+ Higher 9M17 Core PATMI despite lower revenue due to the reclassification of Vietnam Dairy Products Joint Stock Company (“Vinamilk”) as an associate company. The Group has increased both its stake in Vinamilk to 18.74% with representation of two directors on the Vinamilk Board. Vinamillk boosted profitability via (i) higher contribution of dividend income, and (ii) recognition of Vinamilk profit as associated company. Vinamilk paid out over 80% of its earnings to its shareholders in FY16 and has a track record of increasing dividend payout ratio over the past years. We expect a higher profit contribution from Vinamilk to boost Fraser and Neave’s (“FNN”) investment income this year as Vinamilk has posted 17% YoY growth in PAT to VND5.85tn for 1H17.
+ Additional revenue streams from expanded distribution network and product range partially cushioned the slowdown in Soft Drinks business. These include: (i) the vending business (acquired in Jul-16), (ii) penetration into New Markets (namely Indonesia, Myanmar and Vietnam); (iii) distribution of new third party brands (Ribena and Magners); and (iv) Singapore beer business. Notably, 9M17 revenue for New Markets increased by 26% YoY and Beer’s doubled YoY.
We expect a higher profit contribution from Vinamilk to boost Fraser and Neave’s (“FNN”) investment income this year as Vinamilk has posted 17% YoY growth in PAT to VND5.85tn for 1H17.
– Challenging environment in the Beverages and Dairies businesses in Malaysia and Singapore. Persistently weak demand and competitive pricing amidst rising raw material eroded margins.
– Lower revenue from Publishing led to further PBIT losses in the Printing and Publishing business. Losses widened by 54.8% to S$2.7mn in 3Q17 despite being post-restructuring.
Outlook remains challenging against a backdrop of continuing cost and pricing pressure in Singapore and Malaysia. In particular, we maintained our view of subdued demand in Malaysia in FY17-18. The upcoming general election in Malaysia could dampen consumer sentiment and weigh against Ringgit’s strength. Possible implementation of a sugar “sin tax” in Malaysia is another risk to margins and sales volume.
Maintained “Neutral” rating with higher sum-of-parts derived TP of S$2.52 (previously S$2.31) on Vinamilk’s reclassification as associate
We expect Dairies to continue to provide strong support to Group’s earnings. We are also optimistic that the New Markets, particularly Vietnam and Myanmar, would continue to gain traction and lift sales for both Beverages and Dairies businesses. Upside surprise could come from higher contributions from Beer and new vending business.
Potential re-rating catalysts would be acquisition of additional stakes in Vinamilk and Saigon Alcohol Beer and Beverages Corporation (SABECO)
The State Capital Investment Company (SCIC) has recently announced its intention to further sell over 48mn (or equivalent to 3.33%) of Vinamilk shares in Oct-17.
Vinamilk commands about half of Vietnam’s domestic market share for dairy goods and has a steady earnings growth track record.