April 04, 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.
- Average price of VND80,053 or 4.7xs the reference price reflects strong demand.
- The perceived value of Vissan’s strong distribution network and market presence in the fresh and processed meat business was far higher than expected for some at any rate.
- Next step will be selling a 14% stake to strategic investors who we suspect will be happy to pay an inflated price also.
- However a path to control may be some years off.
- Vissan is a leading player in the processed meat industry and a midsized player in fresh meat market.
- Mostly Southern based and has a vertical ranging from slaughter to fork.
- We expect single digit growth for the time being and forecasts FY2016
- NPAT growth of 6.1% y/y.
Vissan IPO average price was far higher than expected.
MAIN TAKEAWAY – Average price of VND80,053 or 4.7xs the reference price reflects strong demand. The perceived value of Vissan’s strong distribution network and market presence in the fresh and processed meat business was far higher than expected for some at any rate. A mere handful of 5 investors took the lot. Next step will be selling a 14% stake to strategic investors who we suspect will be happy to pay an inflated price also. However a path to control may be some years off.
Results suggest very aggressive bidding by a handful of investors – The auction of 11,328,002 shares of Vissan this morning resulted in an average winning price is VND80,053 per share or 4.7xs the starting price of VND17,000 per share. The lowest winning price was still very high at VND67,000 while the highest winning price was VND102,000. As such, total proceeds from IPO comes to VND906.84 billion. It is interesting that there are only 5 winning investors including 4 individuals and 1 institution.
Concentrated ownership the result. Strategics will now bid next – This means that the post-IPO shareholder structure will be quite concentrated with 65% owned by the State, 14% for strategic investors, 14% held by 5 winning investors and 7% belong to employees & union. And this may turn out to be even more concentrated if the winning investors are related to strategic investors which is very possible. As mentioned in our previous note, three candidates for Vissan’s strategic investors are CJ Agrivina, Proconco and Anco. Given the rather unique nature of the business we suspect that they won’t be put off by the high price.
HSC looks for FY2016 NPAT growth of 6.1% although the growth potential longer term is tremendous – HSC forecast Vissan’s FY2016 net sales at VND3,977 billion, up 5.2% y/y and net profit at VND121 billion, up 6.1% y/y. This assumes little change to the way things are done currently. Obviously there are plenty of potential efficiencies and growth potential should an aggressive strategic take a major stake. However our assumption is that this will take several years before control changes hands. And then based on our forecast, forward P/E at average winning price is particularly high at 53.3xs. Which looks like a valuation paid for a “strategic” long term investment than a pure financial investment.
Registration was 5.6 times oversubscribed – The registration for the first noteworthy IPO of the year; that of meat processing company Vissan has been oversubscribed 5.63 times with bods totaling 63.59 million shares vs. the 11.32 million shares being offered. Foreign institutional demand totaled 22.63 million shares from a total of 7 investors. The auction is being held on March 7th at a starting price of VND17,000. Presumably with this level of interest the average successful price at the auction will be at a fairly substantial premium to the reference price.
According to the equitisation plan, the joint stock company will have chartered capital of VND809 billion or 80,914,300 shares. Of which the government will keep a controlling stake of 65%. Only 14% or 11,328,020 shares is being offered to the public while another 14% or 11,328,020 shares will be sold to strategic investors and the remaining 7% is being sold to employees and the union.
We value Vissan at VND20,411 per share given a P/E valuation approach – We compare Vissan with regional companies operating in the feed-farm-food vertical in Thailand, Indonesia and China. There is no perfect match for Vissan as they are much bigger and have a wider scope of business. However given the lack of closer comparatives we make do. And clearly Vissan is following the same business model as their larger overseas peers. The sample includes 6 companies; CP Foods, Thai Union, CP Indonesia, Japfa Comfeed, New Hope Liuhe and Chuying Agro-Pastoral Group. They are trading at a FY2016 median P/E of 16.19xs and a median EV/EBITDA 10.37xs. We apply a discount of 20% on Vissan due to the fact that the stock will be illiquid at least 1 year after the IPO. Based on that, we see Vissan’s fair price at VND20,411 per share or a 20% premium to the current share price.
Midsized player in fresh meat and leading meat processing company – Vissan is a midsized player in the fresh meat business and then a leading processed meat player. The fresh meat market is by far the larger of the two. HSC estimates that in FY2015 the overall meat market consumed 4.1 million tons of meat and was worth around VND407,522 trillion (US$18 billion) while total sales of processed meat came to around VND4.5 trillion or only 1.1% of fresh meat sales. And Vissan’s market share in the nationwide fresh market is small at 1.7% given the fragmented nature of the industry.
However in processed meats they have a 24% nationwide market share. Their most famous product is cooked sausages where they have a market share of 65%. Other key products include canned meats, lap xuong (Chinese-style sausage), rolls, ham, frozen spring rolls and frozen sausages. And then they also own the largest slaughter house in HCMC providing 15% of the fresh pork needs of the city.
Strong brand name and wide distribution network seen as key advantages – In addition, Vissan is the most well-known brand in the fresh & processed meat market given (1) a long established brand name as the company was founded in 1970; (2) the most extensive distribution channel including 120 distributors and 42 agents, 233 points of sales in supermarkets and 59 showrooms nationwide. The company also distributes its fresh meat to 268 points of sales in wet markets in HCMC. Although its fresh meat market share is still modest, Vissan’s brand and wide distribution offer an important platform allowing the company to expand aggressively and consolidate this fragmented industry going forward given sufficient resources.
