Bangkok--3 Aug--Fitch Ratings
Fitch Ratings (Thailand) Limited has assigned Thai Beverage Public Company Limited's (ThaiBev, BBB-/AA(tha)/Stable) new senior unsecured debentures amounting to THB70 billion a National Long-Term Rating of 'AA(tha)'. The debentures are in five tranches with two- to 10-year tenors. Proceeds will be used to refinance existing bridging facilities.
The debentures are rated at the same level as ThaiBev's National Long-Term Rating as they constitute its direct, unsecured, unconditional and unsubordinated obligations.
KEY RATING DRIVERS
Domestic Challenges; but Profitability to Improve: ThaiBev experienced challenges in its domestic beverage segment in the first half of the fiscal year to 30 September 2018 (1HFY18). ThaiBev also incurred some one-off unexpected costs, among the challenges of a slow recovery in domestic demand and rising competition in its domestic and international beverage segment. We believe this will begin to reverse from 2HFY18 and expect a recovery in profitability that will drive deleveraging, as will ThaiBev's commitment to prioritise debt reduction and maintain a conservative capital structure after its large debt-funded acquisitions.
ThaiBev's EBITDA, with the contribution from its newly acquired entities, is likely to increase to about THB40 billion-45 billion in FY18-FY19, from THB32 billion in FY17. Net revenue from the existing beverage business, excluding its regional operations in Vietnam and Myanmar, dropped by about 2% and EBITDA by about 20% in 1HFY18, from 1HFY17.
Improved Business Risk Profile: Acquisitions in Vietnam and Myanmar have expanded ThaiBev's operating scale significantly. Fitch expects EBITDA to rise by 40% and geographic diversification to broaden so that Thailand's share of EBITDA will fall to less than 80% by FY19, from more than 90% in FY17. ThaiBev's ratings are underpinned by its leading positions in the alcoholic beverage industries in Thailand, Myanmar and Vietnam. The domestic spirits segment is a key strength, with a market share of over 90% and EBITDA margins (to net revenue excluding excise tax) of over 50%. The company benefits from its established brands, a strong distribution network, and high entry barriers in Thailand.
Strong Market Position of Acquisitions: Saigon Beer - Alcohol - Beverage Corporation (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 south-east Asia and one of the five largest beer consumers in Asia-Pacific. We believe Vietnam has high growth potential for beer, due to the popularity of the beverage and its young population.
Myanmar Supply Chain and Marketing Services Co., Ltd and Myanmar Distillery Co., Ltd. (MDC), collectively called the Grand Royal Group, which ThaiBev acquired in October 2017, is the leader in Myanmar's whisky market, with a market share of above 65% as of March 2017. Whisky consumption still lags white spirits in Myanmar, with moderate competition among the three main producers.
Significant Minority Interests in Sabeco: ThaiBev's ratings factor in our expectation of strong operational and strategic ties with Sabeco. We have fully consolidated Sabeco's financials when assessing ThaiBev, but exclude dividends paid to minorities in arriving at consolidated FFO and have treated the minority share of Sabeco's cash balance (estimated at about THB12 billion at FYE18) as restricted cash. ThaiBev effectively controls 53.6% of Sabeco, supported by its 26.3% equity stake and a shareholder agreement that gives ThaiBev control over all major operational and strategic decisions of Sabeco's direct shareholder, a ThaiBev indirect subsidiary.
DERIVATION SUMMARY
ThaiBev's ratings reflect its leading market position in spirits and beer in its key markets of Thailand, Vietnam and Myanmar, which are counterbalanced by narrow geographic diversity and small operating scale. ThaiBev's business profile is comparable with that of Molson Coors Brewing Company (BBB-/Stable), even though Molson Coors has a larger operating scale and greater diversification, but with concentration in North America. ThaiBev has a comparable financial profile, with both companies experiencing heightened leverage from large debt-funded acquisitions.
Pernod Ricard S.A. (BBB/Positive) owns a strong spirits brand portfolio with a global presence, which is matched by ThaiBev's strong domestic market position and expanding international presence. The one-notch difference with Pernod is on account of ThaiBev's higher leverage.
Both ThaiBev and Anheuser Busch InBev NV/SA (ABI, BBB/Stable) have high leverage due to acquisitions. However, ABI, the world's largest brewer, has a strong business profile and operating profitability that positions the group in the upper 'A' category, and hence it is rated one notch higher.
Compared with peers on the National Ratings scale, ThaiBev's credit profile is weaker than that of Advanced Info Service Public Company Limited (AA+(tha)/Stable), which has a similar business risk profile. They are both strong market leaders in their respective industries, however, ThaiBev has higher leverage, which drives its lower 'AA(tha)' rating.
ThaiBev has a substantially stronger business risk profile than Total Access Communication Public Company Limited (DTAC, AA(tha)/Stable, standalone credit profile AA-(tha)) and PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, standalone credit profile AA-(tha)). ThaiBev has a strong market position, robust free cash flow (FCF) generation, with FCF margins of 8%-11% (to net revenue), and limited competition. DTAC faces high competition in the Thai telco market, while PTTGC's operating cash flow is considerably more cyclical than that of ThaiBev, given its exposure to commodity prices and refining margins. Both DTAC and PTTGC generate mostly negative FCF across economic cycles, stemming from the high capex requirements in the telecom sector and working-capital swings in the petrochemical industry. Therefore, ThaiBev is rated one notch higher.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
-Flat net revenue (excluding excise tax) for existing businesses in Thailand in FY18, to increase organically in the mid-single-digits in FY19-FY20
-Net revenue from new business of about THB45 billion-50 billion in FY18, followed by high growth of more than 30% due to full-year consolidation in FY19
-EBITDA margin (as a proportion of net revenue) for existing businesses in Thailand to narrow in FY18 relative to FY17, and recover gradually in FY19-FY20; EBITDA margin of 48%-54% for spirits, 15%-21% for beer, below 3% for non-alcoholic beverages, and 10%-13% for food in FY18-FY20
-EBITDA margin (as a proportion of net revenue) for new business to remain stable at about 20%-23% in FY18-FY20
-Capex of about THB5 billion-7 billion per year in FY18-FY20, excluding acquisitions
-Lower dividend payout ratio in FY18-FY20
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
Fitch does not anticipate positive rating action in the next two years due to current high leverage. However, we may consider positive rating action if :
-FFO adjusted net leverage eases to below 3.0x on a sustained basis
-FCF margins (to net revenue) are sustained above 3.5%
Developments that May, Individually or Collectively, Lead to Negative Rating Action
-Failure to reduce FFO adjusted net leverage to 4.0x by FY20
-Evidence of a weakening market position, operating efficiency or pricing power, resulting in sustained weak sales growth and profit margins
-An expansion into non-core investments that results in a deterioration in the business risk profile
LIQUIDITY
Refinancing Required: ThaiBev had THB16.8 billion of debt maturing within the next 12 months at end-March 2018, including short- and long-term loans and working-capital facilities. However, this does not include around THB158 billion of short-term bridge loans used for acquisitions, which the company expects to term out. Refinancing risk should be low, given the company's strong ability to borrow at competitive rates and record of strong access to domestic and international capital markets. For example, ThaiBev is the largest consumer staples company and one of the top-10 largest companies by market capitalisation listed on the Singapore Exchange.