VNM – Upgrade on price weakness – Update

• In 4Q20, VNM reported a 1.3% yoy growth in revenue and a 0.7% yoy decline in net profit.
• We upgrade to Add from Hold with a higher TP of VND127,000 on price weakness.

4Q20 NP decreased slightly due to weak domestic revenue

Although VNM has consolidated the revenue from GTN since FY20, 4Q20 revenue grew modestly 1.3% yoy as a result of 1) Domestic revenue (excluding GTN) fell 2.5% yoy due to historic flooding in the Central Vietnam which hit consumer spending in Oct-Nov 20; 2) overseas subsidiaries reported negative growth of 17.5% yoy as the Covid-19 pandemic hurt demand in the US and Europe. Besides, GM was 0.8% pts lower and SG&A rose 7.9% yoy in 4Q20 as VNM ramped up promotion activities to boost sales after the disaster. Thus, VNM recorded negative NP growth of 0.7% yoy. Consequently, FY20 net revenue/net profit grew 5.9% yoy/4.9% yoy, fulfilling 96.1%/ 95% of our forecasts.

Moc Chau Milk (MCM)’s performance to improve post M&A

After merging with VNM, GTN’s major subsidiary Moc Chau Dairy Cattle Breeding JSC (MCM) recorded positive results with 10.3% yoy growth in net revenue to VND2,822bn in FY20, contributing 5% to VNM’s total revenue. In our view, better results were mainly thanks to its advertising policies to increase the product’s presence in the market as well as promotion programs offered to promote product consumption in 2020. Overall, MCM’s net profit recorded a 68.2% yoy growth in FY20 to VND280.7bn.

We expect VNM to achieve double-digit growth in FY21 net profit

We expect VNM’s net revenue to grow 7.9% yoy in FY21 on the back of 1) 7.0% yoy domestic growth, 2) 8.0% yoy growth of export revenue thanks to stable demand in Middle East markets and expanding export product portfolio to China. Besides, we expect GM to expand 1.4% pts due to GTN’s higher GM of 35% (+5% pts). Thus, we expect net profit to grow 15.6% yoy in FY21F.

Upgrade to Add with a higher TP of VND127,000

We raise our TP by 6.7% to reflect 0.9%/0.2% FY21-22F EPS upgrade and eliminating discount rate for FY21F P/E (from 5% in previous forecast). We use a new WACC of 11.6% for our DCF valuation (from 11.8% previously) due to a lower risk-free rate of 3% (from 4% earlier). Re-rating catalyst is higher-than-expected demand in China market. Downside risk: higher-than-expected material milk prices.

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