Fitch Ratings has affirmed Thai Beverage Public Company Limited's (ThaiBev) Long-Term Foreign-Currency Issuer Default Rating at 'BBB-' and National Long-Term Rating at 'AA(tha)' with a Stable Outlook. Fitch has also affirmed the senior unsecured rating at 'AA(tha)'.
The affirmation reflects our expectation ThaiBev will continue deleveraging to a level consistent with its current rating within the next 12-18 months, driven by strong cash flow generation and sustained business recovery momentum into the financial year ending September 2023 (FY23). Fitch believes ThaiBev will adhere to its commitment to prioritise debt reduction. Its ratings therefore capture the company maintaining a conservative capital structure in addition to its strong market position in Thailand.
KEY RATING DRIVERS
Deleveraging on Track: Fitch expects ThaiBev's EBITDA net leverage to decrease to about 3.5x by FYE23 and about 3.0x in FY24, driven by the recovery in all its business segments. On the other hand, ThaiBev's annual capex should remain at THB4.5 billion-5 billion, mainly for strengthening its market position and supporting organic growth without any major investments planned.
Continued Strong Recovery: Fitch expects ThaiBev's revenue to continue rising by 7%-8% in FY23 and 3%-4% in FY24 while its EBITDA should increase, although at a slower rate of 4%-5% in FY23 amid pressure from rising costs. A full reopening of the country for international tourists from 1 October 2022, following the lifting of restrictions on the operations of pubs, bars and restaurants on 1 July 2022, should support recovery momentum, especially for on-trade beer sales, off-premise brown spirits sales and the food business.
Manageable Pressure on Margin: A recent increase in product prices and the company's continued effort to raise cost efficiency should allow ThaiBev to maintain its EBITDA margin at 26%-27% of net revenue, excluding excise tax, in FY23 and about 27% in FY24 (FY22: 27.3%). The pressure from rising packaging and energy costs should ease in FY23 while advertising and promotional expenses are likely to increase in line with the resumption of business activity.
Fitch expects an increase in raw-material costs for beer in FY23 under new procurement contracts at a higher price than in FY22, although the company said this is still lower than current market prices. ThaiBev's EBITDA rose by 11.5% to about THB45 billion in FY22 despite a weakening EBITDA margin to 27% from 29% in FY20-FY21. This was due to rising raw material, packaging and energy costs as well as a large proportion of low-margin white spirits in the product mix in 1HFY22.
Regional Operational Recovery: Fitch expects the recovery momentum to also continue in FY23 in Vietnam and Myanmar. Its Vietnam operation posted EBITDA growth of 58%-59% in FY22 after two consecutive years of decline. Fitch expects EBITDA growth to moderate in FY23, similar to its Thai operations, due to cost pressure, mitigating strong revenue growth. Its Myanmar performance should also improve from FY22, driven by continued sales volume growth and ThaiBev's efforts to maintain margins amid political uncertainty in the country.
Leading Regional Position: ThaiBev's business profile is supported by leading regional positions, including in local spirits with a sales volume share of above 90%. The company also has a strong beer market share of 35%-40% in Thailand and Vietnam. Its expanded geographical reach in Myanmar and Vietnam has enhanced its operating scale and broadened diversification, such that Thailand's share of EBITDA is now less than 80%, from over 90% in FY17.
Significant Minority Interest in Sabeco: ThaiBev's ratings factor in our expectation of strong operational and strategic ties with Saigon Beer-Alcohol-Beverage Corporation (Sabeco), the company's Vietnam-based acquisition, despite its equity stake of 53.6%. We exclude dividends paid to minorities in arriving at consolidated FFO, and treat the minority share of Sabeco's cash balance (FYE22: about THB17 billion) as restricted cash to factor in the possibility of a cash leakage to minorities.
ThaiBev's ratings reflect its leading regional positions, counterbalanced by its higher leverage compared with its higher-rated peers. These peers are also purely food and beverage companies that benefit from relative cash flow stability, even during economic downturns, while ThaiBev has a complex organisational structure and investments in the more cyclical property sector.
ThaiBev's and Bacardi Limited's (BBB-/Stable) credit profiles are comparable. ThaiBev's business profile is supported by its exceptional local market position in spirits, strong domestic position in beer, as well as leading positions in beer and spirits in Vietnam and Myanmar, respectively. This is reflected in ThaiBev's larger margin. Bacardi, on the other hand, has a strong competitive position in spirits with better geographical diversification than ThaiBev. Barcadi also has lower financial leverage than ThaiBev. Both ThaiBev and Bacardi are deleveraging after their large acquisitions in 2017-2018.
