Update

• Two quarters of deflation. The Department of Statistic Malaysia recently released the Consumer Price Index (CPI) data for February 2019. Headline inflation remains deflated for two consecutive months but narrowed its decline to -0.4% y o-y in Feb’19 compared to -0.7% y-o-y in Jan’19. Meanwhile, on a monthly basis, headline inflation rebounded to +0.2% m o-m from -0.5% m-o-m in Jan’19.

• Inelastic demand. Following on latest CPI data, we reckon that Ajinomoto (Malaysia) Bhd (AMB)’s product pricing and demand are not affected by inflation/deflation trend as evidenced by the difference in movement of its sales and CPI (Please see Figure 1).

• Steady outlook. As such, we are sanguine on AMB’s future prospect following its strong brand and steady consumer demand over the years with wide range of product offerings to both retail and industrial customers. Besides, the Group also has strong export positions in many countries.

• Results recap. In 9MFY19, AMB registered a net profit of RM4.8m which grew 7.7% YoY. Meanwhile, revenue improved 2.2% YoY to RM382.2m. The encouraging result was due to steady revenue and earnings in the Consumer segment.

Comment

• Stable earnings regardless of inflation/deflation. We reckon that demand and pricing for AMB’s product would be not affected by inflation/deflation. We believe Monosodium glutamate (MSG) is one of the main ingredients in household meals as well as the food and beverages industry. As such, AMB’s earnings will move steadily and not be overwhelmed by the current deflation, underpinned by stable demand from both retail consumer and industry segments.

• Dominant in domestic market share. Over the past 5 decades, AMB’s umami seasoning has become a household brand among Malaysian consumers. The Group’s brand has grown into a market leader with dominant market share of over 80%. Under its Consumer business, “AJI-NO-MOTO” MSG is the largest revenue contributor to this segment following its matured position in Malaysian market. Going forward, other products are also expected to register positive growth rate such as “Tumix” flavour seasoning, “Seri Aji” menu seasoning, and other seasonings such as “Aji-Shio”, “Aji-Mix” and sweetener PalSweet in tandem with growing demand.

• Meanwhile, under the Industrial division, the Group offers a wide range of functional savoury seasoning products under the name of “TENCHO” which are mainly used by industrial producers in the food industry.
• Strong exports sales. The Group’s products are exported to various countries such as Asia, the Middle East, Central and South America, South Africa and Oceania. AMB’s exports contribution has increased from 35% to 40% from FY15 to FY18. Export revenue is led by Asian countries and followed by the Middle East with 5-years CAGR of 9.4% and 9.8% respectively. Besides, products exported to the Middle East have a strong advantage on the “halal” certification from JAKIM. We are positive that AMB’s “halal” certified products will garner steady growth for its MSG and flavored seasoning products in Muslim countries. Currently, AMB has a sales office in Saudi Arabia to facilitate exports.
• Cash rich – AMB is in a net cash position with cash reserve of RM95.4m in 3QFY19. It has a dividend policy of 55% however dividend yield is unattractive at 2.6%.

• Risks – Despite dominating the MSG market, AMB faces stiff competition in other food and seasoning products from local brands and overseas producers. Based on its latest financial results, management is cautious that foreign exchange fluctuations and trade tensions could inflate the cost of imported raw materials. However, the Group will adopt the effective cost management as well as sales plan to strengthen overall sales and profit.

Earnings Outlook/Revision

• We maintain our earnings forecast for FY19 but tweak down FY20 earnings by 5.0% due to higher cost of imported raw materials following fluctuation of foreign exchange.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM19.17 (previously RM19.88) based on revised of 2.7x FY20F price to-books (previously 2.8x). This implies +1 standard deviation above its 3-year mean P/B of 2.12 times, banking on its dominant position in the market.

Source: JF Apex Securities Research - 27 Mar 2019