Jul 18, 2013

Thai Bev 18 July 2013; do you see a window or a door?

People with an interest in Thaibev would have surely been watching the downward spiral for the past month or so. Looking at the closing of Thaibev today, what do you see looming; a window of opportunity or the exit door?

Today we see a new sell call coming from UBS setting TP of $0.51 as they think current valuations are rich and Thaibev faces multiple risks going forward. They speculate that if F&N's property is transacted at a lower value, Thaibev will have to pay more to TCC. Another risk is regarding the rollback of government rice subsidies and the recent excise tax hike to weaken spirit sales along with a slowdown in broader domestic consumer spending.

I understand that domestic beer Chang is brewed with rice as one of its ingredients, while steamed rice is also used in producing their spirits. Thailand currently stockpiles massive amounts of rice, and when the government has to sell them before it rots, would it not push down the prices of rice, thereby reducing raw material costs? I am unsure what does UBS mean by relating the rollback of rice subsidies to a risk for Thaibev, perhaps readers you can enlighten me?

UBS believes changes to the subsidy will reduce income of farmers/low income workers forcing them to lower their consumption or avoid Thaibev spirits for cheaper alternatives (is that it?). In Jan 2013, Thailand raised the minimum wage throughout the country. Alcohol is also one of the most resilient products during an economic downturn. The only change would be from an expensive to a cheaper alternative alcohol drink between boom and bust years.
The rice subsidy programme definitely will be scaled down or modified to reduce the burden on the Kingdom's budget, but it would not be stopped, as the government is seeking a soft landing from this issue. As long as the scheme helps support the income of the farmers, I believe the farmers would accept a reduction or some changes just so the scheme can be sustained.

In Thai news The Nation, S&P lowered Thaibev to BBB- on higher leverage. I do not really pay attention to what and how they rate; most of them are what we all already know.

Third news today; TCC and Thaibev has applied for and received approval to extend up till 31 Dec 2013 to restore F&N's public float.

Reasons given were;
1. TCC had been in discussion with potential investors but unable to undertake the disposal as market conditions became unfavorable.
2. Ongoing review for alternative strategic options to unlock shareholder value.

It is unfortunate the market took a turn for the worse since May which soured the mood for many companies originally looking for a public listing or fund raising this year. If I read this right, it is a positive thing for shareholders as Khun Charoen did not hastily sell out his precious shares before the deadline, which may have caused the price to plummet and destroy shareholder value instead. He is also heavily invested in the fate of both companies, and the extension will provide more breathing room for the review and the release of public float. Some may read these actions as time-wasting or inefficient, but personally I view it positively with the interests of minority shareholders' being protected.

Lets look forward to tomorrow.

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