Ajinomoto reported a solid set of 1QFY20 results which met our expectations. Core net profit rose 29% yoy, driven by higher sales (+6% yoy) and gross margin improvement. Sales performance for the quarter was led by a surge in export revenue owing to higher volume growth as well as the weaker Ringgit. We maintain our earnings estimates and our BUY rating on Ajinomoto with an unchanged 12- month target price of RM21.80 (based on a 22x CY20E PER target).

Within Expectations

1QFY20’s core earnings grew 29% yoy over a 5.6% top-line growth yoy, as Ajinomoto benefitted from the reduction in procurement cost of a key raw material that led to a 3.1ppts improvement in the EBIT margin. Segment-wise, Consumer Business sales were flat (-0.7% yoy), while Industrial sales were higher by 23.6% yoy. Geographically, export sales surged 33% yoy which outshone the decline in domestic revenue (-8.2% yoy), aided by higher volume sales as well as the stronger USD which appreciated 5% on a yoy basis. Overall, the earnings were broadly within our expectation, accounting for 24% of our FY20 estimate.

Sequentially Stronger Due to Lower A&P Expenses Incurred

Core earnings also increased by 12.3% on a qoq basis, despite the lower revenue recorded in 1QFY20 (-15.8% qoq) owing to a seasonally weaker sales quarter. This is predominantly due to lower A&P expenses incurred in 4QFY19, and is consequently reflected in a 4.3ppts qoq improvement in the operating margin. Over the coming quarters, we expect earnings growth to be weaker as interest and investment income will be lower as the group utilizes its cash hoard for capex on the construction of a new plant in Negeri Sembilan.

Maintain BUY, Price Target Unchanged at RM21.80

As the results were broadly in line with our expectations, we made no changes to our earnings estimates. Overall, we continue to favour Ajinomoto for its defensive core business, domestic market share leadership, as well as exports growth potential given its Halal-certified products. We reiterate our BUY rating, with an unchanged TP of RM21.80 based on a 22x PER multiple to CY20E EPS. Downside risks: lower-thanexpected export sales, and higher-than-expected production costs.

Source: Affin Hwang Research - 23 Aug 2019