We remain upbeat on the group’s export growth prospects underpinned by sturdy demand for its Halal-certified seasoning products. The PER premium that Ajinomoto Co (listed parent co) has over Ajinomoto Malaysia has widened from 70% on average to >2x currently; we expect this striking valuation gap to narrow going forward. We have lowered our FY20-22E EPS by 2-6%, in view of the extended Covid-19 disruptions. We maintain our BUY rating with a lower 12-month TP of RM13.00.

Sturdy Demand From the Export Markets

For 9MFY20, Ajinomoto’s revenue rose 3.8% yoy to RM340.9m, underpinned by an uptick in sales for both its consumer and industrial seasoning products. In terms of the group’s geographical mix, the Middle East region (16% of revenue) has proved to be an increasingly important market with sales soaring 23% yoy to RM53m in 9MFY20. Moving forward, we expect demand from the export market, especially the Middle East, to remain robust while the group’s upcoming Halal-centric seasoning production plant should further support higher sales volumes upon commencement from FY23.

Increasing Divergence in Valuation Against Parent Co

Based on a 10-year PER band, Ajinomoto’s listed parent co Ajinomoto Co (“Aji Co”) had traded at a c.70% PER premium to Ajinomoto Malaysia, which is unsurprising given in part Aji Co’s market cap of US$8.5bn vs. Ajinomoto’s US$150m. Nevertheless, we note that at this juncture, the valuation gap between the two has noticeably widened to >2x from the past-10-year’s 70%, with Aji Co trading at a PER of >30x over Ajinomoto Malaysia’s 13x forward PER. We think Ajinomoto is comparatively undervalued and expect the huge valuation gap between the two companies to eventually narrow.

Maintain BUY

We lower our FY20-22 EPS forecasts by 2-6%, to account for lower sales across both domestic and export markets as a result of extended Covid-19 disruptions and the lowering of our 2020 GDP growth forecast to 3.3% (from 4.0%) on 16 March. Our TP is lowered to RM13.00, now based on a 14.3x PER (previously 20x) on the CY20E EPS in view of the heightened market volatility. Nonetheless, Ajinomoto’s valuation looks undemanding for a defensive consumer staple stock. We maintain our BUY rating as we continue to favour its defensive business with steady earnings delivery as well as longer-term export market potential.

Source: Affin Hwang Research - 25 Mar 2020