ThaiBev, via its 49% indirect shareholding in Vietnam Beverage Company Limited (Vietnam Beverage), successfully bid for Sabeco's majority shares with a total investment of about VND110 trillion (THB156 billion or USD5 billion), with settlement by 28 December 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 has placed ThaiBev's ratings on RWN pending a review of the company's operational and financing plan for the debt-funded acquisition of Sabeco. We expects 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 effect on the company's financial profile may be partly offset by an improved business profile in terms of operating scale and diversification.
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. However, we believe 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, Limited.
Expanded Geographical Reach: Fitch believes ThaiBev's expanded footprint in Myanmar spirits and Vietnam beer markets will lower the concentration of its business in Thailand. However, considering the cash flow contribution from the newly acquired Sabeco, we 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 in 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
ThaiBev's 'BBB' rating reflects its unique competitive position, with 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 beverage 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, 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, S.A.B. de C.V. (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.
KEY ASSUMPTIONS
Fitch's key assumptions within our 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 30 September 2018 (FY18)
- EBITDA margin, as a proportion of net revenue excluding excise tax, to remain at about 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 about THB4 billion-5 billion per year in FY18-FY19, excluding acquisitions
- Dividend payout ratio maintained at 60%-65%
- Sabeco acquisition to be completed by end-2017, which we have currently proportionally consolidated
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Negative Rating Action
- The rating may be downgraded following the acquisition of Sabeco if, after our review, we believe ThaiBev's leverage is no longer appropriate for its ratings.
Developments that May, Individually or Collectively, Lead to Positive Rating Action
- The ratings may be affirmed if ThaiBev does not progress with the acquisition or if, after our review, we assess that the company's leverage in view of its expanded platform is appropriate for its current ratings
- The ratings may be affirmed with Negative Outlook if, after our review, we believe the company's leverage in view of its expanded platform is appropriate for its current ratings but there are risks to the path of deleveraging.
LIQUIDITY
Manageable Liquidity: ThaiBev had THB31 billion of debt maturing in the next 12 months as of end-September 2017. This is partly supported by cash on hand of THB10 billion, strong free cash flow generation of about THB7 billion-8 billion a year and its strong borrowing capability at competitive rates from its creditability and solid relationship with domestic banks.