ThaiBev’s KFC Acquisition Justified? Breaking Down Its 2017-Q3 Financials

by: Tam Ging Wien


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- Strong Cash Flows and Low Debt Justifies KFC Acquisition

Last week we made a post were we broke-down SingTel’s financials step-by-step in order to peer deeper into the company beyond simply just reading a news report. From the exercise, we got fairly good feedback from our readers and subscribers. If you haven’t caught our previous post on SingTel, do read it at “A Closer Look at SingTel’s Q1-2017 Results”.

So with good feedback, we asked our subscribers to suggest other companies that they were interested to read about. The suggestion on Thai Beverages Ltd (ThaiBev) caught our attention. If you are still not a subscriber yet, we suggest you sign-up with you name and e-mail at the end of this post.

 Before we start, we would like to highlight some media reports regarding ThaiBev for Q3-2017:

Breaking Down the Income Statement

We decided to focus on the consolidated 9-month period ending 30-Jun-2017 so that we get a closer representation of the performance over several quarters. Sometimes, simply just looking at a single quarter could be misleading due to on-off income or expenses.

Starting from the top line, we can see that revenue has slipped by 6% resulting in a decline of about THB9.045bil. Cost of sales has also correspondingly fell faster by 8% resulting in gross profits of THB43.942bil, almost unchanged from the same period one year ago.

After accounting for operating expenses, operating profit fell 4% to THB20.38bil. This is mainly due to increases in selling and administrative expenses. Net profit correspondingly fall by 5% to THB20.943bil owing mainly to a reduction this year in the foreign exchange gains and reduced operating profit.

So far, we haven’t seen anything that caught our attention as the reduction in revenues translated fairly closely down to reduced net operating profit. Management in their presentation slides blamed their reduction in revenue due to decline in domestic consumption due to “continued effects of the mourning period” while still maintaining the “dominant position in spirits “and market share in beer”. The former King of Thailand Bhumibol Adulyadej had passed away last year in October 2016.


Source: Thai Beverage Public Company Limited Quarterly Financial Report

Moving on to the share of profits from the associates, we see a significant rise of 62.3% from THB2.535bil to THB4.115bil. These figures are sufficiently significant to reverse the fall in the net operating profit into a gain of 1.93% in profit before tax of THB25.058bil. So certainly, we want to dig deeper to understand who are these associates and explain the significant differences between both periods.


Source: Thai Beverage Public Company Limited Quarterly Financial Report

In the later section of the same quarterly report, we found that the associates were mainly Fraser and Neave Ltd (F&N) and Fraser Centrepoint Limited (Fraser Centrepoint). F&N is a leading manufacturer and distributor of dairy and beverages whose key brands include NutriSoy, F&N, Ice Mountain, Seasons, FruitTree, 100 Plus, Magnolia, Farmhouse Milk and King’s Ice Cream while Fraser Centrepoint is a property developer and investment vehicle. F&N also owned Marshall Cavendish publishing house.

A quick check against both F&N and Fraser Centrepoint’s 9-month quarterly financial report ending 30-Jun-2017 yielded the following findings:

  • F&N: A 15.8% increase of profits attributed to shareholders of the company from $75.1mil and $87.0mil. The difference of $11.9mil translates to THB290.57mil. There is a further $1,202mil exceptional gains “due to realisation of fair value reserves upon change of interests in Vinamilk” which translates to THB29,350mil. As we know from above, ThaiBev has an interest of 28.53% in F&N, these figures translate to THB606mil profit and THB8,373.6mil exceptional gains for ThaiBev. According to the investor presentation slides of F&N, the increase in the profits excluding exceptional items “arose from higher dividend income and maiden recognition of profit from associated company, Vinamilk”.
  • Fraser Centrepoint: A 17.4% increase of profits attributed to shareholders of the company from $375.9mil and $441.1mil. The difference of $65.2mil translates to THB1,592mil. As we know from above, ThaiBev has an interest of 28.44% in F&N, the profit translate to THB3,063.2mil profit for ThaiBev.

The above could approximately account for the THB4.115bil of share of profits from the associates in ThaiBev’s statements. Therefore, we can conclude the 2 significant reasons for the increase is share of profits from associates are due to:

  • Recognition of dividend income from associates company – Vinamilk
  • Improved performance of Fraser Centrepoint

As we could consider Vinamilk as being in the defensive and consumer non-discretionary industry, we think that this performance is likely to continue. However a better performance in Fraser Centrepoint this year does not necessarily translate to higher performance next year as developer’s profits can be fairly cyclic and revenue recognition not always predictable. Investors should expect that the profit contributions from Fraser Centrepoint may not always stay at this level in the future.

Satisfied with our understanding up to this point, we proceed further to look into the rest of the income statement. The next point that catches our attention is the fair valuation gains on financial assets of THB8,489mil. According to ThaiBev’s presentation slides, this is due to “Recognition of F&N’s fair value gains on financial assets of Baht 8,498 million”. Having knowledge of ThaiBev’s associate F&N’s exceptional gains, we can put both information together and conclude that this exceptional fair value gains on financial assets can be “due to realisation of fair value reserves upon change of interests in Vinamilk” and is consistent with what is reported by ThaiBev. The reason they realised the fair value reserves is due to an accounting “reclassification of Vinamilk from Other Investment to Investment in Associated Company”.


