ThaiBev's $13.6b IPO of its brewery business. Is it a good deal?

Last week, Bloomberg published a report which says that Thai Beverage is considering an initial public offering of its brewery business in what could be the biggest listing in Singapore in close to a decade.

The company may seek to value the unit at as much as US$10 billion (S$13.6 billion), raising approx US$2-3 billion from the listing. If it materializes, the IPO is likely to be the Singapore bourse's biggest since the 2011 listing of Hutchison Port Holding Trust.

A US$10 billion valuation will also see the unit rank among the region's largest beer companies but still a fraction of the US$47 billion market capitalisation of recently-listed Budweiser Brewing Company APAC Ltd, the Asia-Pacific unit of AB InBev. Based on a trailing earnings basis, that valued Budweiser at more than 50x PER (Price-Earnings Ratio).

Shares of Thai Beverage initially appreciated as much as 5.2 per cent to a day high of S$0.91/share before closing at S$0.89/share as the company calls for a share trading halt.

STREET GENERALLY POSITIVE TO NEUTRAL ON THAI BEVERAGE

According to Bloomberg, analysts are generally positive to neutral on Thai Beverage, with 4 positive calls, 3 neutral calls and 1 negative call on the counter.

Its latest set of FY2019 results slightly missed the street's expectations. However, the street believes "Happy Hour" in Thailand could further extend due to stimulus measures implemented by the government to encourage spending.

While its Spirits division continues to outperform expectations and is the key driver of Group's earnings, its beer division remains under pressure due to high-interest costs associated with the Sabeco acquisition.

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Its beer division saw total attributable profit to shareholders of THB826 million (S$37.2 million). This amounts to approximately US$27.3 million.

According to the Bloomberg article, the IPO deal could include ThaiBev's beer assets in Thailand and Vietnam. Assuming that it does not include its Spirits' assets, the valuation of US$10 billion essentially prices its Beer unit at an FY19 PER multiple of 366x!

That will be an extremely positive deal for Thai Beverage to be able to dispose off part of its beer division at such high valuation multiples but not so much for investors' partaking in the deal. Thai Beverage has a current market of US$16.4 billion.

The US$10 billion deal for its Beer division essentially encompasses 61 per cent of its market cap when earnings contribution from its beer division only amounted to 3.5 per cent of Group's FY19 earnings.

If we exclude the financing impact, with the net profit of its Beer division at THB 3.154 billion in FY2019, that will still amount to a hefty 96x trailing PER multiple for its beer division. The only way the valuation makes sense is if its beer division's future earnings growth is expected to double. Is the street expecting that?

VALUATION PROBABLY ACCOUNT FOR PREVIOUS SABECO ACQUISITION

Recall that Thai Beverage previously paid approximately US$4.8 billion for 54 per cent of Sabeco. This values Sabeco at US$8.9 billion, a hefty valuation to be paid at that point in time, with the market subsequently punishing Thai Bev as seen by a circa. 40 per cent decline in its share price post-acquisition from late-2017 to late-2018.

The US$10 billion IPO, if it materializes, seems like a huge valuation premium attached to its beer division, in our view. This likely took into consideration the premium previously paid for Sabeco.

All said and done, such a valuation will be positive for Thai Beverage in our view, assuming the market is willing to attach a US$10 billion valuation to its beer division which is still a "work-in-progress" in terms of its restructuring efforts. All this assumes that its Spirits' division is not part of the US$10 billion valuation.

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CONCLUSION

This is my initial thoughts on the Thaibev IPO deal based on the content derived from the Bloomberg article and is not construed to be fully accurate. Please do your own due diligence on this matter.

I believe a confirmation from Thai Beverage management pertaining to the IPO with more details disclosed will be useful in helping the market make an informed decision.

This article was first published on the New Academy of Finance. All content is displayed for general information purposes only and does not constitute professional financial advice.