Ajinomoto’s FY19 results came in within our expectations, accounting for 98% of our full-year forecast. The growth in PBT (+8% yoy) was led by higher sales (+3% yoy) as well as margin improvement. After rolling forward our valuation horizon, we derive a slightly higher TP of RM22.50 based on an unchanged 22x PER, which is undemanding in comparison to its other consumer staples peers. Maintain BUY.

Within Expectations

The flattish core earnings growth (-0.3% yoy to RM56.4m) was mainly due to a much lower taxation rate recorded in FY18. At the pre-tax level, core PBT grew by 7.6% yoy, which reflected a top-line growth of 2.6% to RM447.7m and slight improvement in operating margins for FY19. Segment-wise, Consumer Business sales rose 4.8% yoy, which offset a 3.0% decline yoy in Industrial sales. Geographically, domestic revenue was 5.3% higher yoy while partially mitigated by lower export sales (-1.3% yoy) as the Ringgit strengthened on a yoy basis. The stronger Ringgit nevertheless kept raw material purchase costs contained, while the group also undertakes active hedging activities. Broadly, the results were within our expectations, accounting for 98% of our FY19 estimate. A higher DPS of 47sen was proposed for the year (FY18: 46sen).

Sequentially Weaker; Higher A&P Spending

Core earnings declined 31.8% qoq to RM12.2m despite higher revenue recorded (+3.7% qoq), as A&P expenses ramped up during the quarter, which resulted in a 6ppts sequential dip in operating margins. Additionally the effective tax rate also crept higher in. Nonetheless, we expect A&P expenses, which were likely higher in 4QFY19 in advance of Ramadhan and Eid festivities, to normalise heading into 1QFY20.

Maintain BUY

We tweak our FY19-21E EPS forecasts by -3.7%/-4.8%/-5.9% to account for slightly slower export sales growth and margin adjustments. Overall, we continue to favour Ajinomoto for its defensive core business, domestic market share leadership, as well as cash-rich position. After rolling forward our valuation base to CY20E, we derive a revised TP of RM22.50 based on an unchanged 22x PER multiple. Current valuations appear undemanding in relation to other consumer staple stocks. Downside risks: weakening export sales, and higher-than-expected production costs.

Source: Affin Hwang Research - 24 May 2019