Ajinomoto’s 1HFY19 core earnings came in marginally below expectation, making up 45% of our previous full-year forecast. The increase in earnings on a yoy basis was mostly due to margin improvements. Revenue came in relatively flat as a surge in domestic sales in the “tax-holiday” period was offset by lower realised export revenue due to a stronger RM against the US$ on a yoy basis. Maintain HOLD with a revised TP of RM21.70.

1HFY19 Core Earnings Slightly Below Estimate

Ajinomoto’s 1HFY19 core earnings of RM26.2m (+12% yoy) came in marginally below our estimate, making up 45% of our previous full-year forecast. 1H19 revenue growth was flat on a yoy basis as the 5% gain in domestic revenue was offset by a decline in revenue in the export markets (particularly the Middle East and other Asian countries) due to the stronger RM against the US$ on a yoy basis. However, the stronger RM helped expand margins, as most of the raw materials used are priced in US$.

Zero-rated GST Period Boosted Domestic Sales in 2QFY19

Sales volume and revenue improved significantly for the Consumer Business segment in 2QFY19 (+8% yoy, +14% qoq) mainly due to the zero-rated GST period from June-Sep 2018. The recovery in export sales volume after a drop in 1QFY19 was offset by the stronger RM against the US$. Operating expenses crept up slightly on higher advertising and promotional activities and delivery costs during the quarter.

Maintaining HOLD, Lowering TP to RM21.70

We adjust our FY19-21 EPS forecasts by 3.2-1.6% mainly to account for slightly lower revenue for the export segment. We maintain our HOLD rating on Ajinomoto with an adjusted target price of RM21.70 based on an unchanged 22x CY19E PER. We believe that current valuations are not too demanding for a consumer play. While we believe the domestic market could benefit from tailwinds arising from improving consumer sentiment and spending, export revenue could face some pressure especially in the near term given our in-house forecast of a stronger RM. Nonetheless, raw materials sourced in US$ act as a natural hedge and thus limit any earnings risk, in our view. Upside risks are stronger export sales and expanding margins, while downside risks are weakening export sales and an unexpected uptick in expenses.

Source: Affin Hwang Research - 28 Nov 2018