Fitch Ratings lowers outlook for ThaiBev to 'negative' on slower than expected deleveraging

CREDIT ratings agency Fitch Ratings has lowered its outlook for Thai Beverage to "negative" from "stable", reflecting a slower than expected pace of deleveraging following a series of acquisitions that raised its debt for the first quarter of fiscal 2018.

ThaiBev acquired Saigon Beer-Alcohol-Beverage Corporation (Sabeco) in Vietnam, the Grand Royal Group in Myanmar and 252 KFC outlets in Thailand.

Fitch attributed the slower than forecast deleveraging to weak domestic demand for alcoholic beverages for the fiscal year ended September 2018.

It has however affirmed ThaiBev's long-term foreign-currency issuer default rating at "BBB-", and its national long-term rating and senior unsecured ratings at "AA(tha)".

"ThaiBev's ratings reflect its strong market position in spirits and its leading share of beer sales in its key markets of Thailand, Vietnam and Myanmar, which are counterbalanced by its narrow geographic diversity and smaller operating scale compared with rating peers," said Fitch.

It expects ThaiBev's net leverage to remain high at around 4.5 to 5.5 times in FY2019 to FY2021, compared with its earlier forecast of four times by FY2021. Fitch did note the company is coming off its peak of 8.3 times at the end of FY2018.

"ThaiBev has demonstrated its commitment to prioritising debt reduction and maintaining a conservative capital structure after large debt-funded acquisitions. The company appears to be mainly focused on improving operating cash flows at Sabeco to reduce its leverage, with no other deleveraging plans announced," Fitch said.

It added that the company could deleverage faster, reducing its net leverage to below four times by FY2021, the level at which Fitch would consider negative rating action, if its newly acquired businesses improve their operating efficiencies or it undertakes capital management or asset restructuring.

ThaiBev has 81.5 billion baht (S$3.47 billion) of debt maturing within the next 12 months at end-December 2018, including short and long-term loans and working-capital facilities. The maturing debt includes 71 billion baht in short-term bridge loans used for acquisitions, all of which were repaid early (mostly refinanced with long-term debentures) in the second quarter of FY19.

Fitch expects a gradual recovery for ThaiBev's earnings before interest, tax, depreciation and amortisation (Ebitda), and that it will increase to above 40 billion baht for FY2019 from 33 billion baht for FY2018, amid broad-based recovery across all its key product segments and end-markets.

The full-year contribution of cash flows for FY2019 from Sabeco and the KFC stores acquired in December 2017, and cash flows from new KFC stores opened in 2018 will add to revenue and earnings growth for ThaiBev, Fitch added.

Thai Beverage shares traded flat at S$0.825 as at 9.29am on Thursday.