VNM – Lacks re-rating catalysts in near term – Update

• VNM’s 1Q21 revenue/net profit plunged 6.8%/6.8% yoy, respectively, as Covid-19 re-emerged hitting domestic demand.
• We see cost upward pressure as the raw milk price is increasing.
• Reiterate ADD but lower TP to VND110,000 following a 13.1%/16.9% downward revision of FY21/22F EPS.

What is behind the sharp decline in VNM’s share price?
VNM’s share price has plunged 18.1% in past 3 months, underperforming the VNINDEX with 8.8% increase in the same period, in the context of foreign investors net sold with a total value of VND5,538bn. We believe that the weak sentiment on VNM comes from rising global milk powder price and its flat FY21F NP growth guideline (+0.2% yoy). The Bloomberg Generic Milk Powder index has increased 32.7% YTD, reaching highest level since Apr 2014 due to possible supply shortage of main producer countries. We estimate that every 5% increase in milk powder price can erode 0.4-0.5% pts in VNM’s GPM.

Lackluster 1Q21 performance due to the Covid-19 resurgence
VNM experienced declines of 6.8%/6.8% yoy in 1Q21 top line/bottom line, respectively, fulfilling 20.5%-20.1% of our full-year forecast. The third wave of COVID-19 in early Feb 2021 hurt the FMCG demand, leading to a drop in both parent company and MCM’s net revenue of 9.4% yoy and 1.8% yoy. Meanwhile, GPM contracted by 3.0% pts yoy due to the sharp increase in raw material prices, offset by 13.0% yoy decline in SG&A expenses as VNM adjusted its advertising and promotion activities amid a soft-demand environment.

We revise downward FY21 – 22F forecasts on higher material cost
We lower our FY21-22F domestic revenue forecast by 2.5%/5.4% to reflect a slower-than-expected consumer demand recovery. Besides, we cut GPM FY21/22F forecast by 3.7%/3.1% pts to reflect 35.0%/30.0% increase in milk powder price assumption. Thus, FY21F revenue and net profit forecast were revised down by 2.2%/13.1%, respectively.

The valuation is attractive but lacks re-rating catalyst in near term
VNM is currently traded at 17.5x FY21F P/E, which is relatively attractive with 22.9% discount to regional peer average and 28.6% to average 5-year of VNM for a long-term horizon. However, we believe the stock price will continue to bear with high milk powder price pressure in short – term. Besides, in FY21F, the management has targeted net profit nearly flat at VNDD11,120bn (+0.2% yoy) and VNM will not have many investment plans in the next five years as its production capacity has been well prepared until FY25F. Thus, VNM’s valuation is attractive enough but lacks re-rating catalyst in near term, in our view.

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