Fitch Believes Nutifood Will Raise Sufficient Funds to Refinance Debts in the Coming 12 months

Nutifood's rating reflects its strong position in Vietnam's nutritional dairy products and dairy-based beverages market, ranking as the third largest in the country by retail volume and fifth largest by value.

Fitch Ratings expects to assign Vietnamese dairy product producer, Nutifood Nutrition Food Joint Stock Company, a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'B+(EXP)'. The Outlook is Stable. Fitch has also assigned the company's proposed US dollar unsecured notes an expected rating of 'B+(EXP)' with a Recovery Rating of 'RR4'.

The expected IDR assumes that Nutifood will raise sufficient funds from the proposed US dollar bonds to refinance debt maturing in the next 12 months, which would improve its liquidity and debt maturity profile. The final ratings are contingent upon the success of the proposed bond issue and receipt of final documents conforming to our current understanding.

Nutifood's rating reflects its strong position in Vietnam's nutritional dairy products and dairy-based beverages market, ranking as the third largest in the country by retail volume and fifth largest by value. Fitch believes the company is well-positioned to benefit from growth in Vietnam's consumption expenditure, supported by the company's financial profile, which is well-placed for its rating level. However, the company is small compared with global peers even though Fitch forecasts its EBITDA to almost double by the end of 2022 from USD50 million in 2018.

Small Size: Nutifood's small scale, measured by EBITDA, compared with global packaged food companies constrains its rating. The company reported EBITDA of USD50 million in 2018. Fitch believes that Nutifood will be able to capitalise on the expected growth in the Vietnamese economy, particularly as it continues to expand its production and distribution facilities, and increase its EBITDA to around USD100 million by 2022. Despite this, Fitch expects the company to remain small by global standards for the foreseeable future, which will continue to constrain its rating.

Leading Domestic Dairy Producer: Nutifood is one of the top five milk formula companies in Vietnam by both volume and value. The company has differentiated itself from other dairy producers in Vietnam by offering innovative nutrition products that are tailored to the nutritional needs and taste preferences of the Vietnamese population.

Partnerships Reinforce Market Position: Nutifood continues to build on this leading position by partnering the Vietnamese government and collaborating with global companies to bring quality products to Vietnam. For example, the company supplies milk for government health initiatives; partnered with BASF and Sweden's Backahill Group and Skanemejerier Ekonomisk Forening to enhance its products; distributes Asahi Group's premium 'Wakodo' brand (the number one infant food brand in Japan) baby formula; and obtained US Food and Drug Administration (FDA) approval to export to the US.

Fitch believes that these collaborations highlight Nutifood's knowledge and distribution channels in Vietnam, and its strong position in various categories of nutrition products in the country. They also put the company in a good position to take advantage of growth from rising incomes in Vietnam.

Strong Growth Fundamentals: Vietnam is one of the largest consumer markets in south-east Asia with a population of 96.5 million in 2018, and increasing consumer spending. We expect growth in the Vietnamese dairy market to be supported by greater health consciousness. The government has introduced initiatives to address malnutrition and stunting, whose levels remain high by global standards. Fitch also expects a high birth-rate and consumers increasingly seeking convenience with nutrition will continue to drive demand for Nutifood's products, particularly its ready-to-drink products.

The company's revenue rose by CAGR of 11.2% for 2016-2018, and Fitch expects this to accelerate over the next five years as it completes new production and distribution facilities. Nutifood's involvement in several government initiatives to improve national nutrition and health, its approval to export to the US and partnerships with several international companies will also bolster its reputation in Vietnam and support its continued growth. The promising outlook of the dairy sector, however, comes with increased competition, both domestic and international.

Extensive Distribution Network: Nutifood's distribution network spans all 58 provinces and five municipalities in Vietnam, with its products available in around 100,000 outlets through 193 distributors. This gives the company a competitive advantage in reaching customers, particularly in rural areas, where demand is growing faster than in urban areas but which remain underpenetrated. We believe that Nutifood is strongly placed to continue to tap this growing rural demand, with rural sales making up around 80% of revenue in 2018 and most of its products priced to target rural consumers.

Strong R&D Supports Premiumisation: Fitch believes that Nutifood's prioritisation of R&D will help it shift towards premium products, which the company expects to drive growth, especially in higher-income urban areas, and diversify its product range. Its main brand GrowPlus+ accounted for 44% of 2018 gross revenue. Its R&D focus is supported by 24 staff, collaborations with local and international organisations, and increasing investments each year.

Fitch believes the commitment to R&D will improve margins and help Nutifood capture new customers and strengthen its position in premium products, such as liquid and milk alternatives, which contribute 26% of revenue after their launch in 2015.

Strong Financial Structure: Nutifood's leverage is strong for its rating and was below 1.5x from 2015 to 2017, before rising to 2.9x in 2018 due to higher debt to finance its expansion. After the proposed bond issuance, we expect leverage to fall by around 0.5x in 2019. Thereafter, Fitch expects leverage to fall below 2.0x by 2021 as profitability increases as investments to expand capacity and shift towards premium products begin to generate revenue and reduce costs. Leverage will also decline due to a cut in the dividend payout ratio to a maximum of 30% of net profit as Nutifood prioritises the strength of its balance sheet.
Corporate Governance: Nutifood's Management and Corporate Governance score of 'bb' reflects its high ownership concentration, and limited board independence and financial transparency compared with global peers.

However, Fitch believes that these risks are offset by the quality of Nutifood's financial audits and the increased transparency that will result from the proposed bond issue, and has captured this within the proposed rating.

DERIVATION SUMMARY

Nutifood's rating is constrained by its small scale relative to global packaged food peers - particularly those rated in the 'B' rating category, which typically generate two to three times Nutifood's 2018 EBITDA. This is partially offset by Nutifood's stronger financial profile - particularly lower leverage - than peers rated in the mid-to-low 'B' rating category, including Grupo Embotellador Atic, S.A. (Atic, B/Stable) and Yasar Holding AS (B-/Negative).

Nutifood has a better governance structure than Atic and this, combined with its stronger financial profile, underscores the one-notch rating differential between the two issuers. Nutifood's better governance structure is also a key differentiator from Russian peer, JSC Holding Company United Confectioners (UC, B/Stable).

Both companies have similar financial profiles, but Nutifood's is expected to improve over the rating horizon as its forecast growth and ability to pass on cost inflation to consumers are likely to protect its margins, compared with UC, which is exposed to a declining market and higher competition. These factors lead us to rating Nutifood one notch higher than UC.

Mastellone Hermanos Sociedad Anonima's (CCC) has weaker margins and its rating is constrained by the Country Ceiling on Argentina, while Nutifood has lower leverage. These factors explain the four-notch rating differential between Mastellone and Nutifood.

The two-notch difference with Yasar's rating is explained by the Turkish company's significantly weaker financial profile and cash generation ability, high FX risk exposure, lower margins and exposure to more cyclical businesses than Nutifood, despite it being around double the size of Nutifood.

By DIEP NGUYEN / BizLIVE