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A Cross-Border Battle: Singapore and Malaysia’s Giant Alcohol Companies

Someone once told me that you cannot go wrong investing in a company making alcoholic beverages:

When times are good, people celebrate and drink. When times are normal, people socialize and drink. When times are bad, people weep and drink. No matter what, people will drink.

Of course that was meant to be a joke. But, there is actually some truth in it. Investors in some of the largest alcoholic beverages companies in Singapore and Malaysia would have done very well over the past decade.

In Singapore’s stock market, the largest maker and distributor of alcoholic beverages is Thai Beverage Public Company Limited (SGX: Y92), with a market capitalisation of S$17 billion. Having been listed since May 2006, Thai Beverage has generated a return of 281% (with dividends reinvested) since its initial public offering.

In Malaysia, we have the RM4.2 billion (S$1.4 billion) Guinness Anchor Berhad (KLSE:3255.KL). Over the same period, the company has seen its shares achieve a return of 361% (in ringgit terms) after accounting for reinvested dividends.

So, these returns work out to compound annual growth rates of 14.7% for Thai Beverage and 17% for Guinness Anchor.

With such impressive track records, which of the two might actually be a better investment now? It’s not an easy question to answer, but a look at certain aspects of their business fundamentals can give us clues.

An introduction

Thai Beverage is one of the largest alcoholic beverages companies in Thailand – it certainly is the largest listed firm in that line of business in Singapore as mentioned earlier. The company counts Chang Beer as one of the many alcoholic beverages in its product portfolio. Thai Beverage’s business mainly resides in Thailand at the moment, but it has a target to increase exports as a percentage of total revenue to 50% by 2020.

Meanwhile, Guinness Anchor is the largest brewery in Malaysia in terms of its marketshare – the company controls close to 60% of the market. Guinness Anchor distributes beer and stout brands like Heineken, Guinness, Tiger, and Anchor. The company is also, like Thai Beverage, mainly a domestic story.

Revenue and profit

In 2014, Thai Beverage had earned revenue of THB162 billion (S$6.4 billion) and net income of THB21.7 billion (S$0.85 billion). This compares with Guinness Anchor’s revenue of RM1.75 billion (S$0.58 billion) and profit of RM214 million (S$71 million) in its fiscal year ended 30 June 2015 (FY2015).

As you can tell, the size of Thai Beverage’s business is at least 10 times larger than that of Guinness Anchor. This makes the Thailand-based company the clear winner when it comes to size.

Profitability

But in terms of profitability, Guinness Anchor is way out of Thai Beverage’s league.

Guinness Anchor had achieved a return on equity of 58% in FY2015 with the important financial metric coming in at above 35% since FY2011.

It’s worth pointing out that Guinness Anchor had achieved its remarkable returns on equity while employing minimal leverage; to that point, the company’s net to debt to equity ratio from FY2011 to FY2015 had reached a high of only 21%. Over the same period, the Malaysian alcoholic beverages outfit had also averaged an impressive gross margin of 34%.

Let’s now turn to Thai Beverage. While the company’s financials are not lousy by any means, they are clearly inferior to that of Guinness Anchor’s. So, from 2010 to 2014, the highest return on equity that Thai Beverage had generated was 38.8% (that was in 2012); on average over those five years, its return on equity had been ‘just’ 23.8%.

Moreover, Thai Beverage had been using way more debt than Guinness. In the five years from 2010 to 2014, Thai Beverage’s lowest net debt to equity ratio was 16% with the highest coming in at 116%. The company’s average gross margin in that period was also ‘only’ 27.5%.

So, Guinness Anchor is quite clearly the more profitable business of the two.

Valuation

This is an area where both companies look similar. At its current share price of S$0.685, Thai Beverage is trading at 16 times its trailing earnings. Meanwhile, Guinness Anchor has a price-to-earnings ratio of 18 at its share price of RM14.08 at the moment.

Foolish Summary

In summary, Thai Beverage has the advantage of size while Guinness Anchor is clearly the one with the stronger profitability. Both companies have similar valuations. While what I’ve shared is useful as a starting point for further study, do note that the information shouldn’t be taken as the final word on the investing merits of the two companies.

17 Feb. 2016

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