Analyst Note| Jeanie Chen |
Narrow-moat Ajinomoto beat its full-year profit guidance as expected but the core business profits (gross profits--SG&A) slightly fell short of our forecasts due to weakness in the moaty food business. Sales decreased marginally by 0.4% year on year while business profits fell nearly 17% during the fourth quarter. Contrary to our projection of a drop in profits stemming from a tough comp and margin normalization, management guided for a slight increase in core business profits for 2021 as it expects a recovery in food service demand and price hikes will sustain profits. Despite our forecast of a 7% profit decline in 2021, we have lifted our fair value estimate to JPY 2,400, from JPY 2,200 as we rolled our forecasts and raised sales and net earnings estimates (due to a cut in the estimates of restructuring costs) mainly for 2021 and 2022. It appears the scale and impact of divestures and business restructuring on sales are less than our expectations. We continue to view shares as fairly valued with 3% upside to our fair value estimate.