Fitch Affirms ThaiBevs Ratings at #BBB and #AA+(tha)#

Stocks and Financial Services Press Releases Tuesday August 8, 2017 18:02
Bangkok--8 Aug--Fitch Ratings
Fitch Ratings has affirmed Thai Beverage Public Company Limited's (ThaiBev) Long-Term Issuer Default Rating (IDR) at 'BBB' and National Long-Term Rating at 'AA+(tha)'. The Outlook is Stable.

The affirmation reflects ThaiBev's strong business profile as the largest beverage producer in Thailand, including the powerful brands in the spirits segment, its wide distribution network, and its diversification across food and beverages products. Its ratings are also supported by its conservative capital structure.

KEY RATING DRIVERS

Strong Beer Performance: Fitch expects sales and profitability of ThaiBev's beer business to remain strong in the next three years, supported by sustained strong growth following its 2015 brand relaunch. The lower consumption of beer during the official mourning period after the late King passed away in October 2016 will likely cause revenue from beer to decline in the financial year ending 30 September 2017 (FY17). However, this should be temporary and we believe beer sales will bounce back in FY18.

We also expect the beer division's EBITDA margin (as a proportion of net revenue excluding excise tax) to be 20%-23% in FY17-FY19 (FY16: 21%, FY15: 13%). The better profitability will be mainly supported by cost savings from higher plant utilisation and increases in product prices.

Spirits Business Remained Intact: Fitch expects ThaiBev's spirits business to remain its key EBITDA contributor, with solid EBITDA margin of about 55% (FY16: 54%), despite the mourning period in FY17 and a potential excise tax increase in September 2017. We expect its spirits sales and EBITDA to recover to pre-mourning levels in FY18 and continue to increase at a low single-digit percentage after that. ThaiBev has maintained healthy operating performance in its spirits division through six excise tax changes and several economic downturns over the past 10 years, partly due to the inelastic demand for locally produced spirits and limited competition in this segment.

Beverage Leader in Thailand: ThaiBev's rating is underpinned by its leading position in the local beverages 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 alcoholic segment over the medium term, given its strong competitiveness in terms of scale and distribution network. The tight alcohol regulations in the country also act as a high entry barrier. These strengths have allowed ThaiBev to maintain EBITDA margins of over 50% in its spirits segment in the past several years, while other segments are generally weaker. ThaiBev's consolidated EBITDA margin has hovered around 30%-35%.

Strong Distribution Network: Fitch expects ThaiBev's strong distribution network across Thailand to continue to be its key competitive advantage and barrier to entry to new players. ThaiBev efficiently uses its 7,000 delivery trucks and 400,000 retailers across the nation for its entire beverages portfolio. Thailand's alcoholic beverage markets are geographically dispersed, especially in the rural area, and the main sales channel remains traditional retailers. As a result, access to these markets requires long-established relationships, far-reaching networks and relatively high logistics costs.

Defensive Revenues: ThaiBev's earnings are less volatile in the face of changes in the economic environment. In addition, its diversification across alcoholic and non-alcoholic beverages, and across price points, provides the company flexibility to cater to changes in consumer tastes, regulations, or economic conditions.

Healthy Credit Metrics: Fitch expects ThaiBev to maintain its low FFO adjusted net leverage at about 1.0x-2.0x in FY17-FY18, barring any acquisitions. Its strong operating cash flow and conservative capital structure should provide some headroom for the company to invest and pursue its growth strategy.

Single-Market Concentration: ThaiBev's ratings are constrained by the concentration of cash flow in Thailand. The revenue contribution from the domestic market was about 96% in FY16. The company's exposure to a single country's political and regulatory risks is compounded by the sale of products that face frequent changes to taxes and controls. ThaiBev has managed this risk well as its cash flows have been resilient to political turmoil and increases in excise tax.

DERIVATION SUMMARY

ThaiBev's ratings reflect its unique competitive position, with its exceptionally strong competitiveness, 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 beverages sector which generally have broad geographical diversification and well-recognised brands globally. ThaiBev's unique competitiveness and conservative leverage profile offset its limited size and global presence, and support a rating equal to that on Anheuser Busch InBev NV/SA (BBB/Stable), Carlsberg Breweries A/S (BBB/Stable), and higher rating than Pernod Ricard S.A. (BBB-/Stable). Compared with Becle, S.A.B. de C.V. (BBB+/Stable), ThaiBev is larger by revenue, but Becle's higher IDR is supported by its geographic diversification in the global tequila market and more solid financial profile.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
  • Overall gross revenue to decline in FY17 due to the mourning period in Thailand and to recover with mid-single-digit growth in FY18
  • EBITDA margin (as a proportion of net revenue excluding excise tax) in FY17-FY19 to remain at about 54%-55% for spirits business, 20%-23% for beer business, and 9%-10% for food business, while EBITDA margin from non-alcoholic beverages to remain weak at close to break even
  • Capex of THB4 billion-5 billion per year in FY17-FY19, barring any acquisitions
  • Dividend payout ratio to be maintained at 60%-65%
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
  • ThaiBev's ratings have reached its rating ceiling in the medium term, given the concentration of its cash flows in Thailand. In the longer term, we may upgrade the company's ratings if it were to show greater geographic diversification without dilution in its domestic competitive position or deterioration in its overall financial profile.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
  • FFO adjusted net leverage rises above 2.0x on a sustained basis (12 months to end-September 2016: 1.6x)
  • EBITDA margins in the spirits segment falls below 50% of net revenue on a sustained basis
  • FCF margins falls below 3.5% of net revenue on a sustained basis (12 months to end-September 2016: 10.6%)
  • An expansion into other investments that results in a deterioration in the credit profile
LIQUIDITY

Manageable Liquidity: ThaiBev had THB26.1 billion of debt that will mature in the 12 months following end-March 2017. This will be partly covered by cash on hand of THB2.5 billion at end-March 2017, strong FCF generation of about THB7.0 billion-8.0 billion a year, and undrawn committed credit facilities of THB4.6 billion. The remainder will be covered by its available uncommitted credit facilities of THB58.3 billion. ThaiBev has strong ability to borrow from banks at competitive rates, supported by its robust business profile and strong relationship with domestic banks.

FULL LIST OF RATING ACTIONS
Thai Beverage Public Company Limited
-- Long-Term Issuer Default Rating affirmed at 'BBB'; Outlook Stable
-- National Long-Term Rating affirmed at 'AA+(tha)';Outlook Stable

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