Ajinomoto’s 9MFY19 core earnings of RM44m (+7% yoy) came in within our expectations, accounting for 78% of our FY19E forecast. The growth in earnings was driven by higher sales as well as strong margin improvement. Owing to the share price’s recent underperformance, we upgrade Ajinomoto to a BUY (from Hold), with a slightly higher TP of RM22.00 based on 22x CY19E PER.

Within Expectations

Ajinomoto’s 9MFY19 core net profit grew 7.2% yoy to RM44.2m, as sales increased by 2.2% yoy to RM328.2m while EBITDA margins expanded by 3.2ppts yoy, underpinned by lower raw material costs and a stronger RM yoy. Revenue from the Consumer Business segment grew 5.1% yoy, partially offset by a -5.0% decline from the Industrial Business segment. Geographically, domestic revenue grew 4.9% yoy while partially offset by lower export sales (-1.9% yoy) amid the stronger RM. Nonetheless, a stronger RM is net positive to the group’s earnings, as most of the raw materials used are priced in US$ while exports accounted for less than 40% of 9MFY19 revenue. Overall, the results came in-line with our expectations, accounting for 78% of our FY19E estimate.

Sequentially Stronger, While Export Sales Continued to Recover

Although revenue declined sequentially (-2.3% qoq) due to moderated domestic sales (-8.0% qoq) following June-Sep 2018’s GST-free period, core earnings rose 15% qoq on the back of lower raw material costs as well as reduced A&P expenses. Additionally, export sales continued to pick up sequentially (+7.0% qoq) as the RM stabilised against the US$, after recording a sizeable drop in sales volume during 1QFY19.

Upgrading to BUY

We tweak our FY19-21E EPS forecasts by 1.3-1.7% to account for slightly improved margins. A strengthening of the RM would be largely supportive of Ajinomoto’s profitability in the quarters ahead (our in-house forecast of US$/RM3.90 by end-2019). Mainly due to the share price’s recent underperformance, we upgrade Ajinomoto to a BUY (from Hold) with a slightly higher TP of RM22.00, which is based on an unchanged 22x CY19E PER (+1SD to 5-year mean). We believe that current valuations are not demanding relative to other consumer staple stocks. Downside risks: weakening export sales, and higher-than-expected production costs.

Source: Affin Hwang Research - 27 Feb 2019