Ajinomoto reported a good set of 6MFY20 results which came in within our expectations. Core net profit grew 12% yoy to RM29.3m on the back of higher export sales and better margins off a reduction in rawmaterial procurement costs. We make no changes to our earnings estimates and maintain our BUY rating on the stock with an unchanged target price of RM19.80 based on a 20x CY20E PER target.

Within Expectations

The results were broadly within expectations, accounting for 50% of our fullyear estimates. 6MFY20 revenue increased by 4.1% to RM221.9m, driven by stronger export sales growth (+22% yoy) – attributable to higher volume sales as well as the stronger US$ (+3.4% yoy) against the Ringgit – which partially offset weaker domestic sales (-5.7% yoy) coming off a high base amid last year’s zero-rated GST period. On a segmental basis, Consumer Business sales were flattish (+0.6% yoy) with higher Middle East export sales (+34.0% yoy) cushioning the softer domestic sales, while the Industrial segment’s higher sales (+14.1% yoy) reflected the rise in export sales to other Asian countries (+14.2% yoy). Meanwhile, EBIT margins improved 1.3ppts yoy in 6MFY20, attributable to the better Industrial sales performance and a reduction in a key raw material’s procurement costs.

Sequentially Stronger

2QFY20 core earnings rose 13.2% qoq to RM15.5m off a seasonally softer 1QFY20 owing to the Ramadan fasting period, as sales from both the local and exports front increased by 20.1% and 21.2% qoq respectively. EBIT margins dipped by 0.7ppt qoq however, affected by a change in sales mix. Heading into 2HFY20, while we expect Ajinomoto to remain operationally intact, we foresee earnings growth to moderate from a fall-off in investment income (12% of 6MFY20 PBT) as management deploys cash reserves for the construction of the new Halal production hub in Negeri Sembilan.

Maintain BUY

We make no changes to our earnings estimates. Overall, we continue to favour Ajinomoto for its defensive core business and exports growth potential riding on its Halal-certified production base in Malaysia. Reiterate BUY, with an unchanged TP of RM19.80 based on a 20x multiple to CY20E EPS. Downside risks: (i) decline in export sales; (ii) higher-thanexpected production costs; and (iii) weakening of global macro conditions

Source: Affin Hwang Research - 28 Nov 2019