Thailand: Thai Beverage goes Singapore for a historical initial public offering

Thai Beverage is ready to launch on May 08 the formal roadshow for its $809 million to $1.12 billion initial public offering that had to be cancelled late last year due to protests by a strong religious lobby - which protested about the listing of a brewing company in the deeply Buddhist country, the Hong Kong based financial publishing company FinanceAsia announced on May 08.

The company has abandoned its earlier plans to list in Bangkok and is now looking to go public in Singapore, where investors are said to be welcoming the chance to buy into a strong and somewhat unique Southeast Asian consumption story.

The response to the deal so far is said to be good and according to bankers, the anti-government protests that culminated in an early election at the beginning of April and Prime Minister Thaksin’s stepping down have had seemingly no impact on demand.

“It has not deterred interest at all,” one observer says. “People are looking at the company as a good play on consumption and the Thai economy. It also generates strong cashflow and offers a very decent yield,” one observer adds.

The Bank of Thailand recently revised down its forecast for GDP growth for this year by half a percentage point to 4.25-5.25% partly due to the ongoing political troubles. However, the stock market has retained its upward bias, suggesting investors aren’t that concerned about longer-term effects on domestic businesses.

Thai Beverage, which is owned by Thailand’s richest man, Charoen Sirivadhanabhaki, dominates the country’s alcoholic beverage industry with a 60% share of the beer market and a 75% share of spirits sales. It sells both brown and white spirits as well as water and a few other non-alcoholic beverages. Because alcohol consumption is pretty stable - whether the economy is good or bad - some observers argue it can be viewed as almost a counter-cyclical play that offers downside protection in an economic downturn.

Sales volumes in the spirits market are growing at about 2% per year, while beer sales have been expanding at a compound annual growth rate of 10% since 1998, according to industry data.

Deutsche Bank, JPMorgan, Merrill Lynch and Thai investment banks, Phatra Securities and SBC Securities are joint global coordinators for the sale, which will be the largest ever IPO by a private sector company based in Thailand. If priced at the top end of the offer range, it could also become the largest Singapore IPO since SingTel’s $1.5 billion listing in 1993. DBS Bank has been brought in to handle the domestic retail tranche.

The structure of the offer is similar to last time with 20% of the company up for sale, plus an additional 15% greenshoe. Plans to set aside half of the shares for Thai retail investors were abandoned when the listing was moved offshore, however. Instead there will be a portion of the deal earmarked for Singapore retail investors, but this will account for only 5% of the total.

Half of the shares will be new, while the other half will be sold by Risen Mark Enterprise, which is an investment holding company indirectly owned in equal parts by Charoen Sirivadhanabhaki and his wife. Risen’s stake in the company will fall to 12.65% at the time of listing from 25.2%.

The price range has been set at S$0.26 to S$0.36. Based on the syndicate profit forecasts for this year this will value the company at a 2006 PE of about 13 to 18 times, which is above the Thai market average.

The company’s dominant position in its home market , the fact that it is not really that keen to expand outside the Thai borders and its focus on both beer and spirits mean it has few real comparables.

Most analysts are looking at other breweries in the region. These include Hite Brewery in South Korea, which trades at a forward PE of about 21 times; Asia Pacific Breweries in Singapore (the producer of Tiger and Anchor beers) with a PE of 18 and Carlsberg Brewery Malaysia, which is valued at 19.8 times its projected 2006 earnings, making Thai Beverage stand out on the cheap side.

The Chinese breweries aren’t really comparable since they typically have a much lower market share of 5-10%, analysts say. As a reference though, Tsing Tao trades at 32 times this year’s earnings.

Because of the stable consumer base and high market share, a key challenge for the Thai brewery will be to grow its revenues and improve margins and many analysts simply view it as a value stock that will generate a stable yield for investors.

The company is intending to pay at least 50% of its net profit as dividend, which would give a dividend yield of about 3.8%, based on current price and profit assumptions. By comparison, Carlsberg Malaysia offers a dividend yield of only 2.3%.

“There are very few big consumer stories in this region that can generate a similar cashflow yield to Thai Beverage,” one observer says. “Most are smaller high growth companies where you have to take a big bet that they will grow into a success with a decent market share – this company is there already and is expected to chug along at a similar pace, generating a lot of cash for its shareholders.”

In 2005, the company generated Bt28.4 billion ($691.7 million) in net cash from its operations.

Growth will come primarily from the launch of new higher value-added products to complement the company’s current strong focus on the mass market. Thailand’s top selling Chang Beer and Mekhong Whiskey are both produced by the company and other well-known brands are Sangsom rum and Ruang Khao (a white spirit).

In March this year, Thai Beverage launched a new beer called Chang Light, which has a lower alcohol content (4.2% by volume) than the 5% used in its regular version, boasts a lower carbohydrate content and is considered an up-market product aimed at health-conscious urban drinkers. Consequently the margins on Chang Lite are wider, which makes it a more profitable product.

There is also potential to launch new products in the white spirits category, which is very popular in certain parts of the country. In fact, Thailand has the highest per capita consumption of white spirits in Asia after South Korea.

The introduction of new brands is expected to result in an increase in capacity utilisation for spirits, which currently runs at only 57%. The company has 16 distilleries in Thailand with a total capacity of 88 million cases per year.

It is also in the process of increasing the capacity at one of its three breweries by 4.6 million hectare litres, which will bring its total beer- and water-making capacity to 15.5 million hectare litres, according to people familiar with the plan. The three breweries currently operate at about 84% of their full capacity.

In 2005, revenues rose modestly to Bt92 billion ($2.24 billion) from Bt90 billion a year earlier, while net profits improved to Bt10.5 billion ($255.5 million) from Bt9.5 billion. This year revenues are expected to edge up another notch to about Bt98 billion while profits should rise to Bt11.6 billion, according to syndicate research.

Within the beer division, the gross margin improved to 22.8% in 2005 from 21% in 2004 and is expected to expand to about 25% this year, according to syndicate research estimates. This will be a result of a slight increase in sales while costs are seen to stay largely level. Spirits had a gross margin of 38% last year, which is expected to remain flat this year.

Given the company’s reliance on soft commodities such as grain and sugar for its production, it will obviously be negatively affected as commodity prices rise. However, according to people familiar with the company, the raw products account for a relatively minor portion of total costs. By far the biggest single cost outlay is excise tax, which accounts 77% of the production cost for spirits and 73% for the total costs on beer.

“Raw material costs can actually go up a lot, without having that much impact on the margins,” one observer reckons.

The official roadshow will run from today until May 24, when the final price will be determined. The Singapore retail offering will be open between May 19 and 23 and the shares are expected to start trading on May 30.

The decision to list in Singapore will likely make little difference with regard to which investors will be interested in the deal, except when it comes to the retail portion of the offering. However, by switching markets, the company will no longer be able to help invigorate Thailand’s IPO market which has been thin this year with only one smallish offering from G Steel ($61 million).

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