This article first appeared in The Edge Financial Daily on March 26, 2020 - April 1, 2020

Ajinomoto (Malaysia) Bhd
(March 25, RM12.10)
Maintain buy with a lower target price (TP) of RM13: For the nine months of financial year 2020 (9MFY20), Ajinomoto (Malaysia) Bhd’s revenue rose 3.8% year-on-year (y-o-y) to RM340.9 million, underpinned by an uptick in sales for both its consumer and industrial seasoning products. In terms of geographical mix, the Middle East region (16% of revenue) has proved to be an increasingly important market with sales soaring 23% y-o-y to RM53 million 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 on commencement from FY23.

Based on a 10-year price-earnings ratio (PER) band, Ajinomoto’s listed parent company Ajinomoto Co Inc  (Aji Co) had traded at a about 70% PER premium to Ajinomoto, which is unsurprising given in part that Aji Co’s market capitalisation of US$8.5 billion (RM37.32 billion) versus Ajinomoto’s US$150 million. Nevertheless, we note that at this juncture, the valuation gap between the two entities has noticeably widened to more than two times from the past 10 years’ 70%, with Aji Co trading at a PER of more than 30 times over Ajinomoto’s 13 times forward PER. We think Ajinomoto is comparatively undervalued and expect the huge valuation gap between the two companies to eventually narrow.

We lower our FY20-22 earnings per share (EPS) forecasts by 2-6%, to account for lower sales across both domestic and export markets as a result of prolonged Covid-19 disruptions and the lowering of our 2020 gross domestic product growth forecast to 3.3% (from 4%) on March 16. Our lower TP is now based on a 14.3 times PER (previously 20 times) on the calendar year 2020 estimated 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. — Affin Hwang Capital Research, March 25