GMD announced a 4.9% decline in Q1 FY 20 NPAT-MI to VND141bn, ahead of our forecast mainly on the back of a surge in gain from JVs, financial income and significantly lower minority interests. Although Q1 earnings have achieved 29% of our full-year forecast, we expect the negative impact of Covid-19 to be fully felt in Q2 FY 20 and linger throughout the year, compromising total container volume throughput. Hence, we cut our earnings forecast for FY 20 by 24%. We lower our target price to VND22,000 (from VND 26,000) based on the SOTP valuation method, and recommend Accumulate on the stock.
Robust growth in other segments revenue partly offset the drop from the port segment. Consolidated net sales slightly declined by 4.4% yoy to VND 601bn, following a mixed performance between port operations (-10.2% yoy) and other segments (+42.7% yoy).
- We believe the decline in the port segment was attributable to an approximately 15% decrease in throughput at GMD’s ports in the Hai Phong area. Main reasons are: (1) its key trade lane – feeder services between China/Hong Kong and Hai Phong – have started to decline in the wake of Covid-19, coupled with the fact that (2) the company lost some services to the only deep-water seaport in Hai Phong, HICT. Beside GMD, many other river ports also fell victim to the emergence of HICT. In fact, we estimate HICT’s market share in terms of TEU throughput rose rather significantly from 8% at the endFY19 to circa 18% at end of Q1 FY 20, according to the Vietnam Port Association (VPA) statistics.
- Meanwhile, GMD’s southern ports, namely Phuoc Long ICD and Binh Duong Port, posted healthy growth as the main trade lanes there – connecting Vietnam and the US/EU markets – were less disrupted by the pandemic for the most part of Q1 FY 20, as per VPA. In fact, according to Vietnam Maritime Administration, container volume throughput at ports in HCMC and Vung Tau surged by 16% yoy and 22% yoy, respectively. However, this was not enough to cover the lacklustre performance of the Group’s ports in Hai Phong.
- Revenue from other services segment, among logistics services, soared as GMD recorded revenue of VND87bn from construction for the Gemadept-Terminal Link (Gemalink) deep-water port in Vung Tau.
Gross profit margin remained stable. Costs of goods sold was lower by 4.1% yoy, in line with revenue, owing to a decrease in manpower costs (-10% yoyY) arising from salary cut measures in tandem with the decline in variable costs (outside services expenses – 6% yoy, other cash expenses -16% yoy). Nevertheless, EBIT margin shrank due to higher goodwill depreciation after the acquisition of Binh Duong Port. Worth highlighting, in Q4 FY 19, GMD increased its controlling interest in Binh Duong Port to 80%, which resulted in an increase of VND276bn in goodwill. Meanwhile, net margin was relatively the same because Nam Dinh Vu Port, a subsidiary port of GMD in Hai Phong, incurred a loss as opposed to last year, weighing tremendously on minority interest (66.9% yoy).
Financial income surged 43.4% yoy and came in at VND17bn, mostly brought about by the minor stake sales (0.23%) at an affiliate named SCSC. Additionally, gain from joint ventures reached VND60bn (+38.7% yoy) on the back of a turnaround in Gemalink’s profitability and steady growth in SCSC.
Grim outlook for core operations. The Covid-19 outbreak has had an unprecedented impact on world trade by disrupting the global supply chain and dampening consumer demand with key trading partners such as the US/EU through countries lockdown. Dwindling trade demand has caused global carriers to massively cut scheduled sailings in Q2 FY 20 across almost all key routes and “no market segment will be spared”, as per Alphaliner.
GMD’s FY 20 container throughput volume is expected to be hit hard. In particular, we expect the full negative effect of Covid-19 to be felt in Q2 FY 20, followed by a gradual recovery in H2 FY 20, predicated on the assumption that Covid-19 is partly contained by then and lockdowns are lifted. That said, we believe the impact will linger for some time, as consumption activities remain uncertain amid weaker global economy. Our revised FY 20 volume assumption is for a drop of 15.8% yoy to 1.5mn TEUs. Overall, our FY 20f revenue/NPAT-MI have been revised down to VND2,298bn (-13% yoy)/VND394bn (-24% yoy).
Our call. We cut our TP to VND22,000 per share (from VND26,000) based on SOTP methodology valuation, implying FY 20f EV/EBITDA of 8.5x, lower than the 5-year average of 10.7x. Total expected return (as at 19 May 2020) should be 13%. Reiterate Accumulate.