Carabao Group

Carabao Group Plc (CBG) 

Investment thesis

We have initiated coverage on CBG with a BUY rating at a YE15 target price of Bt43. We have a strong conviction in both the demand growth outlook for energy drinks and Carabao Group's sales expansion profile, for which it deserves a premium to the market. The stock should trade at a PEG of 1.0x—still conservative when compared to the PEGs of the Retail and Media sector during booms. We forecast FY15 profit growth of 33% YoY and thus derive FY15 target price of Bt43.

Theme #1—growth everywhere!

The energy drinks market is a global one and is expanding at 13% per annum, according to Reuters. Although Euromonitor projects that the Thai market will grow at only 6.2%, we expect much stronger expansion among CLMV markets. The IMF forecasts annual GDP growth for the region of 7.2%, 2015-19, with GDP per capita rising 6.6%/year and population growth of 1.4%/year. Furthermore, 56% of the CLMV population is in the 20-59 demographic (CBG’s target market) and is projected to sustain itself at about that level, setting the scene for strong demand growth.

Theme #2—the game is going Carabao’s way

Apart from the bullish atmosphere—current FY14 net profit margin is estimated at 9.9%—we believe in-house bottle production by APG will add 2% to FY15 net margin and the use of IPO proceeds to pay down debt will add another 1%. Moreover, CBG’s tailored in-house distribution network currently has an 85% market reach and we are confident it can reach 92% by FY16 (its reach in the central region is already 97%). We also believe its negative cash conversion cycle may lead to an increased dividend payout above the 40% threshold (management has also indicated that possibility).

Theme #3—stellar brand recognition and marketing methods

The use of brand ambassador, Aed Carabao, the "Sao Bao Dang" sales team and lucky draw sales promotions will continue to drive growth domestically. The proven mix of above- and below-the-line marketing methods will also help drive growth overseas— already proven successful in Cambodia and we believe it can be repeated in other markets with only modest adjustments. Although an improved marketing mix will trim marketing costs to 7% of sales in FY14, we expect marketing spend to rise to approximately 8% of sales in FY15 in order to maintain good sales growth. 

Theme #4—Solid earnings growth and expanding margin

CBG’s earnings have been expanding since FY12 and still has room for growth. Future profit growth will be led by international sales (especially CLMV nations) and increasing domestic market share and market reach. Also international sales entail fatter margins and cost savings will boost the bottom-line. We conservatively project earnings growth of 33% for FY15 and 18% for FY16.