ThaiBev dead set on dominating Singapore's beverage industry

It's also planning to lead in Malaysia, Thailand.

According to CIMB, S&P has downgraded Thai Bev’s debt rating from BBB to BBB-, citing higher debt and lower cash flow as the reasons for a weaker financial risk profile.

This event is not a negative. "We highlighted when in our initiation that the F&N acquisition will push up debt levels to >1.2x. This downgrade by S&P is understandable as interest cover (EBIT/interest expense) did fall from 40x pre-F&N acquisition to an estimated 5.5x (FY13)," CIMB said.

Here's more from CIMB:

We anticipate improved interest cover as debt levels ease, since free cash flow is in excess of business needs. Furthermore, the domestic business is in a strong position, generating recurring cash flows.

Whilst the F&N acquisition have strained the balance sheet, we argue that Thai Bev is laying the groundwork for dominance of the beverage sector in Singapore,
Malaysia and Thailand.

This makes the business more valuable in spite of balance sheet strains. We previously highlighted that Thai Bev could swap its 29% stake in F&N for cash plus F&N’s F&B business with TCC.

If that happens, the estimated net proceeds of S$1.2bn could be used to pay down debt, reducing Thai Bev’s net gearing from 1.2x to 0.8x.