This article first appeared in The Edge Financial Daily, on November 12, 2015.

Ajinomoto (M) Bhd

We first recommended Ajinomoto (Fundamental: 2.05/3, Valuation: 2.0/3) on November 4 last year at RM5.57. Since then, its share price rose to a high of RM6.38 before retracing to RM6.24 yesterday. 

We continue to like Ajinomoto for its market-leading position and defensive qualities. The company has a cash rich balance sheet, increasing export sales and undemanding valuations. 

Its strong brand name is also underappreciated by the investing community. A household name, “Ajinomoto” is also synonymous with Monosodium Glutamate (MSG), where it commands a staggering 90% market share in Malaysia. MSG contributes about two-third of Ajinomoto’s sales with the balance from food and seasoning products. 

Exports, mainly denominated in USD, accounted for 35.2% of sales in FYMarch2015, up from 31.0% in FY2012. It also stands to benefit from lower commodity prices. For instance, the price of sugar (a by-product of sugar cane — main raw material) has declined by 16.9% over the past 12 months.

For 1QFY2016, net profit surged 25.2% y-o-y to RM10.3 million on the back of a 10.8% growth in sales to RM95.5 million. The better profit margin was largely due to higher sales and lower operating expenses.

Ajinomoto has net cash of RM130.0 million at end-June, up from RM67.1 million in FY2012. This translates to net cash per share of RM2.14 — more than 10 times its dividend per share (DPS) of 20 sen in FY2015, and 34% of current share price. 

Dividend payout ratio has been consistently above 40% since FY2010. In line with rising earnings, DPS rose from 15.75 sen in FY2010 to 20 sen in FY2015, giving a net yield of 3.2%. We estimate net yield of around 4% for FY2016.

The stock is trading at a modest trailing 12-month P/E of 11.9 times and 1.3 times book. By comparison, food and beverage manufacturers with strong brand names like Nestle, F&N and Dutch Lady are trading at P/E ratios of 23.5-29.3 times and 3.5-21.4 times book.