Bubbling Saigon Beer

June 09, 2016

Disclaimer: the opinions expressed herein are that of  Ho Chi Minh Securities and not of VietnamAdvisors.  This is NOT a solicitation to buy or sell securities.

• Sabeco AGM set conservative targets for FY2016 with net sales of VND28,558 billion, up 3% y/y and pretax profit of VND4,471 billion, unchanged y/y.
• HSC is more optimistic about earnings outlook calling for NPAT growth of 3.3%.
• Rising special consumption tax is a drag here.
• Cash dividend for FY2015 and FY2016 would VND3,000 per share for each year.
• Management unclear about government divestment but we sense some movement is afoot.
• Valuations seem close to fair value with a forward P/E of 17.2xs.
• Any hint of a partial divestment would lead to a massive surge in the stock in the hope of future efficiency savings.

Sabeco AGM set conservative targets for FY2016. Possible movement on a future listing.

MAIN TAKEAWAY – We note some management changes with a new Chairman appoint from the MOIT. While the previous chairman moves back to the ministry to take charge of the equitisation department. Even so the government divesting and company listing plan timetable is still unclear although we sense there may be some movement here fairly soon. Company looks for a flat bottom line this year although HSC is more optimistic about earnings outlook calling for NPAT growth of 3.3% Rising special consumption tax is a drag here.

ACTION – OTC listed although there have been a series of big blocks traded in the stock from time to time. Valuations seem close to fair value with a forward P/E of 17.2xs. Of course any hint of a partial divestment would lead to a massive surge in the stock in the hope of future efficiency savings.

A low FY2016 target – Shareholders approved FY2016 targets calling for sales volume of 1,541 million litres, up 1.3% y/y, total sales (including special consumption tax) of VND35,101 billion, up 4.3% and net sales of VND28,558 billion, up 3% y/y and pretax profit of VND4,471 billion, unchanged y/y. Low balled numbers as usual.

Cash dividend for FY2015 and FY2016 would VND3,000 per share for each year – As such payout ratio would be 61.7% for both FY2015 and FY2016. And dividend yield would come to 3.4%.

Management unclear about government divestment but we sense some movement is afoot – Needless to say this issue dominated the Q&A. Management took the official line that such decisions are driven at the MOIT and even higher levels. And therefore during the AGM management claimed they have no new information on this. However two weeks ago media reported that Sabeco and the MOIT have proposed that the government reduce the state’s ownership in the firm to 36% from the current 90% via a public auction. It have been 9 years since Sabeco had an IPO back in FY2007 and there is sense of time passing them by. Therefore if the government approves this proposal, this could be a turning point for the company. At the same time, we note that VAFI (Vietnam Association of Financial Investors) also sent a similar proposal to the MOIT and Sabeco.

We also note that several months ago; Mr. Vo Thanh Ha took over the role of Chairman and CEO from Mr. Phan Dang Tuat. The former held a senior role in the MOIT but has little operational experience while his predecessor has taken the role of head of the enterprise reform and development department in the MOIT. This is an interesting swap and suggests that MOIT will now control development at the company more closely. Perhaps in preparation for a more active stance on divestment going forward. Of course we have seen false dawns here before but this time we sense real movement.

Decent FY2015 result. In FY2015 Sabeco reported net sales of VND27,144 billion, up 10.3% y/y and net profit VND3,410 billion, up 28.5% y/y. Net sales was mostly driven by healthy sales volume growth of 9.1% y/y from 1,394 million litres in FY2014 to 1,521 million litres of beer in FY2015. And during the year the company actually gained 0.7% of additional market share that helped to raise its volume market share from 44.4% to 45.41%. Last year the Vietnamese beer consumption grew at 7.4% y/y from 3,140 million litres to 3,374 million litres.

Gross profit increase sharply 22.2% y/y on lower raw materials price – Gross profit was reported at VND7,558 billon, up 22.2% y/y. Details are not disclosed but its likely due to the decline in the price of malt, the major raw materials. As a result, gross margin improved from 25.1% to 27.8%.

But SG&A also rose – SG&A reached VND3,793 bilion, up 16.5% y/y mainly on the surge of 43.1% y/y on A&P. A&P expenses came to VND1,269 billion and accounted for 50% of selling expenses in FY2015. It is worth mentioning that FY2015 SG&A includes a provision for special tax consumption of VND355 billion. A similar provision of VND322 billion was booked in FY2014 as a retroactive recognition of cost in the restated financial statements. These provisions are for the possible additional charge related to a special consumption tax of VND707 billion for FY2013, FY2014 and FY2015 from the tax authorities. As such SG&A as % sales hit an alltime high at 14% (FY2014: 13.2%; FY2013: 11.1%).

Even though EBIT margin still improved – EBIT margin came to 13.7% from 11.9% in the previous year thanks to better gross margin albeit SG&A surged.

Higher net financial income and share of profits from associates and JVs also contributed to earnings – Net financial income increased by 6.7% to VND297 billion as interest income rose and interest expense fell thanks to higher cash balance. Meanwhile share of profits from associates increased by 8.2% to VND372 billion.

Net profit rose 28.5% y/y accordingly – The company enjoyed the highest profit growth ever since the IPO, at 28.5% y/y.

HSC FY2016 forecast looks modest too – HSC forecasts FY2016 net sales of VND28,885 billion, up 6.4% y/y, pretax profit of VND4,646 billion, up 3.9% y/y and net profit of VND3,521 billion, up 3.3% y/y. Our key assumptions:

1. We assume beer consumption will grow 6% y/y in terms of volume.

2. Expect market share is kept at 45%.

3. Accordingly we estimate Sabeco’s sales volume will come to 1,609 million litres, up 5.8% y/y.

4. And that ASP increases by 3% y/y on better product mix.

5. Assume that the gross profit margin is almost stable at 27.9%.

6. SG&A/sales is forecasted at 14%, even higher than last year’s level.

7. Forecast that the special consumption tax will amount to VND7,116 billion, up 19.8% y/y due to an increase in the tax rate from 50% last year to 55% this year. Tax rate to continue to rise in FY2017 and FY2018 at 60% and 65% according to the new regulations.

At OTC price of VND89,000 per share, Sabeco is trading at FY2016 P/E of 17.2x and EV/EBITDA of 9.4x which is a fair valuation in our opinion.

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