Money Talk: Thai Beverage, Vard Holdings, SMRT

Thai Bev's defensive alcoholic portfolio will provide shelter against any economic contraction triggered by political uncertainty. -- PHOTO: BLOOMBERG
Thai Bev's defensive alcoholic portfolio will provide shelter against any economic contraction triggered by political uncertainty. -- PHOTO: BLOOMBERG

SINGAPORE - Stay up to date on market chatter with our picks of the latest broker research reports, compiled by The Straits Times Money Desk.

1. Thai Beverage (Thai Bev)

Broker: OCBC

We maintain our view that the impact of the current political unrest on Thai Bev will be only a slight dent on near-term revenue growth (5.2 per cent in FY2014; 6.3 per cent in FY2015) unless the protest ground widens beyond Bangkok.

First, the political unrest is mainly limited to Bangkok, whereas Thai Bev's sales takes place in every province in Thailand. Second, Thai Bev's defensive alcoholic portfolio will provide shelter against any economic contraction triggered by political uncertainty. Third, proportional accounting (vs. the current equity accounting) of Fraser & Neave and Frasers Centrepoint revenues would reduce Thai Bev's underlying exposure to Thailand by an estimated 12.6 percentage points to 83.6 per cent based on Q1 figures.

Historically during FY2008-FY2013, where political unrests were the norm, the spirits segment's revenue consistently grew by 7.3 per cent to 16.6 per cent, thereby displaying growth resilience.

We re-iterate Buy with $0.74 fair value estimate.

2. Vard Holdings

Broker: CIMB

With an earnings recovery priced in and risk-reward looking balanced, we turn cautious on Vard.

Furthermore, our deep drill into margins does not offer us a high degree of confidence that the company is able to beat our FY2015 EBITDA (earnings before interest, tax, depreciation and amortisaion) margin expectation of 8.2 per cent, which we deem a key driver for its share price performance in the next six months.

With this, we downgrade the stock to Hold from Add. However, our target price is raised to $1.19 on the back of our FY2015-FY2016 earnings per share upgrades of 8 per cent to 11 per cent.

We have factored in slightly higher EBITDA margins and orders. We will re-visit the stock on stronger margins and orders.

3. SMRT

Broker: Maybank Kim Eng

With bus operations on track for a fare-independent, asset-light model, we envisage a similar operating model for rail. In our view, this is a sustainable solution that allows the government to inject additional capacity and implement fare adjustments without affecting the profitability of the operators.

In our view, three key variables will drive SMRT's valuation post-transition: 1) cash surplus from asset sales, 2) treatment of previous contractual agreements, and 3) retention of rental concessions.

The wide range of outcomes suggests challenges in deriving post-transition valuation without any concrete details. Furthermore, the valuation outcomes are highly sensitive to margin assumptions.

Taking a leaf from the public bus transition, we expect a favourable rail transition to benefit SMRT the most. We therefore upgrade SMRT to Hold and raise our target price to $1.36 (previously $0.80), based on our base case scenario.