FY12 ends strongly as expected
As expected, Viz Branz (VB) reported a strong set of FY12 results, which met our FY top and bottom-line forecasts by -5% and 3% respectively. Its revenue rose 4.3% YoY to S$172.7m following increases in demand across all business segments while declines in raw material costs and operating expenses over the course of the year aided significant margin improvements (gross profit margins +2.4ppt to 34.1%; operating profit margins +3.6ppt to 14.6%). As a result, PATMI climbed higher by 47.6% YoY to S$17m. Management has yet to declare a final dividend but dividends declared thus far totaled 3.3 S cents, which is already greater than last year’s 2.5 S cents.
Growth in key market to continue
Revenue by geographical segment saw strong growth of 12% YoY in China to S$93.6m, which helped to offset declines of 3.2% YoY in South-East Asia and Indochina and 12% YoY in other export markets. While there has been talk of a slowdown in domestic consumption in Asian markets, we draw strength in the relative affordability of VB’s products and demand stability exhibited during the previous downturn, and leave our revenue projections of between 8-9% over the next three years unchanged.
Margins to remain stable
Robusta coffee bean prices – a main component for VB – have crept up slowly as consumers (especially those in Europe) switch away from the more expensive Arabica beans. However, a strong spike in
prices is unlikely given the preference for gourmet coffees i.e. Arabica beans in Europe, the global leader in per-capita coffee consumption. Therefore, we forecast stable gross profit margins at around 33% for the coming year.
No updates on share sale
While management is unable to provide any updates on the third party (offeror) approach for a substantial stake in the company, it maintains that negotiations are still ongoing. With no updates in this round of results, we could expect to see some selling pressure from impatient, speculative investors.
Upgrade to BUY
Given VB’s encouraging set of results and efficiencies in cost savings, we raise our operating margin projections by 2 ppt to 14%. Upgrade to BUY at a higher fair value estimate of S$0.74.
Growth in key markets to continue
Revenue by geographical segment saw strong growth of 12% YoY in China to S$93.6m, which helped to offset declines of 3.2% YoY (to S$73.2m) in South-East Asia and Indochina and 12% YoY (to S$5.9m) in other export markets. While there has been talk of a slowdown in domestic consumption in Asian markets, we draw strength in the relative affordability of VB’s products and demand stability exhibited during the previous downturn. Leaving our revenue growth projections of about 8- 9% over the next three years unchanged, China will remain the largest revenue contributor for VB for the near to medium term although Myanmar’s percentage contribution is likely to continue inching higher as the country continues its reform process. (VB has maintained its status as the market leader in the cereal segment in Myanmar with a management estimated 30% market share.)
Robusta coffee demand increasing but significant price bump unlikely
Demand for Robusta beans – the less-expensive alternative to Arabica traditionally used in instant beverage mixes – has increased gradually as reflected by its price increases over the past year. In Europe, where percapita coffee consumption is the highest in the world, there have been reports that consumers are moving away from gourmet coffee, and indirectly Arabica beans, towards the cheaper alternative. The apparent move is a result of the continued uncertainty and troubles in Europe, which have forced consumers to rethink daily consumption expenditure. In the past, Arabica had been trading at huge premiums to Robusta but this premium has started to narrow recently.
Using an OIR-modified composite weighted price of Columbian Mild Arabicas, Other Mild Arabicas and Brazilian Natural Arabicas against Robustas (raw prices provided by the International Coffee Organization (ICO)), we note that the Arabica premium over Robustas has closed to as low as 57% as recently as June 2012 before moving back to around 74% in July. Although prices for Arabica beans have also been depressed by an excess global supply, we view the declining coffee imports by European nations as a pertinent factor due to the extent of and longdrawn nature of Europe’s problems. As such, prices of Robusta coffee beans are likely to remain supported at current levels. However, a strong surge is unlikely as any additional declines in Arabica coffee beans could encourage Arabica consumers to return, which would cap any possible increase in Robusta coffee beans.
Gross profit margins to remain stable
Given our outlook on Robusta coffee bean prices, we anticipate Robusta coffee bean prices to remain supported at current levels. Therefore, VB’s usual practice of purchasing inventory six months out at a time should serve them well. Assuming no average selling price increases for VB products over the next year, we leave our gross profit margins assumptions unchanged at a conservative 33%.
No update on share sale
Since its initial announcement back in July, management has yet to provide any updates on the third party (offeror) approach for a substantial stake in the company given the ongoing negotiations. This news had been the main catalyst for the stock in the first half of the year and the lack of developments has lead to waning interest from speculative investors.
Easing of cost structure to continue
As mentioned in our 3Q12 earnings report, we noted that the benefits from economies of scale and scope in VB’s operations have become more apparent. For instance, although revenues from South East Asia and Indochina declined by 3% YoY to S$73.2m, operating profit and operating margins rose by 83% YoY to S$3.4m and 2ppt to 4.6% respectively. VB has started to reduce its capital expenditure in its core markets – capex is not expected to exceed S$2-3m over the next three years – and we are optimistic that operating margins will continuously improve going forward.
Upgrade to BUY
With no updates on the share sales in this FY12 results announcement, we expect some selling pressure from impatient investors. Nonetheless, we point to the promising growth prospects for the company, which has seen increasing demand from China and acceptance of the ASP increases over the past year. With the easing of VB’s cost structure going better than expected, we raise our operating profit margins by 2ppt to 14%. This raises our fair value estimate to S$0.74. Upgrade to BUY. In addition, we remind investors that should a takeover materialize, we are only anticipating a small premium of 2% (based on analysis of previous acquisitions/takeovers).
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