Carabao Group

Carabao Group Plc (CBG) 

Investment thesis

Carabao Group’s share price may have underperformed our expectation since initiation, but our confidence over demand growth for energy drinks and Carabao Group’s sales expansion profile remain strong. Doubts over FY14 results and the Thai beverage industry outlook are not a matter of concern, we believe. Our BUY rating stands; CBG now is our top pick among beverage makers. Based on a PEG ratio of 1.0x and an earnings CAGR of 32% for the next two years, we have derived a YE15 target price of Bt43. We address the main market concerns regarding CBG below:

Issue #1—fear of FY14 earnings missing target

There are concerns that the FY14 bottom-line might miss estimates, as 9M14 net earnings after minority interests were Bt641m, far below the trend necessary to achieve FY14 management guidance of Bt1,000m. However, a 4Q14 net profit of Bt256m is expected (up by 6% QoQ and 82% YoY), making for an FY14 bottom-line of Bt897m (up 64% YoY). Stripping out minority interests (removed since July 2014), FY14 net profit would be expected at Bt995m.

Issue #2—doubts over FY15 outlook

As concerns over the risk of weak 4Q14 results mount, doubts are also building over the 2015 earnings outlook for the industry. Yet, we expect a CBG FY14-16 earnings CAGR of 32%, driven by ongoing sales expansion within Thailand and CLMV markets for the Carabao Dang brand. We forecast an FY15 profit of Bt1,321m and believe that an interim dividend of Bt0.26/share is plausible. 

Issue #3—risk of intense price competition and excise tax

We have questioned whether the current price war between green tea brands and the possible introduction of a new excise tax on tea and fruit juice drinks might have negative fallout effects on the energy drinks market. We think not! Firstly, price competition between energy drinks brands is not nearly as severe—players rely on brand loyalty and below-the-line promotions to drive sales. We are confident that CBG’s marketing methods are effective and cheap—about 7% of sales revenues in both FY13 and FY14 (we assume 8% for FY15). Secondly, domestic energy drinks prices already include a 20% excise tax (green tea drinks have 0% excise tax); a further rise would seem unlikely.

Issue #4—margin squeeze

Profit margin slippage is expected for the green tea and functional drink categories, due to deep price discounting and high marketing costs as they brace for low season. But demand for energy drinks isn’t seasonal and Carabao Group’s net margin is expected at 14% for FY15, up from 12% in FY14—the expansion will be driven by a rising proportion of fat-margin international sales (GM of 38% against 33% for domestic sales), a lower gas cost (which will reduce bottle production costs) and one-time cost savings, such as full-year in-house bottle production and the removal of minority interests.