VNM update – BUY

With milk material prices starting to decelerate, VNM’s profit margins are expected to see decent improvements in 4Q2022 and the following year. However, we revised down our projections for the company in 2022 to reflect lower-than-expected results in 1H, though a BUY recommendation is maintained with a lower target price of VND81,132/share, representing a 18.2% expected total return.  

VNM announced 2Q2022 net revenue of VND14,930bn (-5% YoY) and EAT of VND2,102bn (-26.6% YoY). Domestic revenue fell by 5.9% YoY, despite an increase in selling prices, explained by: 

• VNM notes that sales were impacted from inflationary pressures hurting consumer spending. Although we are not fully convinced by this reason considering the controlled inflation rate in Vietnam in 1H2022, it is understandable to some extent if the significant jump in fuel prices and transportation services causes consumers to rebalance their wallets, curbing spending for some other products. Nevertheless, these impacts seem to be more influential in urban area in this period as Kantar Worldpanel’s reports indicated that dairy consumption slid by 1% (including 4% drop in volume) in urban 4 key cities, but was resilient in rural area with a growth rate of 13.1% (including 8% increase in volume) in 2Q2022. 

• Decline in the company’s market share, especially drinking milk except fresh milk. Although detailed numbers were not disclosed, the decline stemmed from the company’s rearrangement of distribution system and consumers gradually moving from other drinking milk products to fresh milk, according to VNM’s management. Additionally, increasingly tougher competition could be a huge pressure for the company as more foreign players jumped in the market while the local brands also look to strengthen their positions.

• Falling consumption volume as a result of increase in selling prices, leading VNM to raise promotion and sales support expenses to stimulate demand after price changes.

Overseas revenue was almost flat. While revenue from overseas subsidiaries rose by 21.7% YoY, direct exports contracted by 11.9% YoY, attributed to weaker consumption amid escalated transportation costs and inflation. 

On a cumulative basis, VNM’s net revenue contracted by 0.3% YoY (including 5-5.5% increase in selling prices) to VND28,808bn and EAT dropped by 19.7% YoY to VND4,386bn in 1H2022. Moc Chau Dairy Breed JSC (Upcom: MCM) generated VND1,514bn of revenue, up by 7.3% YoY.

1H2022 EAT slumped by 19.7% YoY, driven by a narrower gross margin and higher SG&A expenses to net revenue ratio. The SG&A expenses to net revenue ratio was 23.3% in 1H2022 versus 22.6% in 1H2021; in which, the ratio was 24.7% in 2Q (2Q2021: 22.8%), explained by increase in shipping costs, owing to higher fuel prices, and promotion and sales support expenses to foster demand following selling price increase. The gross margin squeezed to 40.6% from 43.6% in 1H2021  because of surging milk material prices. Still, as prices of some primary input materials have shown signs of peaking and the company is negotiating to fix material prices for 4Q2022, we expect the gross margin to improve from this quarter onwards; 2023 earnings growth is consequently projected to be positive. 

In sum, given the company’s business performance in 1H2022, we revised down our expected net revenue for the company in 2022 to VND61,273bn (+0.6% YoY), 5% lower than our previous projection. EAT is projected to tumble by 14.3% YoY, to VND9,116bn, 7% lower than previous projection, in 2022 but may jump by c.16% in 2023. Combining the DCF and PER methods, our target price for this stock is VND81k/share, equivalent to a total return of 18.2% at the year end.

View details in full report below.