Global investors who seek exposure to the Vietnam stock market often do so via ETFs or Closed End Funds (CEFs) that hold the larger and more liquid companies. Such companies are usually prominent constituents on various Vietnam stock indices such as the VN-Index, FTSE Vietnam Index, MSCI Vietnam Index etc.
In this blog post I shall discuss one such large Vietnam stock, the Vietnam Dairy Products JSC (HOSE:VNM). I thought it might be useful to regularly provide a broad overview of the stocks you might see pop up in fund manager holdings. The purpose is not to provide buy or sell recommendations. However a quick summary of key drivers for future performance will be the aim, and readers can make their own mind up of whether Vinamilk is a good stock to buy?
Another reason this stock interested me was as a shareholder of a Singapore listed stock that holds shares in Vinamilk, this was mentioned in my last blog post as I refer to below:
STOCKS FOR A POSTIVE VIETNAM STOCK MARKET OUTLOOK IN 2022
Below I discussed Jardine Cycle & Carriage Ltd (SGX:C07) which has significant investment stake in Vinamilk. I also discussed United Overseas Australia Limited (ASX:UOS).
AN OVERVIEW OF THE VINAMILK (HOSE:VNM) BUSINESS
Vinamilk is the leading player in the dairy industry in Vietnam. It has over half of the market share in the country and hundreds of different products.
Despite the size it is expected to still expand its production capabilities and scale. In recent times it has added to its already large market share through key acquisitions. It sees opportunities in rolling out new high-end products to suit the domestic consumption story, whilst also focusing on major export markets.
Key product areas include liquid milk, condensed milk, powdered milk and yogurt.
The company has enjoyed solid growth over the long term, high ROE and margins, and as a result has often traded at a relatively higher PE ratio.
Source: Vinamilk 2020 Annual Report
Whilst Vinamilk’s already large market share might make it challenging to grow quickly in the future, they should have a structural tailwind in terms of Vietnam’s dairy consumption overall.
Source: Vinamilk 2020 Annual Report
Plenty of room still exists for Vietnam’s consumers to lift their milk consumption compared to what we see in some other Asian countries.
FACTORS TO DECIDE ON WILL VINAMILK SHARES BOUNCE BACK IN 2022?
Growth of certain domestic product lines – Vinamilk has a strategy of increasing high end product lines which offer higher growth potential. Vietnam’s consumer preferences are evolving favouring the growth profile of certain products. Think of the likes of organic fresh milk, yoghurt, and readymade milk which should grow stronger as Vietnam’s average household incomes grow. Whereas traditional powdered milk may not experience the same growth potential. The degree to how this trend develops will be an important factor for the company in the future.
Export segment growth – Vinamilk has key export contracts with the likes of the Middle East, China and South Korea. Therefore it is not just crucial to how the Vietnam economy responds to a tough year with the impacts of covid in 2021. Significant opportunities present themselves in regards to large export markets but competition is high and there are always political uncertainties out there. With strong management though and well regarded products they stand a good chance of enjoying further success in this segment. More than 15% of the company’s revenues are to offshore customers.
Acquisitions performance and capital management – in 2019 the company made a significant acquisition of GTN foods. GTN foods owns a 51% stake in Moc Chau Milk, the biggest dairy producer in the North of Vietnam.
It expanded Vinamilk’s land bank and increased the company’s already large market share very quickly. Without such innovative deals once could make an argument that Vinamilk has already such a large market share it is not that easy to grow it.
Vietnam’s general bounce back in GDP post covid–19 impact – Vinamilk has such a large footprint in the Vietnam consumer economy that its fortunes will closely follow how the country bounces back from the covid disrupted year in 2021.
The industry faced great challenges as the buying power of consumers suffered in the weak economic environment, not to mention the difficulties of supply disruptions. 2022 is shaping up as a better year from that regard, but as we have seen over the last couple of years there are always risks to that outlook.
VIETNAM STOCK MARKET VALUATIONS – VINAMILK PE RATIO, YIELD ETC.
Vinamilk PE Ratio – 19.7 times (2020)
Vinamilk dividend yield – 4.0%
VINAMILK SIZE IN TERMS OF VIETNAM STOCK INDEX AND COMPONENTS
Vinamilk at the time of writing is about the 7th largest company of my searches of Vietnam stock list of the largest companies. The market cap in USD is circa $8.2 billion.
IS VINAMILK A GOOD UNDERVALUED VIETNAMESE STOCK TO BUY FOR 2022?
Milk is an essential product so the company in terms of metrics such as revenues and profits has held up relatively well compared to companies in more covid challenged industries. Having said that, demand for some of its products from lower income consumers in Vietnam are of a more discretionary nature.
However when looking at the share price performance Vinamilk shares have not done so great compared to the VN-Index this year and even over the last 5 years or so. This is at contrast to the explosive run in the shares around 2011-2017.
I would simply put that down to Vinamilk being such a high-quality stock, one of the market darlings in Vietnam, and valuations running a bit ahead of themselves and getting a bit stretched 5 years ago. As we saw in an earlier table in this blog post, the last 5 years has still seen Vinamillk post some solid revenue and earnings growth numbers.
Recent relative underperformance and a cheapening valuation in 2021 means now Vinamilk stands a better chance over the next 5 years to deliver better shareholder returns. No reason why they can’t get back to delivering circa high single digit EPS growth over the medium to longer term as we move through later 2022 and hopefully a lot of the covid concerns are behind us. Given the high level of certainty with its revenue profile and overall quality and history, a P/E ratio of circa 20 times could be warranted as it has been in the past. Whilst the current PE may not look abnormally cheap, it might be attractive considering it is a multiple off depressed covid impacted earnings. All in all Vinamilk appears fair enough value for those looking at more of a blue chip stock to ride the Vietnam consumer growth story.
And should you now want a very quick description of the largest 10 companies listed on the Vietnam stock exchange, be sure to visit the below blog post.
VIETNAM LARGEST 10 COMPANIES ON STOCK MARKET
I summarize the largest Vietnam companies by market cap:
Is Vietnam a good investment?
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