Moody’s ups rating on ‘prudent’ ThaiBev

Moody’s on Wednesday raised its long-term issuer rating for Thai Beverage Plc (ThaiBev) to Baa2 from Baa3.

ThaiBev is Thailand’s biggest drinks maker and operates in four business segments: spirits, beer, non-alcoholic drinks and food.

The company’s market cap is S$22.7 billion (556.75 billion baht). ThaiBev runs distilleries in Thailand, China and Scotland and has traded on the Singapore Exchange since 2006.

ThaiBev was founded in 2003, consolidating under a single entity some of the leading spirits and beer businesses in Thailand. The company branched out to nonalcoholic drinks and now has 11 factories for non-alcoholic drinks. In Thailand, it distributes Oishi green tea, Est cola and Crystal drinking water.

Annalisa Di Chiara, Moody’s vice-president and senior credit officer, said the revision reflects “the company’s position as the largest beverage producer in Thailand”, as well as its stable cash flows and low leverage.

ThaiBev maintains a tight grip on the country’s alcoholic drinks markets, with 90% of the share of spirits and close to 40% of the share of beer by sales volume in 2016.

Stable and predictable cash flows from the company’s spirits segment support a strong credit profile and provide sufficient liquidity to expand the business organically. The segment provides about 90% of ThaiBev’s profits and enjoys exceptionally high margins.

The aggregate amount of ThaiBev’s capital expenditure, interest and tax payments have historically been just 40% of the earnings before interest, taxes, depreciation, and amortisation generated by the spirits business, Moody’s said.

The new rating comes in the midst of a tough regulatory environment and intense industry competition. A Sept 16 excise tax increase was the fifth since 2007.

Ms Di Chiara said that while the excise tax could negatively affect the company’s top and bottom lines in the next two quarters, “the company will be able to pass on the higher costs to the consumer over time, muting the potential adverse impacts on revenues and margins”.

Given its leading market position, ThaiBev will probably be the least affected in the spirits segment, she said.

The company’s operating margins have remained constant at 15% since 2007, indicating an ability to generate stable cash flows despite tax hikes.

ThaiBev’s vision of becoming the leading drinks company in Asean is the final component driving the credit upgrade. The company’s management is open to acquisitions that would diversify revenue sources and is ready to invest to capture growth opportunities in the region.

While expansion is a key strategy of ThaiBev, the company has signalled that it will keep pursuing a “prudent funding approach”.

For ThaiBev, expansion abroad may be the key to further credit upgrades, Moody’s said. The company’s ratings are “unlikely to be upgraded over the medium terms, given its absolute scale and the concentration of cash flows in the domestic market”.

Further expansion, improved margins, and diversification of income streams will all be important components to break into the upper echelons of the rating.

Although ThaiBev’s stable cash flows and scale have given it the upper hand in the market, investors should not discount possible downward ratings pressure caused by increased competitors or loss of market share, especially in the spirits segment, or the deterioration of the company’s balance sheet after an intense expansion campaign.