August 26, 2016
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Impressive volume growth continues to transcend in Q2 2016
VNM posted impressive revenue and NPAT growth of 18.6% and 32.7%, respectively, in H1 2016 vs H1 2015. With these results, we will likely revise up our FY16 forecast slightly, with the most important adjustments to be made in domestic sales and selling expenses. This, coupled with the roll-over effect in our valuation model, will likely prompt us to upgrade our rating for VNM from MARKET PERFORM currently to OUTPERFORM.
Volume growth in domestic market accelerated to 20.7% in Q2 2016 vs Q2 2015. This compares to the already impressive 18% in Q1 2016 vs Q1 2015 and implies that VNM continued to capture additional market share.
Lower input milk powder prices further supported bottom line growth. We note that VNM has locked in milk powder prices for FY16’s whole-year production, which should provide the company a lower cost base in 2016 compared to 2015 given the price trend in this commodity. Given that powdered milk constitutes the majority of its sales, exports showed the most remarkable improvement, with GPM climbing from 44.8% in H1 2015 to 63.3% in H1 2016. On the same note, domestic GPM also improved by 2.2 percentage points vs H1 2015 to reach 41.2% in H1 2016.
Advertising expenses tapering down is another plus. Historically, selling expenses as a percentage of revenue is typically lowest in Q1 and then sequentially rises in the following quarters. As such, we are encouraged to see selling expenses peter out to 15.7% of revenues in Q2 2016 from 16.1% in Q1 2016, thanks to the fact that advertising expenses dropped 1.3% in Q2 2016 vs Q2 2015 after jumping 41% in Q1 2016 vs Q1 2015. This can be explained by the carry-over effect of the marketing activities that VNM carried out in late Q1 2016, which partially supported volume growth in Q2 2016. It further reinforces our view that the ramp-up in selling expenses will slow down in the medium and long term, as smaller players will not be able to withstand VNM’s scale, which continues to grow bigger in relation to competitors.
A hike in the domestic volume growth projection and a reduction in the selling expenses estimate will bolster our FY16 NPAT forecast. H1 2016 export sales seemed to trail our full-year forecast. However, given export sales’ dependence on the timing of shipments, we will need to discuss further with management to determine whether to revise down our export forecast. In any event, we expect an increase in our FY16 NPAT forecast and hence, our target price.
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Absolute, long term (fundamental) rating: The recommendation is based on implied total return for the stock defined as (target price – current price)/current price + dividend yield, and is not related to market performance.
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