Equity Analysis /
Vietnam

Quang Ngai Sugar: Q1 19 – High revenue growth and rising costs

    Thao Dang
    Thao Dang

    Food & Bev, Textiles

    Rong Viet
    31 May 2019
    Published by

    Q1 19 highlights: 

    • Net revenue reached VND2,000bn (+25% yoy) from positive growth in both soymilk and sugar as domestic demand for dairy recovered.
    • However, QNS is facing pressure from (i) lower profitability in the sugar segment due to crop failure, (ii) increase in selling and administration expenses, and (iii) the lack of extraordinary income (cVND25.8 bn). This led to a 18% yoy decline in NPAT to VND155bn.
    • QNS achieved 24% and 78% of its revenue and net profit guidance, respectively. We note that QNS has the habit of setting rather low profit targets; so completing 3/4 of the NPAT target is not considered a positive business result.

    Q2 19 preview: Peak season, price correction offers buying opportunity

    • The soymilk segment is expected to maintain its positive performance. The recovery in domestic demand and the promotion of new product lines from Q2 onwards are the company’s main growth drivers.
    • Sugar prices have shown signs of recovering, with QNS allocating most of its sugar segment depreciation costs in Q1. Therefore, we expect profit margins to improve from Q2 onward.
    • Q2 is considered peak season for both revenue and profit.
    • We believe the recent decline in QNS share price has created a buying opportunity for investors.

    Valuation and recommendation

    In the short run, the downward movement in sugar prices will negatively affect QNS’ business results. However, we remain positive in the long term on its core business activities, especially soymilk where it is the undisputed market leader. QNS targets the soymilk segment to reach USD1bn in revenues by 2027. For 2019, we forecast net revenue and NPAT-MI of VND8,155bn (+2% yoy) and VND1,153bn (-7% yoy), respectively, corresponding to an EPS of VND3,719 per share.

    Using a sum-of-the-parts valuation method, we estimate the fair value of QNS at VND44,000 per share, resulting in an expected return of 45% based on the May 31 closing price and including a VND1,500 per share cash dividend. We have a Buy rating on the stock.