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NKG – Narrowing Margins, Growing Output

• In Q2/2024, the company reported net revenue of VND 5,661 billion (+7% QoQ, 3% YoY). Exports continued to be the main contributor, accounting for 62% of total sales in Q2/2024. Over the first six months of the year, the company achieved a production volume of over 531,000 tons (+24% YoY, fulfilling 53% of its annual production target). The gross profit margin stood at 9%, a decrease from 10.7% in Q1/2024 but remaining consistent with Q2/2023. Gross profit amounted to VND 512 billion (-10% QoQ, +3% YoY). NPATMI reached VND 220 billion (+46% QoQ, +75% YoY). The company maintained a cautious inventory policy, with an average inventory turnover of 102 days, and improved its interest coverage ratio by 8.7% QoQ.
• In 2H2024, domestic production is expected to grow by 12% due to the recovery in the residential real estate market. However, export profit margins may decline as the price gap between domestic and international steel narrows, coupled with a slowdown in steel demand in export markets (North America, Europe). As a result, the gross profit margin for 2H2024 may decline to 5.8%. NKG's net profit for 2H2024 and the full year 2024 is projected to reach VND 52 billion (+12% YoY,- 86% HoH) and VND 422 billion (+261% YoY), respectively. EPS for 2024 is expected to be VND 1,473.
• We value the stock using two methods: FCFE and P/B, arriving at a fair value of VND 24,500 per share, representing a potential return of +14% compared to the closing price on August 26, 2024. In the short term, NKG’s stock is under negative pressure due to declining HRC prices and the narrowing price gap between domestic and international steel. However, given the discount to the target price, investors might consider short-term trading opportunities in the stock if there is a recovery in the price of key raw materials (HRC).