Aug 23, 2013

Thai Bev - Lower debt, focus on business now

Capital reduction exercise proceeds totalling S$1.353 billion from F&N had been received by Thai Bev on July 31.

Thai Bev has utilised the funds to repay its long term debt of S$1 billion and short term debt of S$353 million. This move is according to plan and has allowed the firm to reduce its leverage significantly.

Moody's view this move as credit positive especially in light of the weak first half earnings performance this year. The pro forma adjusted Debt / EBITDA has improved from 4.2x on 30 June 2013, to 2.8x; the appropriate level for a Baa3 credit rating.

Going forward, I expect sales volumes for beer and soft drinks will slowly pick up in the second half, especially for soft drinks. The sharp decline in sales volumes of soft drinks was attributed to the termination of bottling contract with PepsiCo, however Serm Suk has successfully gained a sizeable market share at the expense of Pepsi, which is why I believe the second half will be better. Spirits business unit will still generate stable operating cash flows due to its market leadership but it is also dependent on international sales.

The recent ASEAN Economic Ministers' Meeting in Brunei saw some progress towards the AEC 2015 whereby the member states agreed to encourage each country to cut at least one non-tariff barrier a year. This is of course, merely words out of the sky until we actually see the actual actions. Malaysia and Indonesia were also urged to reduce their high duties on alcoholic beverages by 2015. If it really materializes, there will be new markets to penetrate, however I believe the high duties will still stay due to political pressure.

With the monumental task of working out business synergy with the beverages from F&N, and the upcoming restructuring of its properties, I believe Thai Bev has much on its plate now, therefore there should not be any more acquisitions occurring within the next year or so, and Debt / EBITDA should remain below 3x.

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