Update

• Ajinomoto (Malaysia) Bhd (AMB) announced that it will build a new plant on its acquired land in Techpark @ Enstek, Seremban with a total capital expenditure of RM355m.

• AMB said the land will be home for the AMB’s new plant and to support facilities such as corporate office, and recreational space and facilities for its staff.

• To recap, on 14 February 2018, AMB has bought a 2.03 sq ft freehold land in Bandar Enstek, Negeri Sembilan from Tabung Haji for RM86m in cash.

Comment

• Improving production capacity. Following the announcement, we reckon that the plant could increase their production capacity to meet rising demand. The Group’s current land in Kuchai Lama has limited space for expansion as part of the land in the existing plant was sold to the federal government for the MRT project. We understand that the new plant will be used for manufacturing its current range of halal consumer and industrial products, including Umami seasoning Aji-No-Moto, flavour seasonings, menu specific seasonings and products for the industrial food producers. We believe the new plant will render a potential growth for the Group’s future earnings following its strong brand name and steady consumer demand over the years, with wide range of product offerings to both retail and industrial customers.

• Steady exports market. During the past three years, exports for AMB’s products have been steadily ranging from 38%-40%. During FY19, exports market was mainly led by Middle East. We believe the higher demand from Middle East was due to strong advantage on the “halal” certification from JAKIM. We are positive that AMB’s “halal” certified products will garner stable growth for its MSG and flavored seasoning products in Muslim countries. Therefore, with the new plant, the Group will be able to cater for their growing exports markets especially from the Middle East.

• External uncertainties pose threat – Despite dominating the MSG market, AMB faces stiff competition in other food and seasoning products from local brands and overseas producers. Management is cautious that the foreign exchange fluctuations and trade tensions could inflate the cost of imported raw materials. However, the Group will adopt effective cost management as well as proactive sales plan to strengthen their overall sales and profit.

Earnings Outlook/Revision

• No change for our earnings forecasts for FY20 and FY21.

Valuation & Recommendation

• Maintain HOLD with a revised target price of RM17.71 (RM19.17 previously) based on 2.3x FY20F price-to-book (from 2.8x). This revised valuation implies +1 standard deviation above its 3-year mean P/B of 2.12 times, banking on its dominant position in the domestic market. We are neutral on AMB due to its unattractive dividend yield coupled with uninspiring near-term business and earnings prospects.

Source: JF Apex Securities Research - 14 Aug 2019