Tuesday, 28 August 2012

Viz Branz

OCBC on 28 Aug 2012

Viz Branz (VB) reported a strong set of FY12 results, with revenue gaining 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, which saw PATMI climbing 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. With demand from China and raw material prices likely to remain stable in the coming year, we leave our gross profit margin projections unchanged but raise our operating margin forecasts slightly to account for the continued easing of VB’s cost structure. Upgrade to BUY at a revised fair value estimate of S$0.74.

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.

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