the RWN once the transaction is completed and we are able to assess ThaiBev's increased leverage against a backdrop of an enhanced geographic footprint in Myanmar and Vietnam. Any negative effects on the company's financial profile may be partly offset by an improved business profile in terms of operating scale and diversification," said Fitch.

KEY RATING DRIVERS

High Leverage: Fitch's current expectation suggests that ThaiBev's investment in Sabeco could weaken its FFO adjusted net leverage to above 4.0x over the next four years, from 1.2x at end-September 2017 -- a level aligned with a weak 'BBB' rating. But Fitch said ThaiBev has scope to deleverage and the company has demonstrated its ability and willingness to maintain a conservative capital structure following its 2012 acquisition of Fraser and Neave Ltd.

Expanded Geographical Reach: Fitch said ThaiBev's expanded footprint in Myanmar spirits and Vietnam beer markets will lower the concentration of its business in Thailand. But considering the cash flow contribution from the newly acquired Sabeco, Fitch said it would require clarity on the economic interests and linkage between Sabeco and ThaiBev.

Beverage Leader in Thailand: ThaiBev's rating is underpinned by its leading position in the local beverage industry, with market share by sales volume of above 90% for spirits and 40% for beer in 2016. Fitch expects ThaiBev to secure its leading position in the alcoholic segment over the medium term, given its strong competitiveness in terms of scale and distribution network. Thailand's tight alcohol regulations also act as a high entry barrier. These strengths have allowed ThaiBev to maintain an EBITDA margin of over 50% in its spirits segment over the past several years, although other segments are weaker. ThaiBev's consolidated EBITDA margin has hovered around 30%-35%.

Strong Domestic Distribution Network: Fitch expects ThaiBev's strong distribution network across Thailand to remain its key competitive advantage and barrier to entry for new players.

ThaiBev efficiently uses its 7,000 delivery trucks and 400,000 retailers across the nation for its entire beverage portfolio. Thailand's alcoholic beverage markets are geographically dispersed, especially in rural areas, and the main sales channel remains traditional retailers. As a result, market access requires long-established relationships, far-reaching networks and high logistics costs.

Defensive Revenue: ThaiBev's earnings are less volatile during changes in the economic environment. In addition, its diversification across alcoholic and non-alcoholic beverages, as well as across price points, provides the company with the flexibility to cater for changes in consumer tastes, regulations and economic conditions. ThaiBev's food business also generates a stable revenue stream, despite its small contribution of less than 5% of total revenue.

DERIVATION SUMMARY

Fitch said ThaiBev's 'BBB' rating reflects its "unique competitive position", with resilient operating cash flow in the local spirits market and conservative capital structure. These strengths make up for its limited geographic diversification compared with 'BBB' rated peers in the alcoholic beverage sector, which generally have broad geographical diversification and well-recognised brands globally, the rating agency said. ThaiBev's unique competitiveness and conservative leverage profile offset its limited size and global presence, supporting a rating equal to that of Anheuser Busch InBev NV/SA (BBB/Stable), Carlsberg Breweries A/S (BBB/Stable) and a rating higher than Pernod Ricard S.A. (BBB-/Stable). ThaiBev has greater revenue than Becle, SAB de CV (BBB+/Stable), but Becle's higher IDR is supported by its geographic diversification in the global tequila market and solid financial profile.

ThaiBev's leverage could rise to the higher end of its peer range as its finances the acquisition of Sabeco. This explains the RWN on ThaiBev's ratings, said Fitch.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

Gross revenue for ThaiBev's existing businesses in Thailand to recover with mid-single-digit growth in the financial year ending Sept 30 2018 (FY18)

EBITDA margin, as a proportion of net revenue excluding excise tax, to remain at 54%-55% for its spirits business, 20%-23% for its beer business and 9%-10% for its food business in FY18-FY19, while its EBITDA margin from non-alcoholic beverages to remain weak at close-to-breakeven

Capex of 4 -5 billion baht per year in FY18-FY19, excluding acquisitions

Dividend payout ratio maintained at 60%-65%

Sabeco acquisition to be completed by end-2017, which Fitch has proportionally consolidated

LIQUIDITY

Manageable Liquidity: ThaiBev had 31 billion baht of debt maturing in the next 12 months as of end-September 2017. This is partly supported by cash on hand of 10 billion baht, strong free cash flow generation of 7-8 billion baht a year and its strong borrowing capability at competitive rates from its creditability and solid relationship with domestic banks.

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