Quick conclusion KDC, SAB

Kido Group (KDC: Hold) FY2018 results were weak and below expectations – Net sales came VND 7,807 billion, up 8.3% y/y, while NPATMI plummeted by 88.6% y/y to VND 43.8 billion. Excluding the one-off financial gain of VND 44 billion relating to the consolidation of Golden Hope Nha Be Edible Oils JSC, NPATMI only came to VND 8.5 billion, just a bit higher than the FY2017 loss of VND 10.2 billion. With this, the Company only fulfilled 63.4% of its net sales target and 25% of its pretax profit target. Actual net sales were 10.6% lower than HSC’s forecast of VND 8,508 billion, and actual NPATMI from operations was 63.5% lower than HSC’s forecast of VND 23.5 billion.
 
Quick conclusion – Downgrade from Hold to Underperform. Using a comparative EV/EBITDA approach, we have revised KDC’s fair value down from VND 36,300 per share to VND 16,700, equivalent to a forward FY2019 EV/EBITDA of 10.9x, or a P/E of 55x and a P/B of 0.4x. HSC revised down its 2019 NPATMI outlook by 77% and now expects 57.3% y/y growth from a very low base last year. The 2018 sales driver was the full consolidation of VOC, while VOC itself actually saw flat sales. TAC’s sales were below expectations and KDF’s sales fell. Gross margins drifted lower on product mix changes, and thus EBIT was still modest at 1.5%, even though SG&A/sales decreased. Due to a substantial decline in one-off financial gains, NPATMI dropped by 88.6% y/y. Excluding one-off gains, NPATMI came to only VND 8.5 billion. Overall, the results were quite disappointing, especially over at KDF.
 
FY2018 net sales came to VND 7,807 billion, up 8.3% y/y mainly due to the full booking of VOC’s net sales, while sales from its core businesses (frozen foods under KDF and edible oils under TAC and VOC) were weak, with details about these segments as set out below.
 
–     VOC’s net sales were fully booked in FY2018 – VOC has been fully consolidated to KDC since 23 May 2017, hence in FY2018 all of VOC net sales were booked to KDC’s P&L, instead of the only seven months as in FY2017. Sales from VOC came to VND 4,357 billion, up 158.1% y/y. VOC’s actual sales were flat at VND 4,357 billion, which was below our expectation of VND 4,577 billion, up 4.3% y/y.
 
–     KDF’s net sales plunged by 15.9% y/y to VND 1,256 billion due to a slowdown in demand and rising competition in both the ice cream and yoghurt segments.
 
–     TAC’s net sales rose slightly by 1.6% y/y to VND 4,408 billion. This growth was very modest compared to our forecast of 16.9% y/y, as both the edible oil and sugar distribution divisions were below expectations.
 
NPAT declined sharply from VND 454 billion in FY2017 to VND 163 billion in FY2018, a fall of 64.1% y/y due to a decline of 91% y/y in extraordinary financial gains.
 
–     In  FY2017, KDC booked a one-off financial gain of VND 492 billion in pretax profits, including VND 247 billion in gains from revaluing its investment in VOC, and a VND 245 billion gain related to the sale of 80% of its confectionery arm BKD three years ago. In FY2018, the Company also booked a gain of VND 44 billion from revaluing its investment in Golden Hope Nha Be. The decrease of 91% y/y in extraordinary gains was the main reason for lower NPAT this year.
 
Gross margins drifted lower on product mix changes – Gross margins declined from 20.6% in FY2017 to 17.0% in FY2018, mostly due to changes in the product mix. The contribution from high margin frozen foods (under KDF), with a gross margin of around 53%, fell from 21.3 % to just 16.5%. At the same time, the contribution from low margin edible oils (under VOC and TAC), with an average gross margin of 9-12% rose from 78.9% in FY2017 to 83.5% in FY2018. In addition gross margins in each segment also decreased slightly (from 53.4% to 52.8% for frozen foods and from 11.7% to 9.9% for edible oil).
SG&A/ sales fell thanks to product mix changes and cost saving efforts – SG&A came to VND 1,460 billion, down 3% y/y, and the SG&A/ sales ratio looked better than that in FY 2017, with a drop from 21.4% to 19.2%. This was because of changes in the product mix, with a higher sales contribution from edible oil products which carry much lower SG&A costs than frozen foods. G&A expenses also dropped by 7.2% y/y to VND 411 billion as a result of cost saving efforts.
 
Significant minority interests ate up most of the NPAT attributable to KDC’s shareholders – Minority interests amounted to VND 119 billion in FY2018, up 68.5% y/y and accounted for 73% of NPAT. Therefore NPATMI came to only VND 43.8 billion, down 88.6% y/y
 
Earnings results by business –
 
KDF results were disappointing with net sales of VND 1,256 billion, down 15.9% y/y and net profit of VND 28 billion, down 84.3% y/y.
 
