Credit rating downgrade is old news
We are not concerned that S&P has downgraded Thai Bev’s debt from BBB to BBB-on the grounds of increased debt and lower cash flow as the underlying business is sound with strong recurring cash flows. Debt levels were inflated purely because of the F&N-stake purchase.
Ahead, Thai Bev’s net gearing could improve from 1.2x to 0.8x if itswaps its 29% stake in F&N for cash plus F&N’s F&B business. We maintain our SOP-based target price, estimates and Outperform call. We see catalysts from earnings delivery by the non-alcoholic beverage division and corporate restructuring.
S&P has downgraded Thai Bev’s debt rating from BBB to BBB-,citing higher debt and lower cash flow as the reasons for a weaker financial risk profile.
What We Think
This event is not a negative. We highlighted when in our initiation that the F&N acquisition will push up debt levels to > 1.2x. This downgrade by S&P is understandable as interest cover (EBIT/interest expense) did fall from 40xpre-F&N acquisition to an estimated 5.5x (FY13).We anticipate improved interest cover as debt levels ease, since free cash flow is in excess of business needs.
Furthermore, the domestic business is in a strong position, generating recurring cash flows. Whilst the F&N acquisition have strained the balance sheet, we argue that Thai Bev is laying the groundwork for dominance of the beverage sector in Singapore, Malaysia and Thailand. This makes the business more valuable in spite of balance sheet strains.
We previously highlighted that Thai Bev could swap its 29% stake in F&N for cash plus F&N’s F&B business with TCC (see “Not just an elephant now”). If that happens, the estimated net proceeds of S$1.2bn could be used to pay down debt, reducing Thai Bev’s net gearing from 1.2x to 0.8x.
What You Should Do
We keep our Outperform call. We see catalysts from earnings delivery by the non-alcoholic beverage division and corporate restructuring.
Publish date: 11/04/13