• Ajinomoto’s 9MFY21 core net profit of RM41.7m (-6.9% yoy) came in below expectations
• We expect headwinds in 4QFY21 amid the renewed MCO. Adding to that, price increases in certain raw materials may also weigh slightly over the near term
• Hence, we cut FY21-23E earnings by 3-14%. Post revision, we downgrade Ajinomoto to HOLD with a TP of RM17.30 based on 18x CY21E EPS

9MFY21: Below Expectations

Ajinomoto’s 9MFY21 revenue came in at RM323.7m (-5.0% yoy), on the back of a decline in the consumer segment (-8.0%) due to lower sales volume of its flagship AJI-NO-MOTO MSG brand but slightly cushioned by the industrial segment (+2.4%) which performed better on rising demand for industrial seasoning products for overseas’ industrial customers. Geographically, both domestic and export markets contracted c.-5%. There was a slight improvement in YTD EBIT margin of 16.3% (+1.1ppt) owing to slower marketing spend, but this was offset by a smaller finance income (high base in 2QFY20). Consequently, the group registered a core net profit of RM41.7m (-6.9% yoy) – below expectations. Variance to our forecast was lower-than-expected sales.

Volatility Ahead on Raw Material Prices

Sequentially, revenue and core net profit dipped to RM113m (-2.3%) and RM12.9m (-6.2%) respectively. This comes on the back of lower sales volume in the industrial business whilst further weighed on by higher selling expenses during the quarter. Going into the final quarter 4QFY21, we expect further headwinds amid the renewed lockdown measures that are likely to impact out-of-home consumption. Adding to that, price increases in certain raw materials may also weigh slightly over the near term.

Downgrade to HOLD

We cut our earnings estimates by 3-14% for FY21-23E inputting the MCO impact and higher raw-material price volatility. Post revision, our new TP is revised lower to RM17.30, based on an unchanged 18x CY21E EPS. Downgrade to HOLD, in view of the limited potential upside to current share price. Up/downside risks: (i) increase/decline in export sales and (ii) higher/lower-than-expected input costs.

Source: Affin Hwang Research - 26 Feb 2021