Broker’s Call: MONDE | Oct 7, 2021 | FirstMetroSec

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BUY ahead of potential index inclusion

  • Gradual resolution of headwinds expected
  • Expect positive news flow to drive price action
  • Position ahead of potential index inclusion
  • Reiterate BUY, target price raised to P23.00

Rating: BUY
Price Target P23.0

What’s New: Reiterate BUY on Monde Nissin Corp. (MONDE), TP raised to P23.00 as we rollover our valuation base to FY22F. We have trimmed our FY21F/22F earnings expectations by 8%/3% to factor MONDE’s disappointing 1H21 performance, as well as several headwinds that are negatively affecting MONDE’s businesses this year such as: (i) Upward trend in wheat and palm oil prices; (ii) Disruptions in UK’s food supply chain, amid shortage in food-grade carbon dioxide supply; (iii) Britain’s truck driver shortage; and (iv) Larger-than-expected rationalisation of distribution points in the United States.

But downsides have been ignored by the market so far… We highlight MONDE’s share price has run up by 12.9% since its earnings release and has held up since. Over the longer term, our positive view on the counter remains intact. In the next twelve months, we expect valuations to continue to trend higher as positive developments become more evident. At present, the stock is trading at 28.6x PE on FY22F earnings. Our new target price of P23.00 assumes MONDE will trade at a higher multiple of 35.3x FY22F earnings

Our confidence stems from the following factors:

  • Gradual resolution of the abovementioned headwinds – for its APAC BFB segment, we note that higher raw materials prices stemming from supply side factors are transitory and should be mitigated by ASP increases as well as efficiency programs in place. For Quorn, we take comfort that the British government has so far been on top of the food supply and transport issues affecting industries, having offered subsidies to restart carbon dioxide production and offering visas and other incentives to lure lorry drivers back into UK.
  • Quorn sales momentum will pick up – we expect pickup to be led by the progressive reopening of Western markets, especially the US and UK. We note that management has so far delivered on gross margin expansion for the segment (+290bps y-o-y), and this allowed Quorn to pursue key initiatives to drive market awareness, introduce new products, and rejuvenate Quorn’s branding through increased A&P spend. Over the next 12 months, we expect more positive news flow from management as Quorn pursues increased penetration in the global QSR and foodservice markets.
  • High probability of inclusion in benchmark indices – MONDE has the makings of an index glamour name. In the next 12 months, we see high probability of the stock’s inclusion in major benchmark indices such as MSCI, FTSE, and PSEi. Reasons are: the counter’s large market cap, high trading liquidity, and absence foreign ownership limits. Observing past rebalancing exercises, index inclusion triggers valuation re-rating that tends to be sticky given high investability and increased visibility across a wide range of investors.

Recommendation: Reiterate BUY, TP raised to P23.00, derived using DCF valuation methodology; implies 35.3x P/E on FY22F EPS. This is at a premium to the average of emerging market and local peers at 26.0x and 25.1x, respectively

SOURCEFirst Metro Securities
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