Ajinomoto has announced that it will commence the construction of its new plant and corporate office at the newly-acquired land in Negeri Sembilan, starting from October 2019. The RM355m development is slated to be completed by March 2022, and should provide improved production capacity and efficiency from FY23 onwards. We trim FY20-22E earnings by 2-3% to incorporate the reduction in interest income and newly-disclosed figures in its annual report. We maintain our BUY recommendation, albeit with a slightly lower 12-month TP of RM21.80.

Strengthening Its Production and Reach Within the Halal Food Market

The new plant will allow Ajinomoto to solidify its position as an established halal food seasoning manufacturer with improved capacity to manufacture new products on top of its existing product range across its consumer and industrial business segments. This bodes well for the group’s long-term export prospects, in our view, particularly with sales to the Middle East markets, which have grown at a 5-year CAGR of 10%.

Ample Cash Pile to Bankroll the New Project

Given Ajinomoto’s debt-free and strong cash position (RM305m at endFY19 / 57% of total assets), the group is well-placed to internally fund the new plant and HQ without taking on substantial borrowings. However, we expect earnings to be slightly impacted over the near term due to the loss of investment income, which constituted 14% of the FY19 pre-tax profit.

Maintain BUY

We trim FY20-22E EPS by 2.7%/3.1%/1.8% respectively after incorporating reduced investment income alongside book-keeping adjustments following the release of the annual report. Post-revision, we derive a slightly lower TP of RM21.80, based on an unchanged CY20E PER of 22x. Overall, we continue to favour Ajinomoto for its defensive core business, domestic market share leadership, as well as positive export growth outlook. Current valuations are also undemanding in relation to other F&B staples stocks, in our view. Downside risks: weakening export sales, and higher-than-expected raw material costs.

Source: Affin Hwang Research - 14 Aug 2019