KDC – A promising year smoothly starts off – Update

• KDC reported 1Q21 top line and bottom line grew 34.5% yoy / 740% yoy to reach VND2,322bn and VND94bn, respectively.
• The vegetable oil price index rose 21.4% in 1Q21 and 86% yoy at end Mar-21, hence increasing pressure on COGS of KDC’s edible oil.
• Reiterate ADD rating with target price of VND65,000.

Smoothly starts off in 1Q21
KDC posted VND2,322bn (34.5% yoy) in 1Q21 revenue, driven by 15% yoy growth of ice cream segment and 37.8% yoy growth of edible oil segment. Tuong An (TAC) – KDC’s edible oil subsidiary – had a successful sale season thanks to new premium gift set during Tet holiday with the support from KDC’s extensive network to earn a revenue growth of 53.2% in 1Q21. In 1Q21, KDC 1) continued to optimize its management in all segments to lower SG&A / revenue ratio by 4.8 % pts yoy to 13.6%, 2) applied a tax loss carried forward from 2018 to lower tax rate by 14.2 % pts yoy to 10.2% and 3) merged with Kido frozen food (KDF) in End-2020, lowering minority interest / earnings after tax ratio by 46.2 % pts yoy to 30.4%. As a result, 1Q21 net profit increased 8.4 fold to VND94bn, in line with our estimate, and made up 20.6% of our FY21F forecast.

Downward pressure on gross margin due to rising global food prices
1Q21 gross margin (GM) of edible oil softened 1.3% pts yoy to 13.8% as global vegetable oil prices rose 21.4% ytd and 86% yoy in 1Q21. Consequently, 1Q21 blended GM contracted 1.0 % pts yoy to 19%. We see downward pressure on KDC’s GM in the next couple quarters as prices of palm oil and soya oil are expected to accelerate toward year-end.

Maintain our net profit growth forecast of 123% yoy
Although KDC was impacted by the raw material prices increase, we still maintain our KDC’s FY21F NP forecast of VND457bn (+123% yoy), due to 1) better than expected growth in TAC’s revenue, which reached 53% yoy in 1Q21 to offset the contraction of edible oil segment’s GM, 2) experience in inventory management by pre-loading TAC’s inventories since End-FY20 (TAC’s inventory +61% yoy by the end of FY20 and +68% yoy by the end of 1Q21) and 3) KDC’s ability to shift the rise of COGS to retail price thanks to its leading position.

Reiterate ADD rating with unchanged target price of VND65,000
Our target price for KDC is based on an equal combination of 10-year DCF valuation and target FY21F P/E of 30.0x. Upside risks include 1) faster-than-expected M&As process and 2) successful joint venture with Vinamilk. Downside risks are 1) slower-than-expected M&A process, 2) lower-than-expected growth in KDC’s business and 3) higher-than-expected COGS and SG&A.

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