VNM – Earnings growth rebound on the horizon – Update

• VNM’s 9M21 revenue/net profit plunged 0.2%/6.5% yoy, respectively, fulfilling 71.6% and 74.7% of our full-year forecast.
• The margin downward pressure will gradually ease from FY22F as whole milk powder prices are cooling down, in our view.
• Reiterate ADD with higher TP of VND116,000, following a slight FY22-23F EPS upgrade.

Rising input material prices created downward pressure on 3Q21 earnings

In 3Q21, VNM’s domestic revenue grew only 3.7% yoy on a 2% yoy increase in ASP together with 1-2% increase in sale volume, per our estimated. Besides, oversea market revenue increased 6.2% yoy in 3Q21, to driven VNM’s 3Q21 revenue to grow 4.1% yoy. However, 3Q21 gross margin narrowed down significantly by 3.8% pts due to higher whole milk powder prices (fix contracts since 1Q21). As a result, 3Q21 net profit plunged 4.9% yoy. For 9M21, revenue/net profit plunged 0.2%/6.5% yoy, respectively, fulfilling 7 1.6% and 74.7% of our full-year forecasts.

The margin downward pressure will gradually ease from FY22F

We project GPM will narrow down 2.8% pts in FY21F due to higher whole milk powder prices (+21.5% ytd). However, it will be able to decrease slightly from FY22F but still stay at a high level, in our view. Thus, we believe GPM is likely to rebound by 1.7% pts in FY22F thanks to 1) 8.0% decrease in whole milk powder price 2) the level of autonomy in materials increase by 4% after two dairy farm projects in Quang Ngai and Laos are put into operation in Nov 2021 and 1Q22F and 3) the company still has the ability to increase selling price by 3-5%/year to compensate for high input material expense.

Net profit is expected to grow 7.0%/11.1% yoy during FY22-23F

We project net revenue to climb 5.7%/6.5% yoy in FY22/23F, driven by 1) 4.9%/5.9% yoy increase in domestic revenue and 2) 12.9%/10.8% yoy rise in oversea subsidiaries. In addition, we expect VNM’s gross margin will improve by 1.7%/1.1% pts in FY22-23F after dropping 2.8% in FY21F. As a result, FY22-23F net profit is projected to surge 7.0%/11.1% yoy in FY22/23F after staying nearly flat by 0.6% yoy in FY21F.

Reiterate ADD with higher TP of VND116,000

Our higher TP is derived from an equal weighting of the DCF model rolled forward to FY22F with 1.4%/0.8% increase in FY22-23F EPS and target P/E of 21.8x applied on FY22F EPS. We remain Add call with VNM as we believe that the most difficult time was over, and its net profit will reach CAGR of 7.0% in FY22-24F after moving sideways in FY21F. Re-rating catalysts is stronger-than-expected growth of domestic dairy consumption. Downside risks include 1) longer-than-expected Covid-19 pandemic and 2) higher–than-expected whole milk powder prices.

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