Source: Thai Beverage Public Company Limited Quarterly Financial Report

At this point, we are satisfied with what we can learn from ThaiBev’s income statement. We note that Vinamilk and better performance in Fraser Centrepoint will now contribute a sizable portion of the additional profits to ThaiBev to help to offset its decline in domestic demand due to “continued effects of the mourning period”. We are also satisfied to know that the fair value gains are due to “reclassification of Vinamilk from Other Investment to Investment in Associated Company”. We don’t expect this exceptional item to play a part in future performance and investors should avoid attributing future potential earnings growth to this exceptional item. Investors should look forward to improved performance due to Vinamilk but also recognise that Fraser Centrepoint could be cyclic.

Breaking Down the Cash Flow Statement

Moving on to the Cash Flow statement, we can see that ThaiBev is generating a very healthy cash flow both for before and after working capital changes.

Net cash from operating activities was THB20,004mil which is consistent with the reported profits without the exceptional fair value gains from Vinamilk. CAPEX came in at THB3,790mil which gives ThaiBev a strong Free Cash Flow of THB16,214mil.


Source: Thai Beverage Public Company Limited Quarterly Financial Report

Dividends paid to shareholders of the company for the reported period came in at THB15,066mil. This indicates that majority of the Free Cash Flow generated by ThaiBev is distributed out to Shareholders as dividends. This makes ThaiBev a very strong candidate as a dividend machine for investors looking for consistent and long term dividend income.


Source: Thai Beverage Public Company Limited Quarterly Financial Report

Quick Analysis of Valuation, Efficiency and Debt Ratios

We used a pretty standard ratio analysis and tabulated our results.

ThaiBev’s Total Debt-to-Asset and Total Debt-to-Equity ratio stands at 32.14% and 48.76%. Coupled with our analysis of the income and cash flow statements above, we think that ThaiBev’s debt levels are quite comfortable. Having well managed debts will allow ThaiBev to take advantage of opportunities quickly.

ThaiBev’s ROA and ROE is 14.97% and 22.71% respectively which is fairly high. We can conclude that it is using its assets and equity fairly efficiently in generating income.

Quick Analysis for ThaiBev 2017-Q3

(ending Jun-2017) (THB '000)

Stock Price (SGD1 = THB24.41)

SGD 0.94

Shares Outstanding

25,114,000

Revenue

THB 189,947,038.67

Operating Income

THB 27,924,230.67

Net Income

THB 28,155,930.67

Operating Cash Flow

THB 26,672,624.00

Free Cash Flow

THB 22,882,958.00

Operating Cash Flow Per Share

THB 1.062

Free Cash Flow Per Share

THB 0.911

Total Assets

THB 188,100,808.00

Total Equity

THB 60,452,144.00

NAV per Share (NAVS)

THB 123,983,828.00

Earnings Per Share (EPS)

THB 4.94

Valuation Ratios

P/E Ratio

20.47

P/B Ratio

4.65

Efficiency Ratios

Operating Margins

14.70%

Net Income Margins

14.82%

ROA

14.97%

ROE

22.71%

Debt Ratios

Total Debt-to-Asset

32.14%

Total Debt-to-Equity

48.76%

Quick Thoughts on the KFC Acquisition

On 08-Aug-2017, ThaiBev announced that it has entered into an agreement to buy more than 240 KFC stores in Thailand for THB11,300mil. This works out to be an average of THB47.1mil per store or SGD1.93mil per store.

We at ProButterfly would have loved to analyse this deal, but unfortunately Yum Restaurants Intl (Thailand) isn’t public listed and we don’t have direct access to their financial numbers to assess if the price paid by ThaiBev was reasonable. If only we knew what the average annual earnings per store was, we could assess the P/E Ratio of each store to see if the price was fair.

However, we could take a look at ThaiBev’s financial ratios and compare it pre- and post-acquisition. We will leave this as a future excercise.

For now, we can see that there is THB3,888mil cash on ThaiBev’s balance sheet. Therefore, assuming this is a cash acquisition (as opposed to a share swap), ThaiBev’s would need to raise at least THB7,412mil in debt if not more. In the most aggressive case it, would need to raise THB11,300mil in debts. Clearly, ThaiBev has to raise either debt or equity to complete this acquisition.

Ignoring the Goodwill on ThaiBev’s balance sheet, it has a total asset size of THB188,101mil and a total liabilities of $60,452mil. Total equity excluding non-controlling interest stood at THB123,984mil. This gives ThaiBev at Total Debt-to-Asset Ratio of 32.1% and Total Debt-to-Equity Ratio of 48.8%.

If we assume in the most aggressive case that ThaiBev will raise the full THB11,300mil as debt with no increase in asset value (this is certainly not possible, but it’s the most conservative case!), this would increase its Total Debt-to-Asset Ratio to 38.2% and Total Debt-to-Equity Ratio of 57.9%. So in the worst case scenario, it looks like ThaiBev could quite comfortably make this acquisition by raising its debts.

Its conservative debt levels certainly gives ThaiBev the ability to take advantage of such growth opportunities without taking undue risk.

A Final Word

ThaiBev’s performance as a cash generating machine is still intact. At a good price, ThaiBev is worth an investment for those seeking stable and predictable dividend income.

We also think that with the addition of over 240 existing KFC stores in Thailand acquired from Yum Restaurants International (Thailand), ThaiBev is poised to grow both its top and bottom line in the years ahead.

If you want to take a look at ThaiBev financial announcement, they can be found here:


Disclosure Statement

The views and opinions expressed herein are those of Tam Ging Wien (“the author”) and do not necessarily reflect the official policy, position or view of the author’s employer, organization, committee or other group(s) or individual(s).

The author at time of writing does not hold any stake in Thai Beverage Public Company Limited.


 

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