–     Net sales were dragged down by a slowdown in demand and rising competition in both the ice cream and yoghurt segments. We estimate that ice cream and yoghurt sales fell by 13% and 28% y/y respectively.
 
–     Gross margins fell slightly from 53.4% in FY2017 to 52.8% in FY2018.
 
–     SG&A/sales advanced from 40.9% in FY2017 to 49.2% in FY2018 due to higher sales staff costs. The sharp decline in net profit was primarily caused by lower sales, while the lower operating margin was a secondary factor.
 
TAC earnings were below expectations with sales growth of 1.6% y/y and a decline of 18% y/y in NPAT.
 
–     Net sales came to VND 4,408 billion, up 1.6% y/y, but significant lower than our forecast of VND 5,152 billion, up 16.9% y/y. This was because edible oil’s ASP fell in line with the market, while sales from the sugar distribution segment were also far below target. Details about the sales breakdown by segment, volumes and ASPs were not made available.
 
–     There were no significant changes in operating margins with 3.0% in FY2018 versus 3.5% in FY 2017
 
VOC performance was also weak with flat sales and NPATMI falling by 9.5% y/y.
 
–     Net sales were almost flat at VND 4,357 billion, down 0.7% y/y, due to lower ASPs and rising competition in the trading segment.
 
–     With lower ASP, gross margins narrowed to just 1.7% compared to 3.6% in the previous year
 
HSC has revised down its FY2019 NPATMI forecast and now expects 57.3% growth from very low base – We have revised down our FY2019 net sales forecast by 11.8% from VND 10,087 billion to VND 8,892 billion, up 16.9% y/y. We have also revised down our FY2019 NPATMI forecast by 76.7% from VND 296 billion to VND 69 billion, up 57.3% y/y, based on the assumptions below.
 
–     Ice cream and yoghurt (KDF) net sales are forecasted to come to VND 1,343 billion, up 7.0% y/y, generating NPAT of VND 30 billion, up 5.0% y/y. We expect that KDF will launch several new products to boost sales and forecast sales growth in ice cream, yoghurt and other frozen foods (buns and French fries) will be 7.0%, -5.0% and 78.1% y/y respectively.
 
–     We expect TAC’s net sales to be VND 4,534 billion, up 2.8% y/y, with net profit of VND 129.5 billion, up 19.0% y/y. Growth will be supported by 2.0% growth in the edible oil sales and VND 95 billion in sales from the distribution of sugar for Thanh Thanh Cong Group.
 
–     VOC will make net sales of VND 4,431 billion, up +1.7% y/y, while net profit will slide by 3.8% y/y to reach VND 277 billion.
 
–     We forecast Golden Hope Nha Be’s net sales will be VND 1,300 billion, and net profit of VND 5.2 billion. KDC now holds 100% of Golden Hope Nha Be with the company consolidated into KDC’s books from December 2018.
 
–     Processed meat under Dabaco Food will generate net sales of VND 30 billion and net profit of VND 3.6 billion. Dabaco Food produces cha lua, sausage, spring rolls, páte and canned foods. KDC currently owns 50% of this company.
 
–     Information about new businesses such as instant noodles, beverage and condiments have not been made available, hence we have not assumed any contribution from them.
 
Thus we forecast an EPS of VND 302, translating to a FY2019 P/E of 68.1x.
 
KDC’s business has been impacted by a slowdown in the packaged food market – The packaged food market started to see a slowdown in Q1 2018 (up 2.0% y/y in urban areas and 5.5% y/y in rural areas), but subsequently turned negative for the first time in Q2 2018 (down 3.7% y/y in urban areas and up only 0.3% y/y in rural areas). The picture looked brighter in Q3 (up 2.8% y/y in urban areas and 3.8% y/y in rural areas), and in the October-November period (up 2.4% y/y in urban areas and 5.5% y/y in rural areas) but growth has remained in the low single-digits. This partially explains the weak performance across all KDC’s business segments, including ice cream, yoghurt and edible oils for the whole year.
 
Possible market share loss – The actual sales growth at KDF (-15.9% y/y), TAC (1.6% y/y) and VOC (-0.7% y/y) were all below overall market growth. This suggests to us that KDC has lost market share to competitors in all segments, from ice cream and yoghurt to edible oils. This also means that they have been facing both weaker demand and rising competition, which will require them to focus more on developing new products and entering into new product categories.
 
Progress on new categories was slower than expectations – With its nationwide dry and frozen food distribution network, KDC has been actively looking to boost the number of products traveling down its channels. Condiments, noodles, sugar, processed meat and beverages are segments where we expected to see significant product launches last year. However, there were some delays in product launches, perhaps due to unfavorable market conditions, and we did not see any noticeable earnings contribution from these new categories.
 
