Fitch cuts long-term view of Thai Bev

Fitch Ratings Thailand has downgraded Thai Beverage Plc’s long-term foreign-currency issuer default rating to BBB- from BBB and its national long-term rating to AA(tha) from AA+(tha).

Thai Bev has been removed from negative watch, and a stable outlook has been assigned.

Thai Bev’s ratings have been downgraded by one notch after the debt-funded acquisition of Vietnam’s Saigon Alcohol, Beer and Beverages Corporation (Sabeco) in December.

Fitch expects Thai Bev’s leverage, defined as FFO adjusted net leverage, to increase to 5.7 times by the end of fiscal 2018 (on Sept 30) from 1.2 times at the end of fiscal 2017. But leverage should decline to about 4 times by the end of fiscal 2020, which will be in line with the BBB- rating.

The stable outlook reflects expectations that Thai Bev will deleverage, stemming from its ability and willingness to maintain a conservative capital structure after its 2012 acquisition of Fraser and Neave Ltd (F&N). This willingness may manifest, among other measures, in a lower dividend payout.

The ratings also reflect Thai Bev’s improved business risk profile from expanded reach in Vietnam’s fast-growing beer sector, plus the company’s leading position in Thailand’s spirits market.

KEY RATING DRIVERS

Thai Bev’s new acquisitions in Vietnam and Myanmar significantly expand its operating scale. Fitch expects earnings before interest, tax, depreciation and amortisation to rise by 40% and geographic diversification to improve so that Thailand’s share of ebitda will fall to less than 80% by fiscal 2019 from more than 90% in fiscal 2017.

Thai Bev’s ratings are underpinned by its leading positions in alcoholic drinks in Thailand, Myanmar and Vietnam. ThaiBev’s domestic spirits segment is a key strength, with more than 90% market share and ebitda margins (to net revenue excluding excise tax) of over 50%. The company benefits from established brands, a strong distribution network and high entry barriers in Thailand.

Sabeco is the dominant beer producer in Vietnam, with a 41% market share by sales volume in 2016. Vietnam is the largest beer market in Southeast Asia and one of the five largest beer consumers in Asia-Pacific. Fitch believes that Vietnam has high growth potential for beer, due to the popularity of beer and a young population.

Myanmar Supply Chain and Marketing Services Co Ltd (MSC) and Myanmar Distillery Co Ltd (MDC), collectively called Grand Royal Group (GRG), which Thai Bev acquired in October 2017, lead Myanmar’s whisky market with 65%-plus market share as of March 2017. Although consumption of whisky still lags that of white spirits in Myanmar, competition in the market is moderate among the three main producers.

The ratings of Thai Bev factor in Fitch’s expectation of strong operational and strategic ties with Sabeco. Thai Bev effectively controls 53.6% of Sabeco, supported by a 26.3% equity stake and a shareholder agreement that gives Thai Bev control over all major operational and strategic decisions of Sabeco’s direct shareholder, a Thai Bev indirect subsidiary.

Compared with peers on the National Ratings scale, Thai Bev’s credit profile is weaker than that of Advanced Info Service Plc (AIS, AA+(tha)/stable), which has a similar business risk profile. They are both dominant market leaders in their respective industries, but Thai Bev has higher leverage, which drives its lower AA(tha) rating.

Compared with Total Access Communication Plc (DTAC, stand-alone AA(tha)/stable) and PTT Global Chemical Plc (PTTGC, stand-alone AA-(tha)/stable), Thai Bev has a substantially stronger business risk profile.

Thai Bev has a dominant market position, robust free cash flow generation with FCF margins of 8%-11% (to net revenue) and limited competition. DTAC faces high competition in the Thai telecom market, while PTTGC’s operating cash flows tend to be considerably more cyclical than Thai Bev’s, given its exposure to commodity prices and refining margins.

Both DTAC and PTTGC generate mostly negative FCF across economic cycles, stemming from the high capital expenditure requirements for telecoms and working capital swings in the petrochemical industry. Therefore Thai Bev is rated one notch higher, even though Fitch expects it to maintain higher leverage than DTAC and PTTGC.