Ajinomoto’s 9M18 core net profit increased by 12% yoy to RM41.1m, accounting for 75% of our full year estimates. We view this as slightly below expectations as 9M earnings have historically accounted for c. 80% of FY earnings. Although 3Q18’s net profit grew by 27% yoy, this was mainly due to a lower tax rate as EBIT only increased marginally by 1% yoy. Maintain HOLD with an unchanged TP of RM20.30.

9M18 Results Below Expectation

Ajinomoto recorded a 5.3% yoy increase in 9M18 revenue to RM321m driven by 2.5% yoy and 13% yoy growth in the Consumer and Industrial division respectively. In 3Q18, consumer division’s revenue declined marginally by 2% yoy to RM77m because of slower sales volume of Ajinomoto in domestic market. However, this was mitigated by the increase in sales volume in the Industrial division. 9M18 EBIT declined 9.4% yoy to RM41m as higher marketing expenses in 1H18 resulted 9M18 EBIT margin eroded by 2.1ppts to 12.8% (vs. 14.8% in 9M17). Helped by lower tax rate, 9M18 core net profit ended with RM41m (+12% yoy) and was below our expectations, accounting for 75% of our full year estimates (vs. c.80% of FY earnings historically).

Acquisition of Land

On 12th of February 2018, Ajinomoto announced that the company had entered into a Sales and Purchase Agreement with Lembaga Tabung Haji and THP Enstek Development Sdn. Bhd. for the proposed acquisition of a piece of freehold land measuring 2m sq ft located in Techpark@Enstek, Bandar Baru Enstek, Seremban for a total purchase consideration of RM86m. the proposed land acquisition is expected to be completed by 31st of July 2019. While we are positive on the prospect of the land offer in terms of increasing production capacity and venturing into new business segments, we do not think it will provide material earnings impact within the next 3 years.

Maintain a HOLD Rating and TP of RM20.30

We revised down FY18 core net profit by 6% yoy to assume lower EBIT margin from consumer division arising from higher-than-expected marketing expenses. Nevertheless, we leave FY19-20E earnings largely unchanged. We maintain our HOLD rating on Ajinomoto with an unchanged TP of RM20.30. Risks include price competition, substitution risk, and cost risks.

Source: Affin Hwang Research - 27 Feb 2018