Fitch Assigns First-Time 'BBB' and 'AA+(tha)' Ratings to ThaiBev
ThaiBev's ratings are driven by its robust competitive position as the largest beverage producer in Thailand; its wide distribution network; diversified product portfolio; high barriers to entry particularly in alcoholic segment; and strong financial profile. The ratings are moderated by the concentration of ThaiBev's cash flows in the domestic market.
KEY RATING DRIVERS
Thailand's Largest Beverage Producer: ThaiBev has a share of over 90% of spirits volumes sold, and 40% of beer. Its market position is also underpinned by tight domestic regulations on alcohol consumption, marketing and distribution, which acts as a high entry barrier. ThaiBev has maintained EBITDA margins of over 50% (as a proportion of net revenue) in its spirits segment over the last few years, and has improved its EBITDA margins on beer to over 12% of net revenue in 2015 - driven by a strategy to revamp its product portfolio.
ThaiBev also manufactures and sells non-alcoholic beverages (NAB) in Thailand and regionally, where its market position is evolving and earnings are currently weak. However, it has been improving this segment progressively by utilising its robust free cash flow from spirits for incremental investments, and leveraging on its large operating scale, bargaining power, and regional distribution prowess. ThaiBev generated consolidated EBITDA of THB28bn (around USD800m) in 2015, with an EBITDA margin of 32% of net revenue.
Strong Distribution Network: ThaiBev's strong domestic distribution network acts as a high barrier to entry, and is a key competitive advantage. It has over 400,000 points of sale across Thailand to retail shops and restaurants, which enables the company to deliver products faster and efficiently to market. Traditional retail still accounts for a significant portion of the country's drinks market, particularly in the up-country region where the population is poorer, logistics are difficult, and with limited penetration of modern trade. This requires long-established relationships, far-reaching networks, and relatively high logistics costs to access the market. ThaiBev's acquisition of 28.5% of regional conglomerate Fraser and Neave, Limited (F&N) in 2012 has further supported its expansion into the NAB business, and enhanced its regional distribution network.
Diversified Product Portfolio: ThaiBev's ratings are supported by a diversified product portfolio across price-points, and allows the company to benefit from changing consumer tastes - which thus generates defensiveness in revenues. For instance, consumers can switch from white spirits to more expensive brown spirits and beer as their wealth grows, or alternatively opt for green tea or soft drinks for those more health-conscious consumers.
Single-Market Concentration: Over 90% of 2015 revenue is derived from Thailand, the core focus up to now. This means that ThaiBev is exposed to a single country's political and regulatory risks, and compounded by sale of products that tend to undergo frequent changes to taxes and controls, whilst the company has managed this risk well. Cash flows have been resilient to political turmoil and increases in excise tax. ThaiBev now intends to expand its regional footprint through F&N, which has a strong market position in NAB in south-east Asia. We expect most of ThaiBev's cash flows to stem from Thailand over the next few years, barring any major acquisitions.
Conservative Capital Structure: Strong credit metrics support ThaiBev's ratings and provide substantial headroom to accommodate growth strategies over the next two years. Fitch expects financial leverage to continue to improve, with FFO-adjusted net leverage of below 1.5x in 2016-2018 (barring any acquisitions). The company has demonstrated its ability and willingness to maintain a conservative capital structure by reducing its leverage from 5x in 2012 soon after its acquisition of F&N, to 1.3x in the last 12 months to 1Q16. This has been supported by a capital reduction at F&N post-acquisition; ThaiBev's strong operating cash flow; as well as its modest capital spending and dividends.
Limited Competition from Imports: Fitch believes that it is unlikely for domestic consumers to trade-up to imported products as there is a significant price gap between local brown spirits and the cheapest imported products, and similarly for beer drinkers shifting to premium/imported brands. In addition, Thailand has tight regulations on the manufacture and consumption of alcoholic beverages - with frequent increases in excise taxes, restrictions on advertising, prohibition on promotional campaigns, limited selling hours and alcohol-free zones. However, this has served to act as very high entry barriers to competition.
There is a risk of future government excise tax hikes for alcohol, while the relatively inelastic demand for spirits (which accounted for 78% of ThaiBev's 1Q16 EBITDA) and the relative affordability of domestically manufactured products should enable the company to maintain its profitability over the longer term.
Fitch's key assumptions within our rating case for the issuer include:
- A mid-single-digit revenue growth of gross revenue
- EBITDA margin from the spirit business to remain at about 55% of net revenue; EBITDA margin from beer to improve to about 15% of net revenue in 2016, and come down to 14% in 2017 due to the expected competitive pressure; EBITDA margin from NAB to continue to improve; and the EBITDA margin from food to be maintained
- Capex of about THB4bn-5bn per year in 2016-2020
- Dividend payout ratio to be maintained at 60%
Negative: Developments that may, individually or collectively, lead to negative rating action include:
- FFO-adjusted net leverage sustained above 2.0x
-An expansion into other investments which results in a deterioration in the credit profile
-A sustained weakening in the EBITDA margins in the spirits segment to below 50% of net revenue (i. e. revenue excluding excise tax)
- Free cash flow margins sustained below 3.5% of net revenue.
Positive: Developments that may, individually or collectively, lead to positive rating action include:
-No positive rating action is anticipated over the medium-term owing to the geographic concentration of cash flows in Thailand. Over the longer term, greater geographic diversification without a dilution in its domestic competitive position or deterioration in its overall financial profile could lead to an upgrade of the ratings.