09 December 2014 Asia Pacific/Japan Equity Research Beverage (Food (Japan)) / MARKET WEIGHT Suntory Beverage & Food (2587) Rating NEUTRAL* Price (08 Dec 14, ¥) 4,385 INITIATION Target price (¥) 4,600¹ Chg to TP (%) 4.9 Stable earnings supported by sustained cost- Market cap. (¥ bn) 1,354.96 (US$ 11.15) Enterprise value (¥ bn) 1,585.96 cutting effects Number of shares (mn) 309.00 Free float (%) 35.0 Initiating coverage: We initiate coverage of Suntory Beverage & Food (SBF) 52-week price range 4,385 - 3,215 with a NEUTRAL rating and a ¥4,600 target price (potential return 4.9%). SBF, *Stock ratings are relative to the coverage universe in each which has the second-largest domestic soft drinks market share, appears analyst's or each team's respective sector. committed to building a strong business base. We see little risk of a slowdown in ¹Target price is for 12 months. sales momentum other than due to weather and other unavoidable externals. Research Analysts SBF’s international operations mainly consist of: (1) European business, where it is boosting margins by focusing on brands with high market shares, and Masashi Mori 81 3 4550 9695 (2) Southeast Asian business, where we see substantial growth potential, [email protected] especially in Vietnam. Amid intense competition in the global soft drinks market, Suntory is relatively strong in its focus regions, but we see little potential upside over our TP. Investment theme: We see prospects for a double-digit CAGR in OP over the next three years. The company has stepped up mainstay brand consolidation in all regions. It is also strengthening global cost-cutting efforts, and we expect sustained stable profit growth. However, the company is unlikely to boost shareholder returns substantially. Catalysts/risks: Potential catalysts include: (1) maximization of sales and cost synergies within the group, and (2) a shift to a more proactive M&A strategy. Upside risks: (1) a substantial increase in domestic market share, and (2) substantial declines in commodity prices such as coffee beans. Downside risks: (1) a dip in consumer sentiment in Europe, and (2) slower growth and stiffer competition in the Southeast Asian market. Valuation: We base our ¥4,600 TP on an EV/EBITDA of roughly 9.5x applied to our FY12/15 estimates. The multiple reflects the FY1 Bloomberg consensus. We regard our TP as fair-value as it implies a FY12/15E P/E of nearly 20x (before goodwill amortization), which is close to Asahi Group Holdings' (2502) multiple and the average for European and US soft drink makers. Share price performance Financial and valuation metrics Year 12/13A 12/14E 12/15E 12/16E Price (LHS) Rebased Rel (RHS) Sales (¥ bn) 1,121.4 1,265.0 1,306.0 1,332.0 6000 120 Operating profit (¥ bn) 72.7 85.5 93.9 101.5 5000 110 Recurring profit (¥ bn) 67.3 81.5 89.9 97.5 4000 100 Net income (¥ bn) 31.2 37.0 45.4 50.5 3000 90 EPS (¥) 118.8 119.7 146.9 163.4 2000 80 Jul-13 Nov-13 Mar-14 Jul-14 Nov-14 Change from previous EPS (%) n.a. IBES Consensus EPS (¥) n.a. 117.2 154.1 172.3 The price relative chart measures performance against the EPS growth (%) 9.7 0.8 22.7 11.2 TOPIX which closed at 1447.58 on 08/12/14 P/E (x) 28.2 36.6 29.8 26.8 On 08/12/14 the spot exchange rate was ¥121.52/US$1 Dividend yield (%) 1.7 1.4 1.5 1.6 EV/EBITDA(x) 9.3 9.9 9.1 8.5 Performance Over 1M 3M 12M P/B (x) 1.9 2.4 2.3 2.1 Absolute (%) 5.3 18.7 34.1 ROE(%) 8.3 6.5 7.7 8.2 Relative (%) -0.9 7.3 17.0 Net debt/equity (%) 45.9 40.1 32.3 23.2 Source: Company data, Thomson Reuters, IFIS, Credit Suisse estimates. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION® Client-Driven Solutions, Insights, and Access 09 December 2014 Share price catalysts and valuation Share price catalysts: Maximizing global sales and cost synergies are longer-term objectives Near-term potential catalysts for SBF’s share price include monthly sales in the domestic beverage market and quarterly earnings. SBF is strong in marketing, with the second- largest domestic soft drinks market share after Coca Cola. We see little risk of a slowdown in the company’s sales momentum other than due to unavoidable externals such as the weather. While its near-term performance remains susceptible to sales trends, SBF's earnings look stable relative to the rest of