Thai Beverage
Current S$0.57
Target S$0.77
A more convoluted restructuring

  Without an offer from TCC/Thai Bev which intend to keep F& N listed, F& N’s share price will fall when trading resumes on Monday. But the share price fall will have only 1-4 Scts impact on Thai Beverage’s SOP.

Thai Bev’s price weakness reflects concern that F& N may continue in its current structure (29% owned by Thai Bev, 62% by TCC), necessitating a holding company discount at Thai Bev’s level. But we do not think that this is the end of F& N’s restructuring or Thai Bev’s regional consumer thesis. Maintain Outperform rating and S$0.77 SOP target price. Catalyst will come from corporate restructuring further out.

What Happened
On Thursday, TCC/Thai Bev told SGX that they intend to keep F& N listed. Trading in F& N shares will resume on Monday but the shareholders have three months to restore F& N’s public float to above 10%.

What We Think
TCC and Thai Bev own a combined 90.3% of F& N currently. Restoring the free float to 10% simply entails a selldown of 0.4% or a placement of some new F& N shares. That is not difficult. The puzzling issue is why they are keeping F& N listed. With Thai Beverage interested in only the F& B assets and TCC Assets clearly more interested in the property assets, it would be easier to split up the conglomerate by taking F& N private. The two reasons we can imagine for this choice are 1) TCC needs F& N to stay listed for its stake in F& N to be better recognised as bank collateral, and 2) the group wants to keep F& N listed for the purpose of brand value. Either way, we do not think that this is the end stage of the F& N restructuring. We still expect F& N to eventually be broken up into its property and consumer parts.

What You Should Do
If branding is the reason for F& N to stay listed, F& N could over time end up as the vehicle for the group’s non-alcohol consumer assets. Such an asset would sit more comfortably under Thai Bev than TCC, i.e. the regional consumer thesis for Thai Bev is not dead. In the near term, a decline in F& N’s share price on Monday will shave only 1-4 Scts off our SOP valuation for Thai Bev, which we do not think is a big negative. Unless a holding company discount is required because the group does not undertake further restructuring, price weakness is an opportunity to buy.

1.1 F& N to stay listed what is Chaoren thinking?
Last Thursday, TCC Assets and Thai Beverage jointly announced that they intend to keep F& N listed. On Friday, both shareholders received approval from SGX to lift the trading halt of F& N on Monday and for F& N to be given a three-month period to restore its public float to above 10%.

Thai Beverage’s share price has taken a knock recently as its recent moves were contrary to our investment thesis that Thai Beverage will emerge as a regional consumer play. If Thai Beverage/TCC meant to assemble a non-alcoholic unit within Thai Beverage, surely it would have been cleaner if F& N were de-listed. Also, before this announcement, Thai Beverage sold down its stake in Oishi from 89.3% to 79.7%. We can understand why Oishi is kept listed – the unit has aggressive expansion plans that require funding, it trades at a high multiple and can be a useful funding source for its own growth. However, keeping F& N listed is a bit strange.

F& N’s value to Thai Beverage clearly lies in the consumer business. Its value to TCC is clearly the property assets. So, breaking up the two parts seem to be the most logical thing to do. We do not think that investors should dismiss future restructuring even though F& N is staying listed. Keeping F& N listed does not mean that they cannot restructure. They still can though the key challenge now would be to determine the value of the consumer assets and the property assets and convince minority shareholders (and an independent financial advisor) when asset swaps are carried out at fair values.

Why then did Chaoren keep F& N listed? We can think of two reasons:
TCC geared up when it spent S$8.5bn to buy 61.7% of F& N. A public listing of F& N will allow TCC’s current stake in F& N to act as better collateral.

F& N has better brand value across ASEAN and if the intention is for Thai Beverage to become a regional F& B player, there could be better brand awareness if F& N is kept listed and the other consumer assets are held under F& N.

1.2 Impact on our SOP value for Thai Beverage
We can only speculate on the shareholders’ rationale for keeping F& N listed at this stage. What is more important is that we do not think that this is the end-stage structure. The developments set a negative tone for Thai Beverage’s SOP value for now. We examine how our valuation target can be affected in three scenarios.

1.3 Scenario #1: Near-term de-rating of F& N shares
Without M& A support, F& N’s share price is most likely to fall once trading resumes. Our current SOP values Thai Bev’s 29% stake in F& N at S$9.55 (TCC’s offer price) and can head lower as the value of its 29% stake is worth less. This, however, is not a major concern. Our sensitivity analysis shows that even if F& N de-rates back to the pre-M& A level of S$7.00, the dent in Thai Beverage’s share price will be just 4 Scts.

1.4 Scenario #2: TCC buys property assets at substantial discount
We think that our original thesis of Thai Beverage buying out F& N’s F& B businesses remains the most compelling way to reach an end-game. However, if the intention is to keep F& N listed for branding considerations, Oishi and Serm Suk could end up being shuffled into F& N while the property assets get shuffled out to TCC. The same asset-swap method can be used, i.e. TCC gets S$6.3bn in property assets and S$2.2bn cash from F& N, in return for letting F& N buy back and cancel TCC’s 61.7% stake (worth S$8.5bn). F& N can then be positioned as Thai Bev’s non-alcohol arm as Oishi and Serm Suk get shuffled in, over the longer term. The worry with this chain of events is that F& N could end up selling the property assets at a large discount to TCC, in this interested party transaction. Property developers typically trade at an average discount of 25% to RNAV. By our estimates, the drag on Thai Beverage’s SOP is fairly muted though as TCC’s takeout offer already valued the property assets at a fairly deep discount. Our sensitivity analysis suggests in the worst-case scenario where TCC buys F& N’s property assets at a 45% discount to RNAV, our Thai Beverage SOP will only fall marginally by 1 Scts.

1.5 Scenario #3: No further restructuring, necessitating holding company discount
In our opinion, the worst that can happen from a valuation perspective is that no further restructuring is done after this. Thai Beverage ends up as a holding company for three non-alcoholic consumer businesses. Thai Beverage and TCC end up sharing ownership of a mixed consumer-property vehicle (F& N). We think that this is unlikely as the way Chaoren has structured his empire in the past is to have single-type businesses and pave the way for each part of his empire to be run by each of his children. Indeed, if there is no further restructuring in future, the disconnected nature of three non-alcoholic consumer businesses and the shared ownership of F& N (between Thai Bev and TCC) may lead to a 10-20% holding company discount. This (less likely) scenario is most detrimental to our SOP value and could drag down our SOP to S$0.62-0.69.

1.6 Is it a reason to sell Thai Beverage?
We agree that a decline in F& N’s share price on Monday will be near-term negative for Thai Beverage. However, we stress that the impact of a falling F& N share price on Thai Beverage’s SOP is not significant. The bigger impact on our SOP comes when investors build a holding company discount into Thai Beverage’s valuation. We do not think that this is fair as we expect F& N to be broken up into its property and consumer parts eventually. We certainly do not think that keeping F& N listed equates to an intention of having F& N stay as a property and consumer conglomerate – this will take time, be patient.

F& N’s brand heritage goes all the way back to pre-1900s. Its branding across ASEAN is also much stronger than Thai Bev’s. Brand value for the F& B business is obviously more important than the property business. If Thai Bev/TCC’s rationale for keeping F& N listed is to use F& N as the holding company for Chaoren’s regional consumer assets, we think that it would make more sense for F& N to sit under Thai Beverage eventually than under TCC Assets. The full restructuring though will take time. As the structure becomes clearer, the argument of a holding company discount will not be reasonable. We refrain from factoring a holding company discount into our fair value.