This article first appeared in The Edge Financial Daily on August 15, 2019

Ajinomoto (Malaysia) Bhd
(Aug 14, RM17.48)
Maintain buy with a lower target price (TP) of RM21.80: Ajinomoto (Malaysia) Bhd has announced it had started construction of its new plant and office at the newly acquired land in Techpark@Enstek, Bandar Baru Enstek, Seremban, Negeri Sembilan. The new plant will allow Ajinomoto to solidify its position as an established halal food seasoning manufacturer with improved capacity to manufacture new products on top of its existing product range across its consumer and industrial business segments. In our view, this bodes well for the group’s long-term export prospects, particularly with sales to the Middle East markets, which have grown at a five-year compounded annual growth rate of 10%.

Given Ajinomoto’s debt-free and strong cash position (RM305 million at the end of financial year ended 2019 [FY19], 57% of total assets), the group is well placed to internally fund the new plant and headquarters without taking on substantial borrowings. However, we expect earnings to be slightly impacted over the near term due to the loss of investment income, which constituted 14% of its FY19 pre-tax profit.

We trim Ajinomoto’s FY20-22 earnings per share by 2.7%, 3.1% and 1.8% respectively, after incorporating reduced investment income alongside book-keeping adjustments following the release of its annual report. Post-revision, we derive a slightly lower TP of RM21.80, based on an unchanged calendar year 2020 price-earnings ratio of 22 times. Overall, we continue to favour Ajinomoto for its defensive core business, domestic market share leadership, as well as positive export growth outlook. In our opinion, current valuations are also undemanding in relation to other food and beverage staples stocks. Downside risks are weakening export sales and higher-than-expected raw material costs. — Affin Hwang Capital, Aug 14