We remain assured of Ajinomoto’s medium-term growth prospects, led by a healthy increase in exports and steadfast domestic business. In particular, we continue to see robust demand from the Middle East for its Halal-certified products amid a developing consumer base. Despite a 3-year forecast core earnings CAGR of only 5%, we like the stock for its undemanding valuations, defensive earnings and Halal export-driven upside potential to growth. Maintain BUY on Ajinomoto, albeit with a lower 12-month TP of RM19.80.

Bright Start to FY20; Export Sales +33% Yoy

To recap, Ajinomoto posted a robust set of 1QFY20 results (core net profit +29% yoy). Revenue growth of 6% yoy was lifted by a surge in exports to the Middle East (+55% yoy) and other Asian countries (+24% yoy), aided by a recovery in industrial products sales and a stronger US$ (+5% yoy). We expect a similarly good showing for the rest of FY20 on a healthy domestic private consumption, strong export momentum and stable forex, which should contain raw material procurement costs.

New Plant to Contribute Positively to Group’s Long-term Prospects

Despite the c.4% drag on earnings over the near term due to lower investment income from the group’s high cash pile (14% of FY19 PBT) following its new plant’s construction, we are nevertheless positive on the benefits to be reaped from its plant relocation, which should better position Ajinomoto to tap into the burgeoning Halal food market with improved production capacity and capability to develop new product lines. There would be no production constraint issues during the interim, as the company is able to rely on its regional affiliates’ production facilities.

Maintain BUY, But With a Reduced TP of RM19.80 (from RM21.80)

We make no changes to our earnings forecasts. Although earnings growth would be muted by the new plant’s construction and commencement, there could be potential upside to growth given the group’s Halal-driven export momentum. We reaffirm our BUY rating on Ajinomoto albeit with a reduced TP of RM19.80, based on a lower CY20E PER of 20x (from 22x), in line with its 3-year average. At a 17.3x FY20E PER, the stock continues to look attractive due to its undemanding valuations within the F&B staples space. Downside risks: (i) weaker export sales; (ii) higher-than-expected raw material costs; and (iii) a decline in global macro conditions.

Source: Affin Hwang Research - 23 Sept 2019