Minh Phu - Buy Case
/So today, I wanted to present a buy case for Minh Phu. There are a few reasons why I like the company:
Solid revenue growth: They seem very likely to get to at least exports of USD800m, which would boost sales by almost 9%. Guidance is for USD850m, but I am a bit worried about the second half, because the company is a bit behind what they did last year.
Long-term growth from Mitsui relationship: Overall, I think sales will benefit from the Mitsui relationship. Exports to Japan fell 6% last year and 17% through May of this year but has started to pick up (up 5% in June). The company did have a joint venture with Mitsui previously. In 2013, it invested in Minh Phu Hau Giang JSC (MPHG), a processing plant affiliated with Minh Phu.
New initiative could boost prices for Vietnamese shrimp: We talked about this two days ago, but the push towards inspections and sustainability may be able to push prices for Vietnamese. It will take a while, but in the long run could have a very big payoff. It helps that the company has $100m in additional powder from the Mitsui share sale. This is being invested in expanded farms, refrigeration in export markets and a breaded shrimp factory. All of which should help boost sales in the long term.
Shrimp consumption will continue to grow: One research report forecasts a 6.3% CAGR through 2024 for shrimp consumption. That’s seems fairly reasonable, given the push away from meat and towards more seafood in the West. I expect Vietnam will continue to be a big player in the market, and, especially if it can improve its reputation through these sustainability inspections, will be able to take share. MPC should also be able to take some share from smaller, less equipped exporters.
The change in ownership of MPHG boosts profits. MPC bought out Mitsui’s stake of 31% in MPHG which means that all earnings from the subsidiary will go to the parent now. Overall profits should improve by about VND50bn or 6% in 2019 and another VND50bn in 2020. This is based on 2018 minority interest of VND100bn. Let’s say that VND100bn represented the 31% ownership in MPHG, so that the subsidiary made around VND320bn. Based on this, the purchase of these shares was a good deal for MPC. It purchased the stake for VND872bn, or about 8.7x, in line with their 2018 P/E, so it wasn’t expensive. If revenue grows around 9% this year at the subsidiary, likely profits there will grow about 10%, so that the VND100bn is more like VND110bn. That makes the forward P/E just 8x, which is a good deal.
Valuation is very reasonable: We estimate the company is trading at a forward P/E of 7.6x. This would be 7.1x forward P/E if the company reaches guidance. Forward EV/EBITDA is 8.2x on our numbers. Those are extremely low, and much lower than any of the companies in the sector worldwide. We have 13 comps, with the cheapest one trading at 9.9x forward P/E. Clearwater and Huon Ag are a bit cheaper in terms of EV/EBITDA, but the rest are well above that, and the average is much higher.
Dividend helps provide floor: The company paid a dividend of VND5,000 per share in 2019 (off 2018 earnings. That is almost a 14% yield on today’s share price. They may not be able to keep this level, but even at half of that level, the yield would be good. The owners may be having cash flow issues of their own, which would like push them to keep making dividend payments at these levels. That helps other shareholders as well.
Upside from ETF: If MPC is added to the VNM ETF, there would be an underlying buyer at size (especially at the beginning), which should push the stock up.
Risks: I feel like the biggest risks are around revenues - prices for shrimp are falling, and MPC may not be able to offset that. Lower prices are likely to translate into lower margins as well, for a double hit. There is already the risk that MPC will not meet its guidance, which would likely hurt shares in the near term. But the longer term risk is that shrimp from Vietnam continues to be devalued in export markets. That’s why the sustainability initiatives are so important.
Target price: I don’t have a strong opinion on this. I would say if they were able to trade at 15x P/E, they would still be well below the average for comps, and it would be almost double from current levels, so I am setting my target is VND70,000 per share.
Continue to follow Vietecon.com to see how I do.
SOURCE: COMPANY DATA, BLOOMBERG, VIETSTOCK.COM, VIETECON.COM CALCULATIONS