ThaiBev — a concentrated business
ThaiBev sees itself as the leading beverage company in Southeast Asia. It has its roots in Thailand, growing to become the biggest beverage company there. It is also listed in Singapore since 2006. There are four business segments that make up the company: Spirits, Beers, Non-Alcoholic Beverages, and Food.
The table below summarised the 1-year change of key business metrics in FY2020 from FY2019. The company’s financial year end in September each year.
Top-line sales figures saw a 5% drop, driven largely by a decline in volumes as shown below. Beer volumes registered the highest drop among the business segments. This decline is driven mostly by the effects of the pandemic, forcing bars and restaurants to shut down for periods of time, uneven opening hours, less consumer demand due to the lockdowns and restricted movements especially vis-a-vis entertainment and dining. Furthermore, the economic effects of the pandemic has also put downward pressure on spending power of consumers.
F&N, a similar beverage company, also saw a drop in top-line revenues of 3.58% for its FY2020 results. It shows the challenging business environment that the industry in facing. F&N’s lesser drop in revenues probably highlights the lower elasticity of demand of its products, better diversified product mix and strong distribution channels, as compared to ThaiBev. This is probably an area that the company needs to look at.
Nevertheless, cost rationalisation measure help to cushion the impact of revenue decline. The 6% reduction in cost of sales is close to 1% higher than the drop in revenues, allowing the company to register a milder drop in gross profits of around 3%. Other income also help to buttress the bottom line to a decent 0.07% drop in net profit. In a crisis situation, cost rationalisation measures is imperative to arrest the negative impact to the business.
However, cost rationalisation, while important in crisis situations, are the easy thing to do for any business. It is far easier to burn down vast swathes of forests than it is to plant the trees and build a forest. The same can be said in business. The ability of a business to build back better (thanks, joe!) will determine its future sustainability and profitability after a crisis.
One of the biggest issue for the company is that ThaiBev has too high a concentration of its business in the alcoholic beverages segment. The revenue breakdown by segment does not read well for the future sustainability of the business. Close to 90% of the revenue is derived from the alcoholic segment. Even looking at a post-pandemic world, the demand for alcohol may face headwinds given the increased focus on healthy living among today’s modern consumers. There is an increased focus to lead healthier lifestyles, to be more mindful of one’s diet. This may include cutting back on alcohol. Given the low-margin (10%) business that is beverage, there may not be a strong and growing demand for alcohol to boost volumes and drive revenue growth.
ThaiBev also derive a lot of its business from Asia. Higher consumer spending power and appetite, especially for alcoholic beverages, probably lie in the western markets of Europe and US, maybe even Australia. However, the company may not have the expertise or the capacity to expand into these markets. Furthermore, these markets are already saturated with more established players with superior brand and marketing.
Another area of concern is the high level of goodwill and intangible asset on the company’s balance sheet. Together, these two items account for almost 50% of total assets. This is a precarious situation for a company to be in, given the propensity for these items to be impaired in chunky manner. This will affect the future value of the company. The company will need its acquisitions thus far to be value-accretive in a big manner for this to not be a concern.
Lastly, given the majority of the revenue is derived from alcohol, this company will have issues with religious or ESG screening criteria. Shariah-compliant investments will definitely have to exclude this company.
All in all, I would not add this company to my portfolio.
