Great expectations: Why did ThaiBev fail to deliver in Q3?

Expect a share price pullback soon.

Great expectations can sometimes do more harm than good. Against a backdrop of massive investor confidence, food and beverage giant ThaiBev reported a 9% year-on-year decline in net profit for the third quarter, impacted by a slump in contributions from its associates and a revenue decline from its spirits business.

According to CIMB, lacklustre Thai tourism was the main culprit behind the spirits business’ earnings shortfall. Foreign brands’ brown spirit sales have been hit even harder by Thailand’s tourist dearth.

CIMB notes that while it remains confident on ThaiBev’s prospects, bloated consensus expectations will likely harm the stock in the short term.

“Our downgrade yesterday was premised on the fact that expectations have got ahead of themselves and we expect a short-term share price pullback. Our only grouse is that expectations have gotten ahead of themselves.The Street’s earnings expectations had been overly raised, partly because of the group’s strong showings in 1Q14 and 2Q14. 9M14’s net profit contributions only accounted for 66% of consensus full-year estimates and we expect Street estimates to be cut. As the earnings upgrade/downgrade trend swings from upgrades to downgrades, we expect the earlier year’s share price outperformance to stall from here,” noted CIMB.

Here's more from CIMB:

Management hosted a post-results briefing to explain the weak trends in spirits, the sustained good performance of beer, and the higher costs in non-al and  food.

Spirits performance looked very poor yoy because 3Q13 included restocking activities by wholesalers, back when the excise duties were hiked unexpectedly.

The trends seen in earlier quarters stayed the same. 9M14’s spirits volume was -3% yoy as brown spirits volume contracted more on weak consumer spending trends, and white spirits volumes grew on down-trading trends.

Management guides that the tourism sector needs to recover, to see improvements in brown spirits sales; it is not happening yet. If there is any consolation, foreign brands’ brown sprits sales have been hit even harder.

For beer, exports continue to drive growth. The Thai beer market was contracting 7% yoy and Thai Bev has maintained its market share.

Lastly, the higher costs in the non-al and food business was due to promotional campaigns to keep up with competitors (for non-al) or to target new consumer groups (for food).