Some bad news about Minh Phu

It doesn’t look good for Minh Phu, which just put out very disappointing earnings for the fourth quarter and full year of 2019.

Revenues were flat for the year, but gross profit fell 24%. A big portion of that came in 4Q, when gross margin fell to 6.5%, down from 10.8% from 4Q2018. Overall gross margin in 2018 was 13%, which was already down from 17% in 2017. For 2019, it fell further to 9.9%.

The results aren’t really a surprise, since the company publishes a monthly export report that has shown pretty weak exports through the year. The reason is because of 1) disease in the fish farms and 2) higher raw material costs.

It doesn’t help that the US government is investigating whether Minh Phu tried to evade anti-dumping taxes. Maybe Trump could tweet about it if they lose! That would be…bad.

Looking at the export data, the only destination where exports grew was Europe. I expect the company will be able to capitalize on that progress with the new EU-Vietnam trade treaty. Tariffs on non-processed shrimp will go to zero at the start.

That could be a really big boost for Minh Phu, if it can gets its farms back to working. But even if the farms start to be more productive, the company will still face those higher input costs.

The good news is that other costs are under control: SG&A was VND1.06tr, down from VND1.09tr. Finance costs were also lower, because the company paid down debt. Ultimately, while EBITDA fell to VND795bn, that was almost double 2017, albeit down 38% from 2018.

Interestingly, the company’s ROE isn’t that much worse than it was in 2017 and is better than 2016 or 2015. That’s despite a massive decline in profits. While equity grew more than a third, earnings are still much higher than they were previously.

Stepping back, Minh Phu’s stock has cratered over the past year. But it looks kind of attractive, trading at just 5.1x P/E. And cash flow is solid as shown by an EV/EBITDA of 6.5x.

Three things need to happen for the stock to really work, in order of what’s in management’s control:

The company needs to get a hold on disease. That should help both revenues and costs.
Lower cost of goods. This is mostly out of the company’s hands and will probably be an issue that they just have to work through.
Avoid being subject to US tariffs! Not much they can do about this. Exports to the US fell in value and as a percentage of Minh Phu’s exports from 41% to 38% of total export value. But that’s still a lot to replace. It seems unlikely that exports to the EU would overtake this - it would have to increase more than 3x. Ouch.

The stock looks cheap. It has good backers. If it can avoid problems with the US authorities, I think it is worth looking at. Let’s see what happens.

VietEcon

Some bad news about Minh Phu

VietEcon