Fitch Revises Thai Beverage Outlook to Affirms at #BBB-#/#AA(tha)#

Stocks and Financial Services Press Releases Wednesday April 10, 2019 17:27
Bangkok--10 Apr--Fitch Ratings

Fitch Ratings-Bangkok/Singapore-10 April 2019: Fitch Ratings (Thailand) Limited has revised Thai Beverage Public Company Limited's (ThaiBev) Outlook to Negative from Stable and affirmed its Long-Term Foreign-Currency Issuer Default Rating at 'BBB-', its National Long-Term Rating at 'AA(tha)', and its senior unsecured rating at 'AA(tha)'.

The Negative Outlook reflects risks to the pace of the company's deleveraging, which has been slower than our previous forecasts due to weak domestic demand for alcoholic beverages in the fiscal year ended September 2018 (FY18) following a series of acquisitions in 1QFY18 that raised leverage.


Slower Deleveraging: We now expect ThaiBev's net leverage, measured by funds from operations (FFO) to adjusted net debt, to remain high at around 4.5x-5.5x in FY19-FY21, compared with our earlier forecast of 4.0x by FY21, although coming off the peak of 8.3x at FYE18. This follows the acquisition of Saigon Beer-Alcohol-Beverage Corporation (Sabeco) in Vietnam, the Grand Royal Group (GRG) in Myanmar (made up of Myanmar Supply Chain and Marketing Services Co., Ltd and Myanmar Distillery Co., Ltd.) and 252 KFC outlets in Thailand.

ThaiBev has demonstrated its commitment to prioritising debt reduction and maintaining a conservative capital structure after large debt-funded acquisitions. The company appears to be mainly focused on improving operating cash flows at Sabeco to reduce its leverage, with no other deleveraging plans announced. ThaiBev may be able to deleverage faster, reducing its net leverage to below 4.0x by FY21, the level at which Fitch would consider negative rating action, if its newly acquired businesses improve their operating efficiencies or it undertakes capital management or asset restructuring.

Domestic Demand to Recover Slowly: Fitch expects the stronger domestic demand for food and beverage in 1QFY19 to continue over the medium term, supported by improving economic activity and new product launches. Domestic beer sales rose by 8% in the five months to end-February 2019 from a year earlier, according to data from the Office of Industrial Economics (OIE), after a 12% drop in FY18. The sale of non-alcoholic beverages such as drinking water, soda, carbonated drinks and fruit juices rose by 2%, 4%, 9%, and 15%, respectively, in the five months, OIE data showed.

Gradual EBITDA Margin Recovery: We expect ThaiBev's EBITDA to increase to above THB40 billion in FY19 from THB33 billion in FY18. Its EBITDA margin to net revenue is likely to improve to 27%-28% from 24% in FY18. We expect the improvement to be broad based, stemming from all of ThaiBev's key product segments and end-markets. The full-year contribution of cash flows in FY19 from Sabeco and the KFC stores acquired in December 2017, and cash flows from new KFC stores opened in 2018 will add to revenue and earnings growth for ThaiBev.

Strong Business Risk Profile: Acquisitions in Vietnam and Myanmar have expanded ThaiBev's operating scale and broadened its geographic diversification such that Thailand's share of EBITDA is likely to fall to less than 80% by FY19, from more than 90% in FY17. ThaiBev's ratings are underpinned by its leading positions in the alcoholic-beverage industries in Thailand, Myanmar and Vietnam. The domestic-spirits segment remains a key strength, with a market share of over 90%, supported by high entry barriers, and EBITDA margins to net revenue of over 50%. The company's established brands and a strong distribution network in each of its markets also support its business strengths.

Both ThaiBev's acquired entities - Sabeco and GRG - are leading players in their respective markets. Sabeco has maintained its beer market share in Vietnam by sales volume at about 40% over the last few years, while GRG dominates Myanmar's whisky market, with a share of nearly 70%. Vietnam is the largest beer market in south-east Asia and one of the five largest beer consumers in Asia-Pacific. We believe Vietnam has high growth potential for beer due to the popularity of the beverage and its young population. Whisky consumption lags behind white spirits in Myanmar, with moderate competition among the three main producers.

