Thai Beverage Public Company Limited (SGX: Y92) is a leading beverage company in Southeast Asia and the largest of its kind in Thailand. It also has a 28.5% stake in another Singapore-listed company, Fraser and Neave Limited (SGX: F99), which is a beverage producer and distributor with a long history.
I like Thai Beverage for the various leading beverage brands that it owns, its extensive distribution network, international presence in more than 90 countries, and the growth potential it has in the years ahead.
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Growth plans in place
Thai Beverage wants to become the largest and most profitable beverage company in Southeast Asia by 2020. By that year, it intends to increase its revenue-share from non-alcoholic beverages to over 50%. It also wants more than half of its revenue to come from outside of Thailand.
In a bid to grow its top line, Thai Beverage completed four acquisitions in its fiscal first quarter ended 31 December 2017. One of the deals was the purchase of a 53.59% stake in Saigon Beer Alcohol Beverage Joint Stock Corp (Sabeco), a Vietnam-based beer brewer.
Sabeco has the largest market share in Vietnam’s beer market. It owns famous brands such as Saigon Beer and 333 Beer. Vietnam is the most prominent beer market in Southeast Asia and the third largest in Asia. The acquisition gives Thai Beverage access to extensive distribution networks in Vietnam and helps to diversify its products geographically.
During the same quarter, Thai Beverage also gobbled up a 75% stake in Myanmar Distillery Company (MDC), the maker of Myanmar’s leading whisky brand Grand Royal, and MDC’s related supply chain business.
It is very likely that Thai Beverage would experience growth in the years to come. But, I’m staying away from the company, for now.
Debt-laden balance sheet
The main reason why I’m not invested in the beverage giant is that I’m not comfortable with its weak balance sheet.
As of 31 March 2018, Thai Beverage had THB 234.5 billion in total debt, and just THB 20.4 billion in cash and cash equivalents. In comparison, at the end of September 2017, it had a relatively stronger balance sheet with THB 40.7 billion in total borrowings, and THB 9.9 billion in cash balance.
As a result of the large sequential increase in its debt, Thai Beverage’s gearing ratio increased from 0.47 as of 30 September 2017 to 1.88 as of 31 March 2018.
Thai Beverage’s ability to generate a high level of free cash flow should help it to reduce its debt in the coming years, but I don’t feel comfortable investing in a company laden with debt.
The Foolish takeaway
Thai Beverage is the owner of many leading beverage brands and seems to have plenty of growth ahead in a region with a rising middle class. However, the weak balance sheet is something I’m wary about. When the debt levels are more palatable for me, the valuation of the business might have increased further, but I’m not worried about that.
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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 contributor Sudhan P doesn’t own shares in any companies mentioned.