KDC – Headwinds from edible oil price spike – Update

•  Cooking oil prices have elevated 27.2% ytd, weighing on KDC’s gross margin over FY22-23F.
• We expect KDC’s net profit to decline 7.6% yoy in FY22F before bouncing back 31.4% yoy in FY23F.
• Downgrade to HOLD rating with target price of VND61,700.

Edible oil prices accelerate following geopolitical crisis
Recent geopolitical crisis has sent edible oil prices to record high as Ukraine is a key edible oil exporter with 6% global market share. We estimate 2022’s average edible oil price to rise more than 30% yoy. Although KDC has increased its retail cooking oil price more than 20% since Jul 21, we see that the ability of further retail price raising of KDC is limited owing to the market competition. Currently, KDC accounts about 35% market share of Vietnam cooking oil. We believe KDC need to get more market share to strengthen its pricing power.

KIDO’s bakery is still in the startup phase
The KDC ‘s expansion in confectionary business was more sluggish than our expectation. So far Kido bakery products were delivered through about 25 Chuk Chuk stores and some ecommerce channels. We believe confectionary production installment was hindered by Covid-19 last year. We expect they can enhance their capacity in the next couple of quarter, bringing confectionary revenue to grow to grow 89%/26% yoy, accounting for 2.2%/2.4% to KDC’s revenue and 4.1%/4.3% to KDC’s gross profit in FY22/23F.

A decline in FY22F net profit before rising again in FY23F
We expect KDC’s gross profit to change -1.6%/+0.2% vs previous report following revenue increase and GM narrowed down. We decrease/increase SG&A expenses forecast by 0.6%/5.3% as KDC can reduce SG&A expenses after merging with TAC in FY22F then speedup expansion of Chuk Chuk and KIDO’s bakery in FY23F. As a result, we estimate KDC’s net profit in 2022/23F decrease by 0.9%/3.4% vs previous report to VND545bn (-7.6% yoy)/VND715bn (+31.4% yoy).

Downgrade to HOLD rating with target price of VND61,700
We downgrade to HOLD rating with target price of VND61,700 owing to headwinds from rising edible oil and KIDO’s bakery / Chuk Chuk need more time to prove it’s potential. Our valuation used equally of DCF valuation and P/E target valuation. Potential re-rating catalysts include 1) success in joint venture with Vinamilk or KIDO’ Bakery or Chuk Chuk store chain and 2) better-than-expected in GPM or lower-than-expected SG&A expenses. Risks include 1) lower-than-expected GPM and 2) higher-than-expected SG&A expenses.

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