ThaiBev's business profile is stronger than that of Turkish brewer Anadolu Efes Biracilik ve Malt Sanayii A.S. (Efes, BB+/Rating Watch Negative (RWN)), in terms of operating scale, home-country market position and profitability. Efes' significantly more conservative capital structure could, nonetheless, be affected by a challenging economic environment in its two largest markets of Turkey and Russia as well as Ukraine. Efes is therefore rated one notch below ThaiBev. Efes' RWN also reflects increased rating pressure from a potential acquisition, which could lead to additional debt.
Compared with peers on the National Rating scale, ThaiBev's credit profile is weaker than that of Advanced Info Service Public Company Limited (AA+(tha)/Stable) due to its high leverage. Both have comparable business risk profiles, as they are strong market leaders in their respective industries.
ThaiBev has a substantially stronger business risk profile than PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, Standalone Credit Profile (SCP): a+(tha)) and The Siam Cement Public Company Limited (SCC, A+(tha)/Negative). ThaiBev has a strong market position and robust free cash flow (FCF) generation, with an FCF margin of about 8% to net revenue, as well as limited competition. PTTGC's operating cash flow is considerably more cyclical than that of ThaiBev due to its exposure to commodity prices and refining margins. SCC is diversified across industries, but a substantial portion of its business - cement and chemicals - is also exposed to commodity risk.
PTTGC and SCC generate mostly negative FCF across economic cycles due to the high capex and working-capital swings in the petrochemical industry. Therefore, ThaiBev is rated two notches higher than SCC's rating and PTTGC's SCP.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Net revenue (excluding excise tax) for businesses in Thailand to rise by 7%-8% in FY23 and 2.5%-3.0% a year in FY24-FY25 (FY22: 9.8%);
- Net revenue of Grand Royal Group (GRG), the Myanmar acquisition, and Sabeco, to increase by 7%-8% in FY23 and 4%-6% a year in FY24-FY25 (FY22: 42.5%);
- EBITDA margin as a proportion of net revenue to decrease slightly to about 32.5% in FY23 and improve to 33%-34% in FY24-FY25 for domestic businesses (FY22: 33%) while that for GRG and Sabeco to drop slightly to about 21% in FY23-FY25 (FY22: 21.9%);
- Capex of about THB4.5 billion-4.8 billion a year in FY23-FY25, accounting for around 1.5% of annual gross revenue;
- Dividend payout ratio of 50% in FY23-FY25.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- EBITDA net leverage sustained below 3.0x, provided the company maintains its competitive leading market positions in its core products and markets and its FCF generation;
- Simplification of group structure and ThaiBev becoming a purely food and beverage company.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- EBITDA net leverage sustained above 3.5x;
- Evidence of weakening in market position, operating efficiency or pricing power, resulting in continued slow sales growth and narrowing profit margin;
- Deteriorating FCF towards neutral to negative.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Manageable Liquidity: ThaiBev had THB55.3 billion in debt maturing within the next 12 months at FYE22, consisting of working-capital facilities from banks of THB25.1 billion, bank loans of THB8.3 billion, and debentures of THB21.9 billion. Liquidity is supported by cash on hand, excluding Fitch-defined restricted cash, of THB34.5 billion and undrawn committed revolving credit facilities of around THB3.8 billion.
ThaiBev issued new bonds of about THB13 billion in November 2022 and entered into a four-year loan facility of THB10 billion with a bank in December 2022. ThaiBev's strong credit profile and robust FCF generation support its capital and credit market access, which underpins its liquidity profile.
ThaiBev, Thailand's largest beverage producer, is diversified across four core businesses: spirits, beer, non-alcoholic beverages and food. It acquired a controlling interest in GRG, Myanmar's leading distillery, and Sabeco, Vietnam's leading brewer, in 2017. ThaiBev's listed associates include Fraser and Neave Limited, a Singapore-based non-alcoholic beverage company, and Frasers Property Limited, a Singapore-based property company.
SUMMARY OF FINANCIAL ADJUSTMENTS
Sabeco's cash and cash equivalents are consolidated on a proportional basis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ThaiBev has an ESG Relevance Score of '4' for Group Structure due to the company's complex group structure, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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