Target Price Revised down by 6% to KRW500,000
The author is an analyst of Shinhan Securities. He can be reached at sanghoonpure.cho@shinhan.com. – Ed.
4Q22 OP likely to miss consensus at KRW328.5bn (+38.8% YoY)
We now expect CheilJedang to have earned operating profit of KRW328.5bn (+38.8% YoY) on sales of KRW7.72tr (+11.2% YoY) for 4Q22, missing the consensus estimate by 7%. Excluding CJ Logistics, sales and operating profit likely came in at KRW4.68tr (+14.3% YoY) and KRW205.9bn (+53.3% YoY), respectively. While the company should have seen a sharp YoY rise in profit considering one-off incentive payments booked last year, earnings were weighed down by continuing cost burdens and a drop in Vietnamese hog prices. The food division’s sales growth was likely stunted at 15% YoY due to weak sales volume, despite price hikes and efforts to improve efficiency in marketing spend. Food operating profit should have jumped by 70% YoY. Schwan’s is projected to have seen a 21% YoY growth in operating profit on robust sales of new products and price increases. As for the bio division, operating profit should have increased just 25% YoY on high base effect. The feed and care division is expected to have turned to profit, although earnings likely fell short of our previous estimates on falling hog prices.
Strong brand power seen positive amid economic downturn
We are picking up signs of changes in consumer spending amid the recent slowdown in economic activities. In Japan where recession persists for a prolonged period, consumer spending was mainly concentrated on private brand (PB) and other cheap products. The US also saw a sharp rise in sales of PB products last year as the country was hit hard by surging inflation.
Such changes have raised concerns about the future sales volume growth of CJ CheilJedang whose products come with relatively higher price tags. However, we believe the company’s strong brand power built over a long period should stand out as a competitive advantage in times of high uncertainties. In addition, it is seen positive that processed foods have recently become more attractive in terms of price competitiveness as dining-out expenses are increasing at a more rapid pace. With the recent downturn in grain prices, the company is poised to see improvement in margin spreads from 1Q23 driven by price hikes and easing cost burden.
Target price revised down by 6% to KRW500,000
We lower our target price for CJ CheilJedang by 6% to KRW500,000 to reflect the slower-than-expected recovery in bio market conditions as well as the decline in global peer valuations. Nonetheless, we believe the near-term weakness in earnings has already been priced in at current share price levels. The food division is enjoying both top-line and profit growth, and the bio division is expected to offset the high base effect with the growth of specialty amino acids. Furthermore, the company will further enhance efforts to develop new growth engines, such as future food ingredients, nutrition, alternative proteins, and cultured protein, through the newly-established FNT (food and nutrition tech) division. Once the existing businesses gain greater earnings stability and create synergy with the new growth drivers, we will actively consider removing the discounts (30% for each division) applied to the average multiple of global peers when calculating the enterprise value.