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http://www.ocbcresearch.com/pdf_reports/...15-OIR.pdf
Growth in PRC negated by competition in Myanmar
For 1Q13, VB experienced a 6.8% YoY growth in revenue contribution
from China to S$22.3m following a 5% increase in average selling prices
(ASPs) during the quarter. However, this was negated by a 9.3% YoY
decline in revenue contribution from South East Asia and Indochina –
particularly in Myanmar. In terms of product mix in Myanmar, VB offers
instant coffee, instant cereal and instant tea (with a weighting of 40%,
40% and 20% respectively), and the introduction of foreign competition
has led to a decline in its instant coffee category. Although VB has a 30%
market share in Myanmar (from a combination of its product offerings),
it had to forgo typical ASP increases in an effort to preserve market
share and fend off competitors.
Margin improvements on effective cost control
With the favourable raw material prices, it was not surprising to see
gross profit margin improve by 5.7 ppt to 36.7% from a year ago.
Similarly, the easing of VB’s cost structure and resultant benefits from
economies of scale and scope in its operations has led to a 2.7 ppt
increase in operating profit margin to 15.0% from a year ago.
Signs still point to an eventual GO
Although the market has been disappointed by the lack of progress in
this department, given the fractured relationship between VB's
substantial shareholders, a reduced stake for VB's CEO remains the
clearest indication of an impending deal and of his desire to leave the
business eventually. In addition, in our view, the temporary lull only
represents a transitional platform for Lam Soon before it increases its
stake subsequently. Reasons for a partial stake at the moment are likely
to be intangible in nature.
D. Seize the opportunity; upgrade to BUY
Take advantage of the price correction
VB’s share price corrected about 5.6% following the partial stake
purchase by Lam Soon on market disappointment over the lack of a full
GO. As we deem the possibility of an eventual GO to be high, this
correction has presented a good investment opportunity for investors.
With a supportive base price of S$0.735, which was the purchase price
during the partial share sale, a potential upside of nearly 10% is very
attractive in our view. Even when VB is priced on a fundamental basis,
our fair value estimate comes in at S$0.74. In light of these factors, we
upgrade the counter to BUY.
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