VGS - Strongly Underpriced

Vietnam Germany Steel Pipe JSC (HNX:VGS) was established as one of the leading steel companies in northern Vietnam under the brand name “Thep Viet Duc” for both construction steel and steel pipe products. VGS produces a variety of steel pipes used for construction purposes and interior usages. Viet Germany Steel Pipe had a 9.3% market share in the North in 2017, which shows its power as a large local steel maker. As a common steel brand name locally, VGS benefits from the growth in demand in the region.  Numerous new projects will be underway in the near future in both the public and private sectors.

VGS is in a healthy financial position with no long-term debt. It pays a consistent cash dividend. VGS plans to pay up to VND 1,200 per share for both 2017 and 2018, equal to a dividend yield of 10.9% at current market price. We believe VGS is currently undervalued because of its accounting method that quickly depreciates machinery over two years, which means a feasible large improvement in gross profit in 2018 and 2019 is possible. The residential project in Vinh Phuc will be a catalyst for its stock price, as we evaluate its NPV at VND 89 billion.

Using FCFE, P/E and P/B valuation methods, we believe VGS should be worth VND 15,500 per share, equivalent to a 38% upside  and recommend a BUY on the stock. By taking into account the residential project’s value, VGS share could reach VND 17,800, which means a 59% upside.