(The following statement was released by the rating agency)
Jan 22 -
Summary analysis -- Thai Beverage Public Co. Ltd. ----------------- 22-Jan-2013
CREDIT RATING: BBB/Watch Neg/-- Country: Thailand
Primary SIC: Malt beverages
Credit Rating History:
Local currency Foreign currency
15-Jan-2007 BBB/-- BBB/--
The rating on Thai Beverage Public Co. Ltd. reflects the company’s dominant domestic market position in spirits, and its high and stable cash flows. Thai Bev’s geographic concentration in Thailand, the still weak performance of the company’s beer division, and a growth strategy that may translate into more aggressive financial policies partly offset these strengths. We assess Thai Bev’s business risk profile as “satisfactory” and its financial risk profile as “modest.”
The acquisition of Singapore-based conglomerate Fraser & Neave Ltd. (F&N) by Thai Bev and related party TCC Group is likely to be debt-funded, and this could weaken Thai Bev’s financial risk profile. We will assess how the integration of the different operations of F&N could influence Thai Bev’s business and financial risk profiles if the acquisition is completed. We will also seek more clarity about Thai Bev’s plan to reduce its debt over the next 24 months, its dividend policy, and the likelihood of further debt-funded acquisitions.
Thai Bev’s EBITDA of Thai baht (THB) 20.4 billion for the nine months ended Sept. 30, 2012, was stronger than we anticipated, at about 85% of our full-year expectation. The company’s performance in spirits, especially volume growth, remained strong, notwithstanding the increase in excise tax. The EBITDA margin in the spirits division was about 28%, compared with our full-year expectation of 24%-25%. We expect volume growth in sprits to slow down to 3%-5% in 2013, as the full-year impact of excise taxes should temporarily reduce volume growth. The performance of Thai Bev’s beer division remains generally weak as we had anticipated, with marginal EBITDA losses. Still high marketing and promotion costs and a further refinement of Thai Bev’s product and pricing strategy will likely continue to weigh on the performance of the beer division in 2013, though we expect a marginally positive EBITDA.
Thai Bev has “adequate” liquidity, as defined by our criteria. We expect the company’s liquidity sources to cover its liquidity needs by about 1.2x over the next 12 months. Our liquidity assessment incorporates the following factors and assumptions:
-- Liquidity sources include our expectation of funds from operations of THB15 billion-THB18 billion in 2013 and a cash balance of about THB3.7 billion as of Sept. 30, 2012.
-- Liquidity sources also include about THB4 billion in committed credit lines from domestic financial institutions. Thai Bev also has access to more than THB35 billion in uncommitted credit lines, but we do not capture these in our liquidity calculation given their uncommitted nature.
-- We do not include potential dividends from Thai Bev’s stake in F&N in our liquidity assessment.
-- Over the next 12 months, liquidity needs include THB7.5 billion of debt due and our estimate of working capital requirements of THB2 billion-THB3 billion.
-- Liquidity needs also include maintenance capital expenditure of THB4 billion and our expectations of dividend payments of about THB10 billion in 2013.
-- We expect liquidity sources to remain positive even if EBITDA declines by 15%.
We assess Thai Bev’s access to the Thai capital markets as strong, given its long-standing banking relationships and strong domestic credit standing.
The CreditWatch placement with negative implications reflects the likely weakening in Thai Bev’s financial risk profile if the acquisition of F&N goes through. We expect to resolve the CreditWatch when we obtain further clarity regarding: (1) the acquisition; (2) F&N’s integration with Thai Bev and TCC; (3) Thai Bev’s financial policy, particularly its dividend payout; and (4) the strategic intent of the acquisition, including potential synergies.
We may lower the rating on Thai Bev if the company’s deleveraging potential reduces, such that we expect its debt-to-EBITDA ratio to remain above 3x over the next 24 months.
We may affirm the rating if we expect Thai Bev’s financial risk profile to improve in the next 24 months. The ratio of debt to EBITDA at less than 2.5x and the ratio of debt to debt plus equity lower than 40% by the end of 2014 could indicate such improvement.