Thai Beverage has reported a set of FY2023 ended Sept 30 numbers which is below the expectations of some analysts, prompting them to cut their respective target prices for the stock.

However, as they expect ThaiBev to report better earnings for the coming FY2024, they have kept their &ldquo buy&rdquo or equivalent calls, given how the stock has dropped by more than a fifth year-to-date to what some have called &ldquo unjustified&rdquo levels.

 

On Nov 22, ThaiBev reported slightly higher revenues of THB279 billion ($10.6 billion) for FY2023, up 2% over FY2022. However, higher-than-expected marketing costs for its core beer business led to an overall 9% dip in FY2023 earnings of THB27 billion over FY2022.

 

For FY2023, ThaiBev plans to pay a final dividend of THB0.45, which will bring its total payout for the fiscal year to THB0.60, equal to that paid in FY2022. However, given the drop in earnings, the payout ratio for FY2023 has increased to 55% from FY2022&rsquo s 50%.

 

In FY2023, revenue from its beer segment was down 1% y-o-y to THB121 billion, along with a 9% y-o-y drop in this segment&rsquo s patmi. CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan, in their Nov 23 note, point out that the lower patmi for this segment was led by poorer showing from its beer business in Vietnam, plus a lower share of earnings reported by its separately listed associate Frasers Property TQ5 0.00% .

 

&ldquo These two factors overshadowed strength in other business segments in Thailand, which continued to report positive revenue growth in 4QFY2023,&rdquo state Ong and Tan.

 

The higher-margin spirits business, on the other hand, generated a slightly higher turnover of THB120 billion, up 3% y-o-y. Revenue from the smaller non-alcoholic beverages and food divisions increased by 12% y-o-y and 16% y-o-y respectively to THB20 billion and THB19 billion.

 

&ldquo The disappointing earnings and margin stemmed mainly from the weak beer sales volume &mdash this, in turn, was due to challenging market conditions and compounded by an increase in the group&rsquo s brand investment and marketing activities,&rdquo says RHB Bank Singapore&rsquo s Alfie Yeo in his Nov 24 note.

 

&ldquo Due to the weak beer segment&rsquo s performance, we are factoring in both softer revenue and higher distribution costs for this unit to reflect more challenging business conditions anticipated ahead,&rdquo he adds.

 

Yeo has cut his projection for ThaiBev&rsquo s current FY2024 and coming FY2025 earnings projections by 9% and 10% respectively in anticipation of higher marketing and branding costs &ldquo Nonetheless, we still expect earnings to grow by 5% to 7% y-o-y going forward on the back of higher sales volumes,&rdquo he says.

On the other hand, the CGS-CIMB analysts note that ThaiBev&rsquo s beer segment reported its third straight quarter of revenue decline in 4QFY2023. Citing management, they say that recovery in Vietnam will only take place in the 2HFY2024. Meanwhile, in Thailand, the home market for ThaiBev&rsquo s beers, there is new competition in the form of Tawandang 1999, note Ong and Tan.

 

As such, they believe that beer volumes could remain rather &ldquo lacklustre&rdquo in the current FY2024.

 

However, with lower raw material prices, specifically that of malt, and the company keeping a close eye on its marketing spend, the CGS-CIMB analysts believe that ThaiBev should be able to grow the ebitda of its beer business by 3% y-o-y for FY2024.

 

While the beer segment is losing some fizzle, the spirits business is seen to have more room to do better and be an earnings growth contributor for the current year. Citing ThaiBev&rsquo s management, analysts note that there is further growth headroom for brown spirits as volume has thus far stayed below pre-pandemic levels even with the return of tourists.

 

&ldquo To push more sales of brown spirits, the company expects advertising and promotion spend to remain stable. The company is also planning to implement price increases for smaller volume stock keep units that have maintained the same price for the past five years,&rdquo state DBS Group Research&rsquo s Andy Sim and Chee Zheng Feng in their Nov 24 note.

 

To account for lower revenue from ThaiBev&rsquo s beer business and lower operating margins overall, the DBS analysts have trimmed their target price from 75 cents to 72 cents, which is equal to the stock&rsquo s average 15-year historical 12-month forward P/E of around 15.9x. &ldquo We believe there is significant headroom for a valuation re-rating, given the company is trading at an attractive P/E of 11.3x, &ndash 1.7 s.d. (standard deviations) of its 15-year average forward P/E,&rdquo they add.

 

Similarly, Yeo of RHB remains upbeat on this stock, even though he has reduced his target price to 82 cents from 87 cents. &ldquo We continue to see better consumption and economic recovery driving volume growth. Thailand&rsquo s consumer confidence index continued to improve to a year-to-date high of 60.3 points in October. We remain positive on the recovery in consumption in Thailand,&rdquo he says.

 

CGS-CIMB&rsquo s Ong and Tan appear to be more cautious. Their new target price, relative to their peers, is at a more restrained 67 cents, from 75 cents previously. While they reiterate their &ldquo add&rdquo call, they have also removed the counter from CGS-CIMB&rsquo s list of high conviction picks on slower-than-expected Vietnam recovery and potential competition from new entrants.

 

For them, potential re-rating catalysts include better-than-expected gross profit margins on lower input costs and cost control. On the other hand, downside risks include a weaker macroeconomic environment dampening its sales volumes, and higher-than-expected marketing and branding spend hurting margins.