Revenue falls on increased competition but margin improvement continues
Ongoing competitive pressures in Myanmar caused Viz Branz (VB) to report a 5.6% YoY decline in 1H13 revenue to S$86.1m. However, favourable raw material costs and a reduction in administrative expenses – brought about by a stronger Singapore dollar – saw operating margin increase by 1.8ppt YoY to 15.7% and operating profit rise by 6.7% YoY to S$13.6m. As a result, 1H13 PATMI came in higher (+4.0% YoY) to S$10.1m. VB’s management also declared an interim dividend of 1 S cents, which was similar to last year’s interim payout.
Management to address revenue slide
With Myanmar opening up, it is not surprising to see VB’s revenue decline with the gradual influx of other foreign competitors. While the decline has been largely confined to its coffee instant beverage – leaving its other product mainstays of cereal and tea largely intact – management has ramped up expenditure on promotional activities and is hopeful that the slide will be addressed in the coming quarters.
Lack of GO progress a disappointment but stance unchanged
Admittedly, with much of the investor focus on the counter related to the possibility of a general offer, the lack of progress on this front has been disappointing. Nonetheless, we believe that a resolution is likely. The lack of a declared final dividend for FY12 and the increase in its
cash balance are some of the signs that negotiations are ongoing between the relevant parties. In our view, the delay is largely due to the rather delicate nature of the relations between the relevant parties.
Price is holding up; maintain BUY VB’s price has been relatively stable thus far, and we expect to see it continue holding up well. Keeping our fair value of S$0.74 unchanged, we maintain BUY on VB.
A. Performance recap
Revenue declined on competition and seasonality
For 1H13, VB saw revenue declined by 3.2% YoY and 5.5% YoY for China and South East Asia and Indochina respectively to S$49.9m and S$35.8m, respectively. China’s decline was mainly due to a drop-off in external sales from the flexible packaging segment, rather than a decline in demand for its products. On the other hand, South East Asia and Indochina saw declines mainly related to increasing competitive pressures in Myanmar. Management also attributed part of the revenue decline to the later onset of Chinese New Year in February this year versus January last year. Traditionally, VB experiences an uptick in orders a month prior to the festive season. Therefore, this year’s seasonal increase will only be seen in 3Q13 results.
But margins improved
Fortunately, raw material prices remained favourable during 2Q13 and this aided margin improvement for VB, which helped to soften the blow of revenue declines. Gross profit margin for 2Q13 improved by 3ppt YoY to 37.7% (+4.2ppt YoY for 1H13 to 37.2%) while operating profit margin rose 1.2ppt YoY to 16.5% for the quarter (+1.8ppt YoY for 1H13 to 15.7%) following a reduction in administrative expenses. 1H13 PATMI for VB increased 4.0% YoY to S$10.1m. VB’s 1H13 top and bottom-line figures were within our expectations, and accounted for 46.3% and 54.8% of our forecasts respectively.
B. 2H13 forecasts unchanged
Promotional expenses likely to tick upwards slightly
While VB’s margin improvement for 1H13 resulted in decent PATMI results, we are likely to see an increase in promotional expenses in the second half of the year as VB attempts to stave off competition in Myanmar. However, we expect the impact to be marginal as VB’s distribution channels in the counter remain strong. Continued relief from raw material prices With raw material prices at current levels, VB has seized the opportunity to lock in supplies beyond the traditional six-month period. At this juncture, management has indicated that their supplies for the next nine months have been procured, and will continue to look for opportunities should the cost environment remain in their favour.
C. Lack of GO progress a disappointment but we maintain our stance
Signs still point to an eventual GO
The continued lack of progress in this area will undoubtedly come as a disappointment to the market. However, we continue to maintain our stance that a general offer will still take place. We point to the fact that VB’s management had not declared a final dividend for the recently concluded FY12, which is usually a sign that a company is about to undergo a substantial development. Furthermore, the delay is also not unexpected given the rather delicate nature of the relationships between the relevant parties. With negotiations still ongoing, we remain optimistic that a deal is likely to materialize.
Price has held up well
With investor focus on the possibility of a GO, the current lack of progress could result in some selling pressure in the near term. However, we take comfort in the fact that VB’s share price has remained pretty stable since the start of the year. As a reminder, the price Lam Soon paid for its partial stake was S$0.735, and this should remain a supportive base price for the counter. We keep our fair value estimate of S$0.74 unchanged and maintain our BUY rating.
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