VNM [BUY +22%] – Hoisting Vietnam’s Champion for a re-rating
November 4, 2015
Vinamilk (VNM), Dairy
* Given the increasing likelihood of an FOL lift at VNM and its superior fundamental indicators, we believe VNM deserves a re-rating to narrow the valuation discount gap to its regional peers.
* We increase TP by 21% as we raise our target PER to 22x from the previous range of 19-20x. Meanwhile, we forecast a 13% EPS growth in FY16 vs FY15F.
* Impressive 9M15 performance with results slightly above our forecast due to better-than-expected export sales.
* We revised down our FY16 EPS forecast by 7% as we lifted our input milk powder cost assumption driven by expected lower production in New Zealand.
Impressive 9M15 results on the back of accelerating sales growth and significant GPM expansion. Revenue and NPAT grew by 15.8% and 35.5% vs 9M14 respectively, as we see domestic sales growth speeding up, a bounce-back in exports from FY14’s low base and a 825bps GPM expansion in 9M15 vs 9M14 thanks to lower input milk powder costs (see page 2 for detailed comments).
We assume VNM’s input milk powder cost base to remain the same in FY16 vs FY15, averaging USD 2,400/ton between skim milk powder (SMP) and whole milk powder (WMP), compared to our previous projection of a 15% decline in FY16 vs FY15. Since our last update, dairy prices had seen four consecutive strong gain sessions before showing signs of retreat recently. Expectation over lower production in New Zealand this season coupled with Fonterra’s strategy of cutting offer volumes on its auction channel supported dairy prices, whereas continuing improved production in other major countries and a still sluggish global demand prospect are the main restraining factors. General consensus points to a price recovery in 1H16, giving VNM a window to possibly lock in low prices for the whole FY16. In our recent meeting with VNM, the company suggested to have done so for a part of 2016’s production needs, but did not disclose the specific figure.
Our target PER of 22x for VNM is at around 10% discount to its regional peers, which we believe is justifiable given VNM’s superior fundamentals across the board.
9M15 recap – strong results, broadly in line with our expectation
Dairy prices – anticipated to recover around 1H16 as supply/demand gradually regains balance
VNM remains undervalued relative to its regional peers
Financial Statements
RECOMMENDATION HISTORY
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Valuation Methodology: To derive the target price, the analyst may use different valuation methods, including, but not limited to, discounted free cash-flow and comparative analysis. The selection of methods depends on the industry, the company, the nature of the stock and other circumstances. Company valuations are based on a single or a combination of one of the following valuation methods: 1) Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA), peer-group comparisons, and historical valuation approaches; 2) Discount models (DCF, DVMA, DDM); 3)Break-up value approaches or asset-based evaluation methods; and 4) Economic profit approaches (Residual Income, EVA). Valuation models are dependent on macroeconomic factors, such as GDP growth, interest rates, exchange rates, raw materials, on other assumptions about the economy, as well as risks inherent to the company under review. Furthermore, market sentiment may affect the valuation of companies. Valuations are also based on expectations that might change rapidly and without notice, depending on developments specific to individual industries.
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cost , Dairy prices , diary , Financial Statements , milk powder , New Zealand , skim milk powder , Vietnam , Vinamilk , whole milk powder
