KDC – MUA – KQLN in the first quarter was positive thanks to reducing SKU and brand to focus on high margin products – Update (May 15th 2013 1:21 pm)
We raised the recommendation for KDC from HOLDING to MUA and raised the 12-month target price to 62.400 VND. We expected EPS to rise 20% per year from 2013 to 2015 thanks to the brand repositioning strategy that would stimulate the growth of high-margin products and the product lines like instant noodles.
High rated KQLN in the first quarter of 2013 reflected the company’s growth with sales up 14% and gross profit margin up 4%. KDC was currently trading at PER of 18.9 times based on EPS 2013 and 15.7 times based on our backup EPS 2014.
Brand Re-popularizing boosted revenue from favored products as well as increased gross margins
In 2012, KDC implemented a brand re-popularizing campaign, increased marketing costs for popular brands and products, and discontinued non-selling products. This had reduced the number of products (SKUs) from 500 to 150. And the results were very positive. In the first quarter of 2013, sales increased by 14% in comparision with the same period last year which was 807 billion VND and profit after tax increased to 34 billion VND compared to 4.4 billion VND in the first quarter of 2012. In the first quarter of 2013, revenue growth was mainly driven by product growth, especially mainstream products such as biscuits and ice cream, which accounted for 25% and 18% of last year’s gross profit. Furthermore, the gross profit margin in the first quarter of 2013 increased from 34% to 38%, indicating a successful product-focused strategy. Normally, the first quarter only accounted for only 15% -17% of the full year revenue.
New product lines were expected to grow 20% in revenue over the next three years
KDC recognized that its current product line, especially moon cake, was highly seasonal. Therefore, the company would enter the market of instant noodles which was worth about 900 million dollars. KDC admited that the instant noodles market in the country was competitive, but also suggested that instant noodles would help to increase profitability, reduce seasonality and make the most of the company’s distribution network. The instant noodle products of the company would have three flavors and the cost for most consumers was 4.000 VND/85g pack which was equal to Hao Hao of Vina Acecook. Operating margin was from 10% to 12% due to the fact that the production is processed and the packing was done by the company. Forecasted revenue from instant noodles would come up to 43 billion VND (1% lower than the sales of 2013) and 300 billion VND in the next 18 months. We believed that instant noodles would be a key factor which brought long-term revenue to the company.
Source: Acecook Vietnam
