Can Thai Beverage Public Company Limited Be Considered A Cheap Stock Now?

When Asia Pacific Breweries (APB) was privatized in 2012 by Heineken InternationalFraser & Neave Limited (SGX: F99) received about S$5.4 billion for its 39.7% stake in APB.

The deal valued APB at a price-to-earnings (PE) ratio of around 35. Many might argue that it was a fair price, given that breweries are very stable businesses with recurring revenues. It helps too that APB was managing some of the best alcoholic beverages brands in the world.

With APB as a basis for comparison, does it mean that  Thai Beverage Public Company Limited (SGX: Y92), the only remaining brewery left listed in Singapore’s stock market, might be undervalued with its PE ratio of just 19?

Brewing up some business

Thai Beverage is the maker of the Chang brand of beer in Thailand. Besides its breweries business, Thai Beverage also distills spirits and manufactures snacks and non-alcoholic beverages.

(On a tangential side note, Thai Beverage is now a major shareholder of Fraser & Neave.)

The company’s growth has been good. Revenues have steadily climbed by 5.3% per year from THB 91.6 billion in 2003 to THB 162.0 billion in 2014. Profit-growth has been even more impressive at 10.9% per year over the same period.

In the first six months of 2015, Thai Beverage had experienced a 6.2% increase in profit attributable to owners of the firm; looking at the numbers, it seems that Thai Beverage is set to have another year of growth.

Things that might go wrong

There are some important risks involved with Thai Beverage.

The bulk of its revenue is from Thailand and its Spirits business. Even though the company has a long-term target of deriving at least 50% of its revenue from outside Thailand, 95% of its sales in 2014 had come from within the country.

On the bottom-line, profits from the spirits business have been making up around 100% (sometimes even more) of overall net income for a number of years now as the other segments are struggling badly to generate a profit.

These characteristics bring a layer of concentration risk to the picture.

Foolish Summary

In terms of geography, Thai Beverage is much more of a domestic story than APB (the latter’s business is more international). When it comes to business segments, the key business for Thai Beverage is its spirits segment, which is something different from beer brewing.

APB might have been privatized at a much higher valuation than what Thai Beverage is trading at right now. But given the differences in the nature of the two companies, the use of the PE ratio (a relative valuation technique) might not be the best way to compare the two businesses.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any company mentioned.