In spite of its leading market position, Vissan is a medium size company – In FY2014 Vissan reported net sales of VND4,013 billion, up 5.4% y/y and net profit of VND109.8 billion, up 5.9% y/y. In the first 9M of FY2015, net sales came to VND2,644 billion, down 12.6% y/y while net profit improved to VND94.5 billion, up 13.8% y/y. We estimate Vissan’s FY2015 net sales came to VND3,780 billion, down 5.8% y/y delivering net profit of VND114 billion, up 4.3% y/y. Hence HSC estimates that from FY2011 to FY2015, growth was quite modest with net sales CAGR of 4.3% and net profit CAGR of 5.1%.
Fresh meat dominates sales – Regarding product mix, fresh meat accounts for nearly half of Vissan’s net sales (VND1,449 billion in 9M FY2015 or 43.3%) while cooked sausage is the second largest sales contributor with VND952 billion in sales during the first 9M FY2015 or 28.4%. Followed by chilled/frozen processed food with sales of VND409 billion in the first 9M FY2015 or 12.2%.
Cooked sausage the key profit generator – Cooked sausages generated gross profit of VND305 billion, accounting for 55.4% of total gross profit and carried the highest gross profit margin of 32.1%. Meanwhile over the same period the fresh meat segment made a gross profit of VND125 billion or 21% of total gross profit and translating into a gross margin of just 8.6%. No mystery here as cooked sausages are a branded packaged product while fresh meat is a commodity.
Company’s owned farming business currently supplies 10% of raw materials – Vissan targets to increase the farm size to 300,000 hogs or 30% of raw materials demand.
Profitability is moderate but the company is in good financial health – In 9M FY2015, Vissan’s gross margin was at the higher end of their range at 21.2% although it would be far higher but for the drag from low margin fresh meat segment. The 3 year average GPM for Vissan came to 19.1% with a range between 17.6-21.2%.
Then first 9M FY2015 SG&A came to VND473 billion or 17.9% of sales. The 3 year average SG&A/sales for Vissan came to 15.4% with a range between 14-17.3%.
This resulted in NPAT of VND94.5 billion resulting in a net margin of just 3.6%.
Meanwhile ROE is not so high, at 18% for FY2014. But operating cash flow is usually remained high and quite sustainable (VND236 billon in 9M FY2015 and VND207 billion in FY2014, higher than the same period’s net profit). As of 30 September 2015, debt to equity was low at 0.6xs. Current ratio and quick ratio at relatively safe levels 1.5xs and 0.8xs respectively.
Significant capex from FY2016 to FY2019 – Vissan is moving the current factory in HCMC to a new factory in Long An province which costs VND1,440 billion. Plus an investment of VND353 billion in farms and other small projects, total capex from FY2016 to FY2019 is approx. VND1,900 billion. That also means interest expense and depreciation expense will increase substantially. We forecast the incremental interest expenses and depreciation expenses to come at VND307 billion per annum from FY2019. Which will impact the bottom line from FY2019 onwards. We expect single digit growth for the time being – Future strategy and earnings outlook will depend largely on who the strategic partner are. And whether or not we see changes in management post equitization. Thus for the time being, with the equitization process not yet complete, our forecast is rather conservative. As we assume no major changes in strategy or style for the time being. In other words this is a baseline forecast with the company continuing to expand as if it were an SOE. No doubt the picture will change but we don’t yet know exactly how.
HSC forecasts FY2016 NPAT growth of 6.1% y/y – We forecast FY2016 net sales at VND3,977 billion, up 5.2% y/y and net profit at VND121 billion, up 6.1% y/y. For FY2017 we forecast net sales of VND4,212 billion, up 5.9% y/y and net profit of VND141 billion. Our forecasts are based on following assumptions
1. We assume for now that there will be no major new products over the next two years. This is of course unlikely once a strategic partner is decided however it’s premature to speculate on what that might be at this point. And instead it enables us to focus on the organic growth potential of the company from existing sales.
2. Assume that fresh meat sales, dried processed foods (including cooked sausage) and chilled/frozen processed food will grow at 2%, 7.9% and 3% respectively in FY2016. And then at 3%, 8.1% and 3% respectively in FY2017. Driven by growing consumption of meat with a bias towards the branded products.
3. Assume that FY2016 gross profit grows by 6.1% to VND844 billion. And then by 6.5% to VND900 billion in FY2017. Leading to a gross profit margins of 21.2% in FY2016, unchanged y/y and then a gross margin in FY2017 of 21.4%, slightly improved y/y on a bit better product mix.
4. SG&A/sales is 17.1% in FY2016 and will be reduced to 16.8% in FY2017 assuming SG&A cost savings.
5. Financial income and financial expense is insignificant. Then the forecasted FY2016 EPS will come to VND1,748. At starting price of VND17,000 per share, the stock is valued at FY2016 P/E of 11.3xs, P/B of 1.7xs and EV/EBITDA of 10.8xs. In our view these valuations are reasonable given the company’s current condition. Meanwhile the expected strategic partnership with industry players could increase the company value substantially over the long term.
Potential strategic investors – According to Vissan’s management, CJ Agri Vina, Proconco and Anco have subscribed to buy the 14% stake as strategic investor. All three companies have a presence in the animal feed companies and all of them CJ (CJ foods), Proconco (Masan) and Anco (Masan) belong to larger consumer businesses. They would be very capable of growing Vissan’s business rapidly as part of a broader Feed – Farm – Food value chain. We suspect Masan as the local champion could add the most value however. However a path to control may take a few years as the state will still hold a controlling stake of 65%. The stock is likely to list in about a year and at that time would be very suitable for medium and long term investors in our opinion.