Investment conclusion: Downgrade from Hold to Underperform. Using a comparative EV/EBITDA approach, we have revised KDC’s fair value down from VND 36,300 per share to VND 16,700, equivalent to a forward FY2019 EV/EBITDA of 10.9x, or a P/E of 55x and a P/B of 0.4x. KDC has an interesting portfolio of products, ranging from ice cream and yoghurt to edible oils and several new frozen and dry foods. The strategy of adding frozen and chilled products, including buns and processed meat, and then sauces, sugar to fill in the seasoning segment, and other packaged foods like noodles, tea and milk makes a lot of sense. However, weaker demand and rising competition in existing product segments are both affecting their short-term growth potential. 
 
SABECO (Underperform) – FY2018 results lower than expected – Net sales came to VND 35,948 billion, up 5.1% y/y and 3.0% lower than our forecast of VND 37,076 billion. NPATMI was reported at VND 4,175 billion, down 11.4% y/y, which was 7.5% below our forecast of VND 4,515 billion.
 
Quick conclusion – Reiterate Underperform. Using a comparative P/E approach, we see fair value for SABECO at VND 181,000 per share implying a forward FY2019 P/E of 26x. The Company’s restructuring plan should result in significant margin gains over the next few years, but the new owners need a little time to implement changes. Therefore, we do not expect to see substantial earnings growth this year. HSC forecasts FY2019 net profit will grow by 8.3% y/y, and then forecast net profit growth of 18.8% y/y in FY2020.
 
Valuations remain high, with some investors finding them as somewhat of a barrier to investment. With the VNM investment story under something of a cloud, investors are looking for a new core investment in the consumer space, and the country’s leading beer company, under new ownership and with plenty of low hanging fruit in terms of efficiency savings to gain possibly making for an interesting investment opportunity over the next few years.
 
SAB grew slower than the industry in 2018 – According to MOIT, the beer industry grew 6.5% y/y in volume terms last year, indicating that SAB has lost market share in 2018.
 
Gross margin squeezed on higher input prices – Two major raw materials, malt and rice, saw higher prices in 2018 (up 19% y/y and 6% y/y respectively). It seems that any gross margin improvement resulting from the impact of new management will be seen from 2019.
 
SG&A came in line with expectations – SG&A was flat y/y, while SG&A/sales came in at 10.4%, which was line with our forecast. Within this, selling expenses fell by 1.5% y/y, while G&A rose by 4.0% y/y
 
HSC forecasts FY2019 net profit growth of 5.0% y/y – We revise down our net sales forecast by 4.3% from VND 39,930 billion to VND 38,226 billion, up 5.0% y/y and NPATMI by 6.5% from VND 4,836 billion to VND 4,521 billion, up 8.3% y/y, based on the following assumptions.
 
1.   The beer industry will grow by 5% y/y to reach 4,910 million litres in sales volumes.
 
2.   SABECO’s market share will be 39% in 2019 versus 40% in 2018, given tougher competition from multinationals.
 
3.   SABECO’s sales volume growth will be 3.4% y/y.
 
4.   ASP growth will be 3.0% y/y.
 
5.   The gross margin will be 24.0% versus 22.5% in 2018.
 
6.   SG&A/ sales will be 10.7%, slightly above the 10.4% seen in 2018.
 
With this we forecast a FY2019 EPS of VND 6,567, up 8.1% y/y. At the current market price, SAB is trading at FY2019 P/E of 35.3xs and an EV/EBITDA of 24.1xs.
 
For FY2020 HSC calls for net profit growth of 18.8% y/y – We forecast FY2020 net sales of VND 40,772 billion, up 5.9% y/y, and net profit of VND 5,372 billion, up 18.8% y/y based on the following assumptions.
 
1.   The beer industry will grow by 3.0% y/y and achieve sales volumes of 5,058 million litres
 
2.   SABECO’s market share will remain at 39%.
 
3.   SABECO’s beer sales volumes are forecast to be 1,972 million litres, up 3.0% y/y
 
4.   The ASP will remain unchanged.
 
5.   The gross margin will increase from 24% in 2019 to 26% in 2020 due to more efficiency in procurement and lower logistic costs.
 
With this we forecast a FY2020 EPS of VND 7,804, up 18.8% y/y. At the current market price, SAB is trading at FY2020 P/E of 29.7xs and an EV/EBITDA of 20.3xs.
 
Investment Conclusion: Reiterate Underperform. Using a comparative P/E approach, we see fair value for SABECO at VND 181,000 per share implying a FY2019 P/E of 26.0x. At the current market price the stock is expensive based on a FY2019 P/E of 35.3x and EV/EBITDA of 24.1x. HSC does not expect significant growth in FY2019, as any improvement in the Company’s operations will take time. However, if the comprehensive solutions being initiated by Thai Bev are able to deliver results sooner than expected, earnings in FY2019 and FY2020 may exceed our forecasts.
HSC
 
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