Thai Beverage Public Company Ltd (SGX: Y92) is a leading beverage company in Southeast Asia and the largest in Thailand. The group’s business consists of four key segments: spirits, beer, non-alcoholic beverages, and food. Thai Beverage owns 18 distilleries, three breweries, and 11 non-alcoholic beverage (NAB) production facilities in Thailand. The group also has a wide portfolio of brands including Ruang Khao, Mekhong, and Grand Royal Whisky.
The group has reported a remarkable performance for the first nine months of 2019 (9M 2019). Sales revenue was up 18.2% year on year to 205 billion Baht, while attributable net profit was up 14.3% year on year to 19.9 billion Baht (excluding non-recurring expenses). Sales volume for spirits improved slightly in Q3 2019, while sales volume for beer fell slightly. However, for 9M 2019, both the spirits and beer divisions saw healthy sales volume growth on a year-on-year basis.
However, no investment thesis is complete without looking at the business’s risks. Here are two key risks investors need to be mindful of, as they may severely affect the group’s performance.
1. Consumer business may be volatile
Though Thai Beverage runs an easy-to-understand business manufacturing and selling products that are consumed by the masses on a daily basis, the business may face uncertainty and volatility during economic downturns. This is because the spirits division (which is the main profit generator for the business) is priced more highly than the beer and NAB divisions.
During downturns, people tend to cut back on discretionary purchases, and expensive liquor may be included in that mix. With job losses, ordinary folk may not have the same level of disposable income to purchase whisky and brandy, thus affecting the sales volume and revenue of the spirits division. Hard liquor is more sensitive to changes in consumer demand, and as this division makes up the bulk of profits, investors need to be mindful of the risk of a collapse in demand.
2. Beer division dragging down the group
Although beer takes up the highest sales volume for the group and also makes up 44.8% of sales (for Q3 2019), investors should note that the beer division’s performance has been declining. If looked at on a 9M 2019 basis, sales revenue for beer increased by 31.6% year on year, but attributable net profit declined by almost 32% year on year. Net profit margin is also very thin, at just 2.9% for 9M 2019, compared to the 17.2% net profit margin for the spirits division.
In other words, there is a high chance that the beer division will drag the entire group down as its margins are razor-thin. This division also consumes a lot of manpower and resources due to the high sales volume, but it generates very little in the way of profits. Investors need to keep a close eye on how this division performs in subsequent quarters.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.
Motley Fool Singapore 2019