March 22, 2016
Disclaimer: The opinions expressed herein are that of HSC Securities and not of VietnamAdvisors. This is NOT a solicitation to buy or sell securities.
- KDC FY2015 consolidated unaudited results are in line with consensus.
- Ice cream and cooking oil sales did better than expected.
- Noodle sales came up short in what is a rather crowded marketplace.
- GPM fell as the product mix deteriorated post sale of BKD while SG&A ratio jumped.
- Prospects for this year moderate with stronger sales of new products.
- Reiterate HOLD. Periodic treasury buybacks remains the main catalyst for now.
KDC FY2015 consolidated unaudited results are in line with consensus. Reiterate HOLD.
MAIN TAKEAWAY – Ice cream and cooking oil sales did better than expected although noodle sales came up short in what is a rather crowded marketplace. No details as yet. Confectionary sales contributed in the 1-H only following the sales of 80% of the division. GPM also fell as the product mix deteriorated post sale. While SG&A ratio jumped. Needless to say NPAT surged with the sales proceeds contributing 96.8%. Prospects for this year moderate with stronger sales of new products helping out while the sale of the balance of 20% of BKD should cushion the drop in NPAT. Even so KDC is a business in transition at the moment and the expected consolidation of Vocarimex from Q3 this year will take time to benefit the bottom line.
ACTION – Reiterate HOLD. Periodic treasury buybacks have been greeted by short term rallies in the stock and remains the main catalyst for now. Valuations for a medium sized consumer company look reasonable given a forward P/E of 18.2xs. However the long term growth here will take time to emerge. Although given the quality of management we have no doubt it will.
Top line looks good and overshoots targets – Net sales came at VND4,952 billion, exceeding the company’s target by 4.5% and HSC’s forecast by 14.5%. But compared to FY2014, sales declined by 36.7% y/y due to the dropping out of confectionery sales in 2-H. DC transferred its confectionery subsidiary BKD to Mondelez at the end of Q2 retaining a minority stake only. We estimate that confectionery sales in 1-H and also in the whole year was around VND1,764 billion, down 57.4% y/y as a result of the handover of BKD. Ice cream and cooking oil did well. Noodles less so – However ice cream and the new category cooking oil performed quite well. The company does not disclose the sales mix but said that ice cream and yoghurt saw a sharp increase of 27% y/y primarily due to contribution of a new product called “ice yoghurt”. KDC also launched the first cooking oil product under the brand name “Đại
Gia Đình – An Hảo” in May 2015 and first 10 months sales apparently was worth several billions VND or better than our forecast. However sales of instant noodles look to have been below HSC expectations.
Gross margin narrowed on the big changes in the product mix – Gross margin was 37.9% in FY2015, down from 43.3% in FY2014 as the sales weight of lower margin products such as noodles and cooking oil increased y/y. Confectionery usually carry a gross margin of 40% while noodles & cooking oil carry gross margin of around 20-25% and 10-12% respectively. On the other hand the gross margin of ice cream is the highest at around 55%.
SG&A/sales continued to surge – SG&A was VND1,228 billion, 24.7% lower y/y. Even so SG&A/ sales hit a new record high at 39.2% on the lower sales. Clearly new products such as cooking oil and noodles need aggressive advertising and promotion while revenues are still modest.
Thus EBIT was a negative number – Given a thinner gross margin and rising SG&A, EBIT and EBIT margin were negative. EBIT came to VND(40) billion, a big drop compared to VND514 billion in FY2014. While EBIT margins were -1.3% compared to 10.4% in FY2014.
The enormous financial income from selling 80% of BKD helped the bottom line – Net financial income was huge at VND6,617 billion, up 5,501% y/y thanks to a gain of VND6,555 billion on selling 80% of BKD. After transaction costs of around VND44 billion and tax expenses of around VND1,425 billion, the transaction is estimated to have made an after tax profit of VND5,086 billion, or 96.8% of KDC’s net profit last year.
Profit from associates is also noticeable – BKD has become KDC’s associate since July 2015. Hence KDC recorded VND86.3 billion of profit from associates in 2-H. Which also compensated for the operating loss.
Net profit close to expectation – Net profit came at VND5,254 billion, up 879.4% y/y and just 0.8% lower than HSC’s own forecast of VND5,295 billion. Pretax profit was VND6,667 billion, or 2.6% above the company’s target of VND6,500 billion.
HSC forecast FY2016 net operating profit to increase by 49.9% y/y – We forecast KDC will record net sales of VND4,194 billion (+56.8% y/y) and NPAT of VND1,681 billion (-68% y/y). Based on the following assumptions:
1. We forecast FY2016 sales of ice cream, noodles and cooking oil sales will be VND1,113 billion (+11.6% y/y); VND210 billion (+75% y/y) and VND414 billion (+65.6% y/y)respectively. 2. We assume that Vocarimex will be consolidated into KDC from the beginning of Q3 and that Vocarimex’s net sales and profit for all of FY2016 will be VND6,413 billion (+6.9% y/y) and VND129 billion (+16.8% y/y) respectively.
3. We also assume that in Q3, KDC will sell the remaining 20% of BKD to Mondelez as committed at sales price of VND2,174 billion and generating an after tax profit of VND1,429 billion.
4. As a result we forecast KDC net profit in FY2016 at VND1,681 billion, down 68% y/y.
5. Excluding the one-off gain from the sales of BKD, FY2016 net operating profit is forecast at VND251 billion, up 49.9% y/y.
Possible treasury buyback main catalyst for now – KDC is trading at FY2016 P/E of 18.2xs and EV/EBITDA of 6.6xs. The company will begin transforming Vocarimex into a more profitable and leaner company post consolidation. Although this process will take several years. Then we also expect some treasury share buybacks during this year. To date since December FY2014; KDC has bought back a total of 49.5 million shares or 19.3% of the OS as of December FY2014. And at the end of FY2015 they had cash of VND3,059 billion on the books. They will also receive around VND1,800 billion within this year from selling the remaining 20% of BKD. Even assuming working capital and other requirements for this year we estimate this leaves up to VND3,000 billion to continue treasury buybacks. Which at the current price would amount to around 135 million shares. Given the expected long gestation period for the new businesses, the treasury buyback is the best catalyst for the shares at the moment. Reiterate HOLD.
consumer goods , cooking oil , ice cream , noodles , share market , stock market , vietnam markets
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