Significant Minority Interests in Sabeco: ThaiBev's ratings factor in our expectation of strong operational and strategic ties with Sabeco despite its equity stake of 53.6%. We have fully consolidated Sabeco's financials when assessing ThaiBev, but have excluded dividends paid to minorities in arriving at consolidated FFO and have treated the minority share of Sabeco's cash balance (FYE18: about THB17 billion) as restricted cash.


ThaiBev's ratings reflect its strong market position in spirits and its leading share of beer sales in its key markets of Thailand, Vietnam and Myanmar, which are counterbalanced by its narrow geographic diversity and smaller operating scale compared with rating peers. ThaiBev's business profile is comparable with that of Molson Coors Brewing Company (BBB-/Stable), even though Molson Coors has a larger operating scale with concentration in North America. ThaiBev has a comparable financial profile, with both companies experiencing heightened leverage from large debt-funded acquisitions. The risk to ThaiBev's slower deleveraging pace underpins the company's Negative Outlook.

Compared with peers on the National Ratings scale, ThaiBev's credit profile is weaker than that of Advanced Info Service Public Company Limited (AIS; AA+(tha)/Stable). They both have comparable business risk profiles as they are strong market leaders in their respective industries. ThaiBev has more geographical diversification but its rating is lower than that of AIS by one notch due to ThaiBev's higher financial risk.

ThaiBev has a substantially stronger business risk profile than Total Access Communication Public Company Limited (DTAC, AA(tha)/Stable, standalone credit profile AA-(tha)) and PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, standalone credit profile AA-(tha)). ThaiBev has a strong market position, robust free cash flow (FCF) generation, with FCF margins of about 8% (to net revenue), and limited competition. DTAC faces fierce competition in the Thai telco market, while PTTGC's operating cash flow is considerably more cyclical than that of ThaiBev due to its exposure to commodity prices and refining margins. DTAC and PTTGC generate mostly negative FCF across economic cycles, stemming from the high capex requirements in the telecom sector and working-capital swings in the petrochemical industry. Therefore, ThaiBev is rated one notch higher than the two companies' standalone credit profiles. However, ThaiBev's National Rating may be downgraded by more than one notch if it is not able to reduce its net leverage to below 4.0x.

Fitch's key assumptions within our rating case for the issuer include:
  • Net revenue (excluding excise tax) for businesses in Thailand to increase by about 10%-12% in FY19, and reduce to 2%-5% in FY20-FY21
  • Net revenue (excluding excise tax) of GRG and Sabeco of about THB50 billion-60 billion in FY19-FY21
  • EBITDA margin (as a proportion of net revenue) for businesses in Thailand to improve to about 30%-33% in FY19-FY21; EBITDA margin of 50%-55% for spirits, 15%-20% for beer, below 3% for non-alcoholic beverages, and 13%-15% for food in FY19-FY21
  • EBITDA margin (as a proportion of net revenue) of GRG to decline due to higher marketing expenses in FY19-FY21
  • EBITDA margin (as a proportion of net revenue) of Sabeco to hover around 17%-19% in FY19-FY21
  • Capex of about THB5.5 billion-7.5 billion per year in FY19-FY21, excluding acquisitions
  • Lower dividend payout ratio in FY19-FY21
Developments That May, Individually or Collectively, Lead to Positive Rating Action
  • The rating Outlook could be revised to Stable if ThaiBev generates stronger-than-expected operating cash flows or undertakes capital management to reduce debt, leading to a decline in FFO adjusted net leverage to below 4.0x by FY21.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
  • Failure to reduce FFO adjusted net leverage to 4.0x by FY21
  • Evidence of a weakening market position, operating efficiency or pricing power, resulting in sustained weak sales growth and profit margins

Refinancing Completed, Healthy Liquidity: ThaiBev had THB81.5 billion of debt maturing within the next 12 months at end-December 2018, including short- and long-term loans and working-capital facilities. The maturing debt includes THB71 billion in short-term bridge loans used for acquisitions, all of which were repaid early (mostly refinanced with long-term debentures) in 2QFY19. ThaiBev's liquidity is supported by its credibility as the largest consumer staples company and one of the 10 biggest companies by market capitalisation listed on the Singapore Exchange. It has significant ability to borrow at competitive rates and strong access to domestic and international capital markets.

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