the sector, supported by stepped-up global cost reduction initiatives. The main catalyst from a longer-term perspective is maximization of sales and cost synergies with the company’s string of acquisitions. We think SBF has paused its M&A strategy for now and is looking to strengthen the individual businesses it has acquired. We expect the company to aim for synergies including optimization of its global production base and cross sales. The company is currently striving to boost sales in Southeast Asia, but its longer-term objectives probably include full-fledged entry into the Middle East and African markets. After reinforcing its global business base, we think SBF will likely resume its proactive M&A strategy. In terms of shareholder returns, we think the company’s financial position allows for a steady increase in dividends. We see little likelihood of a share buyback, however, given SBF’s shareholder composition. Figure 1: Current performance in line with TOPIX Figure 2: Valuation multiple has risen since listing in July 2013 (Index) (Yen) (x) 150 4,400 Versus TOPIX (LHS) 9.3 140 Share price (RHS) 4,200 9.1 +2σ 9.1 8.9 130 4,000 +1σ 8.8 8.7 120 3,800 8.5 Ave. 8.4 8.3 110 3,600 8.1 -1σ 8.0 100 3,400 7.9 90 3,200 7.7 -2σ 7.6 7.5 80 3,000 7.3 13/7 14/7 Note: TOPIX-relative share price performance Note: EV/EBITDA based on forecasts for full 12-month period Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates Valuation Our ¥4,600 TP is based on EV/EBITDA of roughly 9.5x applied to our FY12/15 estimates. The multiple reflects the FY1 Bloomberg consensus. We regard our TP as fair-value as it implies a FY12/15E P/E of nearly 20x (before goodwill amortization), which is close to Asahi GHD’s multiple and the average of European and US soft drink makers. The European and US soft drink makers include: Coca-Cola, PepsiCo, Monster Beverage, Dr Pepper, Coca-Cola Enterprise, Coca-Cola Amatil, Danone, and Nestle. Figure 30 in our sector report shows valuations for these companies. Suntory Beverage & Food (2587) 2 09 December 2014 Company overview Developing business mainly in Japan, Europe, and Asia-Oceania SBF is the core of Suntory Group’s beverage and food business. It is developing business operations in four regions: Japan, Europe, Asia-Oceania, and the Americas. The company’s Japanese operations are centered on its soft drinks business, where it not only ranks No.2 behind Coca Cola in terms of market share but also offers a wide range of products. SBF is currently strengthening its core brands. The company has some of the best-known Japanese brands in each product category, including BOSS (canned coffee), Suntory Tennensui (mineral water), and Iyemon (tea). Moreover, the company also has a strong presence in health-oriented products, with offerings such as coffee, tea, and cola in the Food for Specified Health Uses category. In Europe, Orangina Schweppes Group (acquired in 2009) handles manufacturing and sales of non-alcoholic beverages, with carbonated drinks and fruit juices comprising its core products. SBF is steadily expanding its business portfolio, acquiring leading UK brands Lucozade and Ribena in 2013. The company is also widely involved in manufacturing and sales of health foods and non- alcoholic beverages in Asia, where SBF Asia and its affiliated subsidiaries constitute the core of its operations. In Oceania, Frucor Group (acquired in 2009) operates the company’s non-alcoholic beverage business. In the US, SBF is involved in the bottling business for PepsiCo, mainly in North Carolina. Figure 3: OP weighting by region: Aims to boost earnings also in industrialized countries by cutting costs and strengthening key brands FY12/12 actual FY12/15 CSE Americas Americas 8.6% 7.7% Asia Asia 8.0% 9.1% Japan Oceania Oceania 45.6% 4.9% 6.5% Japan 43.8% Europe Europe 31.3% 34.5% Source: Company data, Credit Suisse estimates Financial position, shareholder returns: steady increase in dividends looks possible SBF was listed on TSE-1 in July 2013. In its medium-term plan (2013–15), the company set itself a sales growth target of at least 5% (CAGR) versus 2012 and an EBITDA growth target in excess of 5–9% (CAGR). We think the company will likely attain these targets in FY12/15, probably also benefiting from a weaker yen.