S&P places BBB credit rating on Thai Beverage, puts rating on watch negative
October 24, 2012
– Summary analysis -- Thai Beverage Public Co. Ltd. ----------------- 15-Oct-2012
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. (Thai Bev) reflects the company's dominant domestic market position in spirits, and high and stable cash flows. Thai Bev's geographic concentration in Thailand, the company's still weak performance in its beer division, and a growth strategy that may translate into more aggressive financial policies partly offset these strengths.
Thai Bev's debt-funded acquisition of a 29% stake in Singapore-based conglomerate Fraser & Neave Ltd. (F&N: not rated) for approximately Singapore dollar 3.6 billion could adversely affect the company's credit profile, in our opinion. We are still seeking more clarity about the company's plan to reduce its debt over the next 24 months, its dividend policy, and the likelihood of further debt-funded acquisitions. We will also assess the credit implications for Thai Bev of any future related-party transactions between the company and related party TCC Group (TCC: not rated). TCC offered to purchase the 69.5% it does not own in F&N in September 2012.
Thai Bev's EBITDA of Thai Baht (THB) 14.6 billion for the six months ended June 30, 2012, was about 60% of our full-year expectation. The company's performance in spirits was stronger than we anticipated, with EBITDA margin of about 27%, compared with our full-year expectation of 24%-25%. The contribution of newly-acquired Serm Suk's operations also supported Thai Bev's performance because of stronger-than-anticipated margin. Higher sales volumes triggered a 22% increase in EBITDA for Thai Bev's beer division, although higher marketing expenses weighed on the second-quarter performance. We still expect the beer division to break-even in 2012.
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 THB18 billion-THB20 billion and a cash balance of about THB3.9 billion as of June 30, 2012.
-- Liquidity sources also include about THB4.5 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 those in our liquidity calculation given their uncommitted nature.
-- Over the next 12 months, liquidity needs include THB6.5 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.
-- 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.
We do not include the cost of Thai Bev's F&N acquisition in our liquidity needs. The company expects to finance this acquisition using bridge financing from a number of financial institutions.
We expect to resolve our CreditWatch placement with negative implications within the next month. This will be after we have a better understanding of Thai Bev's financial policy, particularly its dividend payout; more clarity about the strategic intent of the acquisition, including potential synergies; and the credit implications of any potential related party transactions between Thai Bev and TCC.
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.