Vedan International (Holdings) Limited

Vedan (‘Group’) is engaged in the business of manufacturing and selling Monosodium Glutamate ‘MSG’ (64.4% of revenues), modified starch (17.4%), specialty chemicals (5.3%), fertilizer and feed products (6.8%), and others including trading of coffee beans and bulk food ingredients. These products are sold to food distributors, international trading companies, and operators in the paper, textiles, and chemical industries.

The group sells its products in Vietnam (47% of sales), Japan (18%), China (12%), USA (7%), Taiwan (6%), ASEAN countries excl Vietnam (7%), and others. Its production assets are also primarily based in Vietnam (87% of assets) along with China (11%) among others.

The group experienced only a moderate decline (<1%) in revenues in the last six months as decreases in sales to Vietnam and Japan were offset by increases in China. Gross profits declined by 12%, however, because of increases in raw material costs that couldn’t be passed on to customers. The primary raw materials are cassava, molasses, and energy (coal and oil) – all of which have been historically cyclical.

Sales have been fairly stable with TTM sales at $2.78b (2019: $2.81b), but ebitda margins have compressed in recent years from 12.4% in 2017 to 10.3% today. TTM ebitda was $285m (2019: $312m), and net profits were $73m (2019: $122m).

Taking account of increased competition in the recent past but accounting for cyclicality, the company generated average ebitda of $315m in the recent past. Deducting depreciation (which roughly equates to past capex), and taxes, results in normal earning power of roughly $130m.

The group operates with minimal net debt of $62m and healthy current and liquid asset ratios.

The stock sells for $1.16b, which is about 9x earnings.

Dividend payouts have been consistent averaging a 7-9% yield at market - though the recent interim dividend was cut in half.

Business prospects appear promising but the group’s low returns on tangible assets of less than 6%/year is a severe drawback in evaluating the attractiveness of growth. Therefore, we aren’t convinced the current price is low enough to deem this stock an attractive investment.